Capital Markets Weekly: Multiple ESG debuts well received, flagging clearly positive EGG momentum

This week's standout items include ESG debuts for Mexico, using a sustainable development goal-based format, along with Brazilian paper firm Suzano selling the second-ever sustainability-linked bonds, alongside first-time ESG issues for Burberry, QNB, Rentenbank, Munich Re and Unipol. IAG's underwritten rights issue and Delta's plans to raise USD6.5 billion in secured bonds and loans are also important risk-positive developments for the airline sector.

ESG

Brazilian paper and pulp manufacturer Suzano completed the first sustainability-linked bond from an emerging market issuer and only the second overall linking a bond coupon to achievement of sustainability goals. The deal is also the first using new ICMA principles for such instruments.

Suzano sold USD750 million of 10-year bonds at 3.95%, versus initial guidance of mid-4% area, with demand reaching USD7 billion. The issue priced tighter than the company's outstanding January 2030 conventional issue, which yielded 4.03% before the sale. The offering includes a 25-basis point penalty if the company fails to reach its goal of reducing carbon emissions by 15% by 2030.

Although the structure now benefits from a formal industry-based framework, it remains subject to criticism for not specifying the use of proceeds. Suzano is also questioned by some investors for alleged use of genetically modified trees and concerns over Brazilian deforestation.

On 16 September, its use of the structure was followed by Novartis, which announced an eight-year Euro-denominated deal at mid-swaps plus 55 basis points guidance. Uruguay and Sydney Airport are among other issuers considering the structure.

Mexico raised a EUR750 million 2027 bond to fund sustainable development goals, the first sovereign issue linked to the UN's Sustainable Development Goals. The issue, under its SDG framework, was priced at 1.603%, with a 195-basis point spread, 40 basis points inside guidance. Final demand reached EUR4.8 billion from 267 investors. The coupon, of 1.35%, is the second lowest on record for Euro-denominated issuance by Mexico.

Mexico's Treasury stated that the deal "permits the country to diversify its investor base", citing the existence of some 3000 funds with a sustainable investment focus, managing USD800 billion of funds, of which 80% are in Europe.

Mexico noted that it had attracted 78 new buyers, heavily focused towards sustainable assets, with 44% of the issue allocated to specialist sustainable investors.

The statement further describes the deal as starting the development of a foreign-currency sustainable bond yield curve while establishing favorable reference pricing points for other Mexican issuers.

Bank of China arranged a two-tranche "blue" bond, for water-based environmental purposes, denominated in Euros and CNY, through its Paris and Taipei branches. This is the first marine sustainability transaction from an Asian borrower, the first from a commercial bank and only the fourth to date overall. In a statement Bank of China flagged that the issue was being conducted under its Green Bond program, with proceeds dedicated to renewable energy and sustainable water and waste-water management projects. The three-year dollar tranche was for USD500 million, and priced at 1.054%, 90 basis points over comparable US Treasuries, versus initial guidance of 130 b.p. BOC Macau sold CNY3 billion of two-year debt at 3.15%.

On 14 September, QNB attracted over USD1.8 billion for its USD600 million debut Green Bond, also the first by a Qatari bank: the issue had a five-year term.

UK luxury fashion group Burberry gained GBP2.45 billion of orders for its GBP300 million debut issue, the first sustainable bond from its sector. Additionally, Prada, Salvatore Ferragamo and Mercier all have signed loans liked to sustainable goals in the last year.

Munich Re also enjoyed a successful Green Bond debut this week. On 15 September, it placed a EUR1.25 billion Tier 2 Green subordinated deal, the first by a German insurer. The 20-year non-call 10-year deal was priced at 155 basis points over mid-swaps, versus guidance of 190 b.p. with peak demand reaching EUR5.7 billion. The final pricing was five basis points tighter than secondary levels for the company's outstanding 2049 comparable (non-Green) deal.

Landwirtschaftliche Rentenbank sold its first public green bond, raising EUR1.75 billion for seven years with demand reaching just under EUR4 billion. According to Horst Reinhard, representing the issuer, "the record demand for a Rentenbank bond shows how dynamically this market segment is currently developing".

Additionally, Société Générale attracted EUR5 billion in demand for a "green positive impact bond" priced at 128 basis points spread versus guidance of 155-160 b.p.

Italy's Cassa Depositi e Prestiti previously arranged its fifth social bond, with proceeds dedicated to lending to Italian firms involved in research and development, and to those badly affected by the COVID-19 pandemic. The EUR750 million 1% eight-year deal was strongly received, attracting orders from over 180 investors.

Italian insurer Unipol also is undertaking a debut Green bond, using the extra liquidity to fund the repurchase of its EUR500 million 4.375% March 2021 notes.

Icade Santé, which invests in healthcare properties, sold its debut social bond on 10 September, raising EUR600 million of ten-year debt with a 1.375% coupon, priced 155 basis points over the reference rate. According to the company's statement, the issue was nearly 10 times oversubscribed.

Emerging markets

On 10 September, South Korea issued a USD1.45 billion two- tranche operation involving the sale of USD625 million of 10-year debt, which cleared at 1.198%, 50 basis points over comparable US Treasuries, and EUR700 million of five-year debt at -0.059%, 35 basis points over mid-swaps. According to the country's Ministry of Economy and Finance, the Euro-denominated sale is the first for a non-European country to achieve a negative yield.

According to the Korea Herald, the deal initially had targeted USD/EUR500 million but was upsized after demand exceeded USD5 billion and EUR5 billion respectively.

Bulgaria has raised EUR2.5 billion split equally between 10 and 30-year maturities, its first international issue in over four years. The two tranches were priced at 0.389% and 1.476%, respectively 60 and 145 basis points over mid-swaps, versus initial guidance of 95 and 175-180 b.p. Final demand reached EUR3.7 billion for the 10-year portion from 254 accounts while the long bond gained EUR3.6 billion in demand from 236 buyers. Bulgaria's Finance Ministry flagged that the 10-year deal achieved its lowest cost and spread to date, while the 30-year bond represented its longest tenor: the package is Bulgaria's largest international borrowing.

Equity

This week's post-Labor Day IPO calendar was impressively busy, with 12 US deals seeking some USD6.8 billion. The largest is for cloud-based data firm Snowflake, selling 28 million shares at USD75-85 each, along with a separate private sale of over USD800 million to Salesforce Ventures and Berkshire Hathaway. According to media sources, Snowflake will be the largest software IPO on record.

On 10 September, International Airlines Group, owner of British Airways and Iberia, announced a fully underwritten EUR2.74 billion rights issue of 2.98 billion new shares at a 35.9% discount to the theoretical ex-rights price based on the closing price on 9 September. Qatar Airways has confirmed it is subscribing its 25.1% share.

Outlook and implications

For the second week consecutively, ESG debuts are this week' stand-out item.

While the deal itself was a clear success, IHS Markit Country Risk specialists flag some contradiction inherent to Mexico's leading role in issuance of sustainable debt, noting that the country has not shown enthusiasm to develop renewable energy sources, and its willingness to destroy jungle to progress the state-favored Maya rail project.

Suzano's sustainable development goals-linked bond also went well but faced criticism over Brazil's environmental stance and its own activities. Despite such criticisms, this week's issuance contains a very impressive list of firsts, including debut deals for Munich Re, Unipol, German state-owned agricultural bank Rentenbank, Burberry and Bank of China's two-currency Blue bond.

IAG's rights issue is also a positive. Coming after Ryanair's smaller share placing and last week's highly successful bond sale, and an earlier share placement for EasyJet, several European airlines are strengthening their financial positions without recourse to state resources. Delta Air's large-scale bond sale using its frequent flyer program as security is a further example of airline sector finance serving to sustain the sector. On 13 September it announced plans to raise USD6.5 billion from a bond sale and term loan to boost liquidity secured by its subsidiary SkyMiles.

Posted 18 September 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit