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Capital Markets Weekly: New Zealand syndication highlights debt pressure on stronger borrowers

18 June 2020 Brian Lawson

New Zealand's twice-subscribed record syndication, double a prior record financing set in April, further confirms the changing fiscal dynamics even in countries previously with the strongest debt sustainability metrics: elsewhere, the Federal Reserve's activation of its corporate debt purchase programme has given renewed momentum to both debt and equity markets, with highlights including PG&E's return to markets, a successful two-tranche issue by Belarus, a seven-times covered Honduran bond sale and a sizeable Chinese share listing on the London Stock Exchange.

New Zealand

On 15 June, New Zealand launched a new 0.5% May 2024 syndicated bond. On 16 June it sold a record NZD7 billion at 0.4275%. Total demand exceeded NZD14 billion (USD9.05 billion)

On 7 April, New Zealand had placed NZD3.5 billion of May 2031 debt by syndication, its prior record sale, attracting NZD5 billion in demand.

Bank of New Zealand rate strategist Nick Smyth noted that the NZD7 billion size was "as large as the entire 2017-18 bond program". He also flagged that offshore demand had covered 36% of the deal, which he described as "impressive", given that offshore investors had been net sellers "consistently over the past few years".

New Zealand's projected debt trajectory is far worse than after the February 2011 Christchurch earthquake. From 13.6% of GDP in fiscal 2009-10, its debt stock then rose to 25.5% of GDP in 2012-13, before declining to 19% in 2018-19. In May New Zealand's Treasury revised its forecasts sharply higher for 2019-20 and thereafter, setting a NZD60 billion funding requirement for 2020-21, six times its prior estimate, and increasing subsequent targets. It described the impact of COVID-19 as "unprecedented", forecasting that outstanding government debt will reach 47% of GDP by end-June 2021, rising gradually to 57% by June 2024.

Debt

After the Federal Reserve activated its corporate bond purchase program, global risk sentiment improved:

According to Financial Times coverage on 16 June using Refinitiv data, US high grade debt issuance was close to last year's full-year total of USD1.15 trillion and should pass this imminently. Corporate debt sales also are likely to surpass the 2017 USD1.37 trillion full-year record.

This week's US debt highlight was Californian utility PG&E undertaking a large-scale debt package on its re-emergence from bankruptcy protection, for which it filed in early-2019.

On 16 June it sold a USD8.925 billion six tranche high-grade mortgage bond offering which attracted USD54 billion in demand. The offering spans from two to 30-year debt. The shortest tranche was priced at 1.753%, 155 basis points over US Treasuries, 45 basis points inside initial guidance. The 30-year tranche was priced at 3.534%, 200 basis points over Treasuries and 62.5 basis points inside guidance. In parallel, it is working on a sub-investment grade unsecured offering, reportedly targeting up to USD 4 billion, and a bank facility.

On the same day, US-based Merck & co., Inc. sold USD4.5 billion of five, 10, 20 and 30-year debt for general corporate purposes. The tranches yielded from 0.84% to 2.563%.

Ireland's AIB launched Additional Tier 1 perpetual debt. On 16 June it marketed Euro-denominated perpetual non-call 5.5-year instruments with coupon guidance of 7% area to first call. The deal, which was partially to fund repurchase of an existing AT1 deal at initial call, was upsized from EUR500 million to EUR625 million after books passed EUR 5 billion. Pricing was set at 6.25%: a similar EUR675 million issue by Bank of Ireland in mid-May had required a 7.5% coupon with a EUR1.4 billion order book.

UK insurer Legal and General marketed a GBP-denominated perpetual non-call 11.25-year restricted Tier 1 (RT1) deal at 6.25% to first call, which rapidly attracted over GBP 2 billion in demand. La Mondiale, a French insurer, gained EUR3.4 billion in demand for a EUR500 million 11-year subordinated Tier 2 deal, priced at mid-swaps plus 225 basis points.

After announcing sizeable (USD17.5 billion) asset write-offs earlier this week based on lower oil price projections, BP gained over EUR20 billion in demand for hybrid issuance in Euros, GBP and USD. It sold USD5 billion, EUR4.75 billion and GBP1.25 billion, with coupons as low as 3.25% on a Euro-denominated tranche.

Emerging markets

Belarus gained over USD5 billion in demand for a USD1.25 billion two-tranche bond sale on 17 June of five and ten-year dollar debt. Pricing has been tightened 25 basis points on both tranches, to 6.375% and 6.625% respectively. Issuance had been postponed in early March, when Belarus had planned to raise USD1-1.2 billion from issuance in dollars and Euros.

On the same day, Honduras raised US600 million of 10-year debt, pricing at 5.625% versus 6.25% guidance after the deal reportedly was seven times subscribed. Proceeds are reportedly for state power company ENEE to clear debt.

Additionally, Philippines telecommunications company PLDT gained over USD10 billion in demand for a USD600 million offering of 10 and 30-year debt, its first international sale in 18 years. The two tranches were priced at 2.5% and 3.45% coupons, the lowest to date for such maturities for a Philippines borrower. Proceeds will repay existing liabilities and cover capital expenditures.

Equity

China Pacific Insurance Group (CPIC) raised USD1.81 billion from its placing of 102.9 million global depository receipts (GDRs) on the London Stock Exchange. The deal was priced at the bottom of its indicated range of USD17.6-19 each, with each GDR equivalent to 5 A shares.

The offering equates to 8.2% of the company's share capital. CPIC Chair Kong Qingwei described the deal in the company's statement on 12 June as designed to "broaden CPIC's access to global capital market" while offering international investors "the opportunity to share the growth potential of the insurance sector in China". According to the firm's CIO, it also plans strategic investments into overseas insurance companies.

Royalty Pharma - which buys biopharmaceutical royalties across the biopharmaceutical sector - has undertaken the largest US IPO this year, and the second largest ever in the pharmaceutical sector. On 15 June it placed USD2.18 billion of shares, pricing at the top of an indicated range of USD25-28 per share, increasing the deal by 11 percent from its initial volume of 70 million shares. The company sold 60,000,000 new shares with existing shareholders disposing of 17.68 million shares: a further 11.65 million shares are available under the greenshoe. Company proceeds will be used for general corporate purposes including possible acquisitions. Trading started on 16 June, with the share price surging to USD44.5, a 59% first day gain.

Our take

The Federal Reserve's corporate bond program applies to the secondary market - existing securities rather than new issues - and will cover investment grade companies and be "index-based". It is being undertaken through the Fed's Secondary Market Corporate Credit Facility (SMCCF). The Primary Market Corporate Credit Facility, permitting direct investment into new issues, has still to be activated. Together, they total USD750 billion.

SMCCF will represent a relatively modest proportion of the overall expansion in the Fed's balance sheet through extraordinary monetary measures. However, it is an important further support to the market, and was well-timed to coincide with some deterioration in sentiment to reflect the degree and likely longevity of economic recession and the risks of renewed outbreaks of the COVID-19 pandemic. Within this week's supply, there are further multiple indicators of risk acceptance by both debt and equity investors.

Its activation - and the ECB's provision of liquidity to banks this week - has boosted both debt and equity markets, with Belarus's success a clearly positive indicator of improved sentiment.

Like Estonia's recent market "re-entry" after nearly two decades away from selling public term debt, New Zealand's two recent record debt syndications highlight the fiscal impact of the COVID-19 pandemic, even though its own outbreak was modest and well contained. After targeting for much of the last decade a debt-to-GDP ratio below 20%, with this peaking around 25% after a major earthquake, New Zealand now faces unprecedented borrowing needs, with its debt stock projected to reach 57% of GDP.

Such examples are important guidance as to potential shock impacts elsewhere, notably in those countries most affected by the epidemic. With official bodies like the IMF and EU prioritizing economic recovery ahead of fiscal consolidation, debt metrics should worsen further before improvement: complex fiscal consolidation issues lie ahead.

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

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