Capital Markets Weekly: Oman follows Egypt in accessing loan market while bond sales continue indicating duration appetite

Emerging markets: Oman, Egypt bridge loans and Philippines AT1

A Reuters report claims that Oman has raised a USD2 billion one-year loan, bridging for future bond issuance.

On 23 Almalnews.com website claimed that Egypt doubled its recent loan from USD1 billion to USD2 billion, given the participation of "a large number" of banks. The loan reportedly was priced at 365 basis points over 3-month LIBOR with a one-year bullet term. USD510 million were arranged in Islamic format.

Abu Dhabi has returned to bond markets, raising three, 10.5 and 50-year debt. It sold USD5 billion, comprising USD2 billion of three-year bonds at 65 basis points over US treasuries, versus initial guidance at 95 b.p., USD1.5 billion of 10.5 year debt at a 105 basis point margin, versus 135 b.p guidance, and USD1.5 billion at 2.75% for 50 years, the longest tenor to date for a MENA borrower, versus 3% guidance.

Rizal Commercial Bank from the Philippines has become the country's first bank to sell AT1 debt and completed the first dollar Asian bank AT1 deal since February. It offered a USD300 million perpetual non-call five-year deal at 6.75% area to first call, pricing the deal at 6.5% or 626 basis points over comparable US Treasuries. Proceeds will help maintain its capital ratios, while funding asset growth. The deal attracted peak demand of over USD825 million with a final order book of over USD600 million after pricing was tightened. 57 accounts were involved with 79% of the issue sold in Asia: asset managers took 59%, with private banks and hedge funds buying 24% and 19% respectively.

The bank ranked only eighth in the country at end-2019, according to IHS Markit Banking Risk Service data showing it with 4.5% of total sector assets. Its recent performance does not indicate an urgent need for capital. In June 2020, the bank reported capital adequacy and CET1 ratios of 13.9% and 13.0% respectively, while impairment was modest, with a non-performing loan ratio of 2.2% versus 2.1% a year previously. The NPL coverage ratio improved to 95.4% in June 2020 versus 78.6% a year previously.

ESG

Sweden's debut sovereign Green bond - expected to be an SEK20 billion 7 or 10-year deal - moved closer with an investor call scheduled on 26 August, with one-on-one meetings planned for the following day. The issue will focus on environmentally friendly transportation such as electric railway development, along with renewable energy and biodiversity projects.

On 24 August, Germany announced its Green Bond framework, ahead of its planned issue in September, which will be in "twin bond" format alongside a conventional issue with the same maturity and coupon (but with a potentially-different issue price and distinct ISIN identification code). Debt agency Finanzagentur has announced that Germany has identified EUR12.7 billion of environmental spending, spanning areas like transport, energy and industry, forestry and agriculture.

Other debt

According to International Financial Review, US high grade corporate issuance in August reached USD121.3 billion by 21 August, surpassing the prior record August supply level.

Vodafone has sold a two-tranche hybrid issue in Euros, attracting over EUR7 billion in demand for the EUR2 billion sale. The two tranches each have 60-year terms and are first callable after six and 10 years.

Vodafone's success triggered two further hybrid corporate deals, and two bank AT1 sales:

OMV has sold perpetual debt callable after six and nine years (with guidance of 3% and 3.375% to initial calls). It sold EUR750 million in the first tranche at 2.5% and EUR500 million at 2.875%.

Solvay offered a EUR500 million deal first callable after 5.5 years, with guidance of 3.25% until initial call. The offering was priced at a 2.625% yield. The company also linked a tender to repurchase an outstanding perpetual issue of the same size with initial call in June 2021, which bears interest at 5.118%.

Intesa Sanpaolo also sold Additional Tier 1 debt, offering EUR750 million tranches first callable after 7.5 and 11 years. The two tranches gained demand of Eur3 billion and EUR3.5 billion, and were priced at 5.5% and 5.875%, versus initial guidance of 6% and 6.5% respectively.

Its success prompted Bank of Ireland to launch a EUR300 million perpetual non-call five year issue.

Bank senior debt issuance also has been active, with BNP Paribas and Commerzbank selling liabilities in Euros and Nationwide Building Society and Nordea each issuing for five years in US dollars.

At the time of writing, Finland is marketing a EUR3 billion ten-year deal.

Royalty Pharma, which undertook its IPO for over USD2 billion earlier this year, has sold its first debt offering. On 24 August the weak investment-grade rated firm placed a six-tranche USD6 billion package, which obtained USD10 billion in interest before price guidance. Proceeds will be used primarily to repay existing term loans.

Equity

RWE is reported to have enjoyed a "blowout" with a EUR2 billion capital increase. On 18 August it announced a 10% capital increase through an accelerated book-building with institutional investors, with delivery of the new shares slated for 24 August. Proceeds are to support short-term capacity build-out and to fund "mid and long-term growth opportunities in renewables".

According to a Bloomberg report, Ant Group may seek as much as USD30 billion from a share sale to accompany its planned simultaneous dual listing on the Hong Kong and Shanghai Star markets. The report suggested that the sale could take place as soon as October: if such targets were achieved, this would make the deal the largest-ever equity offering. The firm has suggested it will sell at least 10 percent of its current capital, with a Financial Times report claiming it would place 10% in Shanghai and 5% in Hong Kong.

Chinese electronic vehicle manufacturer Xpeng has filed for a NYSE listing, seeking USD1 billion. It is offering 85 million ADS at USD11-13 each, with USD400 million reported to be subscribed by insiders and a further USD100 million from a new strategic investor. The company has stated that Alibaba, Qatar Investment Authority and Xiaomi are among those subscribing.

The IPO market continues to outperform within the stock markets. The Renaissance IPO Index was 48.4% higher in 2020 as of 20 August, while the Renaissance International IPO Index was 31.6% higher. In the week to 21 August, eight special purpose acquisition companies were floated, including the USD1.3 sale of Foley Trasimene Acquisition, the third largest SPAC sale to date.

Outlook and implications

Oman's underlying debt fundamentals are of growing concern to IHS Markit. Our latest forecast projects its 2020 fiscal deficit at 18.02% of GDP, with external debt levels equating to 108.7% of GDP. Public sector debt has been on a steep upward trajectory, with Reuters claiming that it rose from around 15% of GDP in 2015 to almost 60% in 2019. Earlier this year, its bond prices spiked to levels indicative of severe debt distress, and the country was unable to complete plans to raise bond funding (of around USD3 billion).

In this context the reported access to a bank bridge facility is clearly helpful - but at best a modest and temporary respite. USD2 billion is nowhere near enough to cover Oman's external funding needs. Prevailing bond levels now do suggest that like Egypt and Bahrain, bond issuance also would be possible, but this too would not provide a lasting solution, for which major fundamental structural change will be required.

Rizal's success in raising the first Philippine bank perpetual bond sale, and the subsequent rush of hybrid sales by Vodafone, OMV, Solvay and Intesa Sanpaolo provide multiple indicators of continuing risk appetite, with the search for yield representing a key likely driver of the "duration bid".

Germany's debut Green bond, slated for September, is a clear "trophy" for ESG market credentials, with another major issuer making a sizeable commitment to dedicated Green Bond issuance. How the Green tranche trades relative to its "twin" will be an interesting future indicator. In both cases, Germany and Sweden are issuing Green debt for political reasons, to strengthen their environmental credentials, rather than any market requirement to do so - although there is little doubt that there will be strong demand for the two countries' Green debut bonds.

Posted 27 August 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit