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Capital Markets Weekly: Pemex and Turkey boost emerging market debt

19 October 2018 Brian Lawson

While major IPO postponements indicate worsening sentiment, Turkey's market return and Pemex's 10-year bond sale are clearly risk-positive.

Equity and emerging market debt indicators have pointed in opposite directions this week. The IPO for Spanish energy firm Cepsa was postponed on 15 October, just a day before final pricing. According to the company "recent international economic developments have created severe uncertainty" and investor appetite had "been reduced significantly, reducing their interest in participating in IPOs". Spanish press sources suggest that a 6-12 month delay is now likely.

CEPSA's postponement comes shortly after the recent withdrawal of the USD2 billion flotation for Tencent Music, and three European IPO postponements on Thursday 11 October. These included Leaseplan, a Dutch car leasing group, Sonae MC, the retail unit of Portuguese conglomerate Sonae, and Vannin Capital, a UK based entity offering litigation funding. This last deal already had been reduced in value from GBP1 billion to around GBP600-700 million, but finally was pulled due to "volatility experienced in the equity market".

Nevertheless, there are also some positive equity-market indicators. Eurotorg, a supermarket chain, has reconfirmed plans for Belarus's first IPO through some USD300 million equivalent of Global Depository Receipts listed in London. On 15 October, Kazakh uranium miner Kazatomprom also announced its possible flotation on the London Stock Exchange. It is considering the sale of up to 25% of the company. In 2017, it produced around 20% of global uranium production. On the same day, Slovenia's Nova Ljubljanska Bank filed for a potential re-flotation within 2018, to meet EU requirements.

By contrast, global bond markets have been in risk-positive mood

After facing severe financial dislocations in recent months, Turkey has managed to return to international bond markets. From a peak of 615 basis points on 13 August, its EMBI+ spread index has declined to 430 basis points over US Treasuries, following its sharp policy-rate hike and rapid improvement in its trade balances. Turkey printed USD2 billion of five year 7.5% bonds on 17 October, attracting total demand of over USD6 billion. 60% of demand was from US investors, 23% from UK-based buyers, 11% from elsewhere in Europe, and 5% from Turkey, whose Finance Ministry claimed that over 250 investors participated.

Pemex also raised USD2 billion, for ten years at 6.5%, with demand exceeding USD11 billion. It was followed by Transportadora de Gas Internacional, a Colombian gas distribution firm. This revived a USD750 million issue it withdrew in April. The deal, expected to fund the repurchase of outstanding 2022 debt, obtained 3.3 times over-subscription : pricing was tightened from 5.75% area to 5.6% area. AI Candelaria, a special-purpose vehicle linked to Colombian oil production, with a 22.4% stake in the Ocensa pipeline, also is seeking a USD650 million senior secured 10-year deal, with initial guidance of mid-7% area.

On 17 October, Development Bank of Mongolia sold a USD500 million five-year deal, its first international issuance in five years. This attracted USD4.1 billion of demand, and was priced at 7.25%, 75 basis points inside initial guidance. The issue was notable for the absence of a government guarantee and for pricing only 85 basis points over the interpolated government curve, well inside comparable government-backed banking sector prior issuance. Proceeds will refinance short-term debt, extending duration.

South Africa's rating review by Moody's has been delayed, enabling it to retain its last investment grade rating for domestic debt for the time being, reducing the risk of near-term capital flight.

Risk Summary

Overall, primary equity markets are indicating a more cautious investor stance. The rush of postponements is a clearly adverse indicator of sentiment. Recent developments indicate that major political uncertainties, notably those relating to global trade and Brexit, are starting to have an adverse effect within financial markets. However, the picture is by no means uniform. In particular, efforts to conduct both the first Belarussian IPO and a Khazakh privatisation through global depository receipt sales in London are a positive indicator.

Conversely, Pemex's clear success and Turkey's return to international bond markets are obviously risk-positive indicators. Pemex's deal was clearly well received and has assisted wider revival in Latin America corporate debt issuance. In addition to undertaking a sharp increase in policy rates, prior weakness in the Turkish lira has improved Turkey's trade balances, potentially lowering its need to seek external finance. The successful issue for Turkey is an important and positive risk indicator for its banks, potentially assisting them to roll over more foreign liabilities, and in restoring wider investor confidence in Turkey overall. Similarly, Development Bank of Mongolia's stand-alone financing is a strong positive indicator for Mongolian access to international markets, just a few years after its debt sustainability had appeared in doubt.

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Posted 19 October 2018 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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