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Capital Markets Weekly: Petrobras and Cemex reopen Latin American market, Benin plans debut

15 March 2019 Brian Lawson

This week's broader picture also continues to look risk-positive, spanning both debt and equity markets. Favorable indicators include the successful completion of sizeable equity sales for Asian internet provider Sea and Dutch payment company Adyen, along with a strong response to a EUR 1 billion perpetual AT1 sale for Unicredit and multiple sub-investment grade corporate bond deals.

In addition, Benin is planning its market debut, reportedly with an eight-year Euro-denominated deal.

Petrobras reopened the market for Brazilian risk selling USD2.25 billion of new 30-year dollar debt priced at 6.9%, versus initial guidance of low 7% area, and tapped its outstanding 5.75% 2029 issue with USD750 million at 5.95%. Proceeds will repurchase existing debt, with Petrobras holding a tender for ten outstanding deals with maturities spanning from 2021 to 2025. The repurchase tender was increased to cover an aggregate nominal amount of USD4.5 billion, versus the USD3.2 billion initially announced.

Cemex also sold debt, raising EUR400 million from a seven-year deal priced at 3.125%, versus initial price talk of 3.5%. The deal is callable after three years and will be applied to general corporate purposes including the repurchase of debt. AES Gener, a Chilean power company, is seeking to sell USD450 million of sixty-year hybrid notes, to repay an existing hybrid deal due in 2073. The company has stated that its primary goal is to reduce its borrowing costs.

Malaysia has priced a 10-year domestic Japanese Samurai bond at 0.53%, raising JPY200 billion (USD1.8 billion). The deal represents Malaysia's first Japanese domestic issue in 30 years. The issue is guaranteed by Japan Bank for International Cooperation at an annual cost of 0.1% and is the largest JBIC-guaranteed deal outstanding. The guarantee was provided as part of the effort by the Japanese and Malaysian authorities "to foster closer economic and cultural ties" between the two countries. The deal is viewed in the market as preceding renewed stand-alone borrowings by Malaysia in the international markets.

Benin has appointed banks for a debut international bond sale. It is undertaking marketing this week ahead of the planned sale. Bloomberg suggests that the pending deal will be Euro-denominated with an eight-year term.

Our Take

The reopening of Latin American issuance is as we forecast: Latin American spreads have been tightening during 2019. Petrobras is a high-profile issuer, and its successful completion of a USD3 billion sale of long duration is a clearly-positive market signal.

Other favorable indicators this week include the completion of two sizeable equity sales, and the sharp tightening in price and heavy oversubscription for Unicredit's AT1 deal.

Malaysia's deal needs to be viewed in the context of recent budget overruns. The current administration reported in its 2019 Budget statement that the 2018 deficit would reach 3.7% of GDP, versus an initial projection of 2.8%, criticizing the prior government for having kept some of its spending off-budget. Government projections show the deficit at 3.4% in 2019, falling to 2.8% by 2021.

IHS Markit assesses that Benin is in the High Payments Risk category for our medium term rating, with a numerical score of 55, equivalent to a B+ rating. We have maintained this stable since 2006. S+P restarted coverage of Benin last July, giving it a B long-term rating with stable outlook. Fitch awarded it the same level on 8 March, with positive outlook.

In terms of caveats, Benin has very modest foreign exchange reserves (well below one month's import cover), but this has been a long-standing feature and reflects the country's membership of the West African Economic and Monetary Union, whose currency is pegged to the Euro. For 2019, we also forecast that Benin's current account deficit will reach 11.6% of GDP, versus 8.4% in 2018, but with a 1.4% of GDP positive inflow from FDI. More positively, the country's total external debt burden is relatively modest, at around 25% in 2018, after past debt relief.

Overall, IHS Markit's economist for Benin, Alisa Stroebel, assesses that Benin's macroeconomic fundamentals have improved over the last two years and that the outlook for economic growth looks supportive. Additionally, the Beninese authorities have managed to address the country's fiscal imbalances, which surged to 40% of GDP in 2016 because of heavy military spending to fight Islamist militant group Boko Haram. Subsequently, the government-imposed austerity measures and the government's fiscal consolidation path foresees a further deficit reduction to 1.8% of GDP in 2019.

In recent years, Benin's government has sharply increased its issuance of bonds issued in the regional financial market to support higher investment spending, and this is a likely potential driver of the country's international market debut. We assess that increased infrastructure investment is risk-positive, even if it expands the current account deficit near-term, as it will boost Benin's productive capacity. However, we would note the drawback that use of market funding sources for such development is likely to prove considerably more expensive - and bear higher refinancing risk due to shorter maturities - than long-term concessional loans from official lenders.

Posted 15 March 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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