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Capital Markets Weekly: Heavy post FOMC supply indicates absence of “taper tantrum”
Saudi Arabia, Bahrain, Peru and China all placed debt successfully this week, alongside further sizeable financial sector and junk bond supply including Ford Motor Company's successful Green bond debut.
Kingdom of Saudi Arabia arranged its third international bond sale in 2021. Having raised USD5 billion and EUR1.5 billion in early-2021, including three-year bonds at -0.057%, on 9 November it marketed a 9.5-year Islamic sukuk deal at US Treasuries plus 110 basis points, and a 30-year tranche at 3.6% area. Arab News reports it gained USD11 billion of demand for the USD3.25 billion sale comprising USD2 billion of the shorter tranche, priced 20 basis points inside guidance after gaining USD6.9 billion of interest, and USD1.25 billion for the 30-year bond, priced at 3.36% with USD4.1 billion of demand.
Alongside the launch, Arab News reported that IMF Director for the Middle East Jihad Azour had forecast that GCC foreign exchange reserves would increase by USD300-350 billion in the next three years, a clearly-positive debt sustainability indicator. Additionally, Saudi GDP grew at an annual rate of 6.8% in the third quarter, according to flash estimates from the General Authority of Statistics, the fastest rate of expansion since 2012.
According to a recent statement by Hani Al Medaini, CEO of the National Debt Management Centre, the Kingdom will raise Green Bonds shortly, with such instruments "one of our main funding channels in the future".
Bahrain followed on 10 November, marketing a 7.5-year sukuk deal at 4.25-4.375% and 12.5-year conventional debt at 6-6.125%. It gained USD4.7 billion of demand for a USD2 billion sale, with the USD1 billion tranches priced at 3.875% and 5.625%. The sukuk tranche priced considerably tighter than Bahrain's outstanding 2028 and 2029 issues, presumably reflecting specific demand from Islamic investors.
On the same day, (mainland) China sold its pending Euro-denominated sale of 3, 7 and 12- year debt at the guidance of 20, 40 and 65 basis points over mid-swaps. Initial details show record low pricing for the EUR1.5 billion three-year tranche, set at -0.192%, with the seven and 12-year portions priced at 0.216% and 0.759%.
Mainland Chinese corporate supply remains active, with a three tranche USD1.2 billion sale of five, seven and ten-year debt for logistics and delivery firm SF Holding gaining USD4.2 billion in demand and pricing 25 basis points through guidance. Among other issuers, Zhengzhou Metro, the rail system operator in the capital of Henan Province, placed USD500 million of three-year debt at 1.915%, 120 basis points over US Treasuries and 40 through initial price talk, with demand having reached USD1.9 billion. Less positively, internet data firm VNET withdrew its planned three-year sale at 8.75% area due to adverse market sentiment.
Ukbekneftegaz (UNG), Uzbekistan's state-owned holding company for the oil and gas industry, launched a USD700 million seven-year issue at 4.75%. Its issuance had been approved by the Cabinet of Ministers on 3 November. The deal initially was presented as being for a five or ten-year maturity, or a dual-tranche structure. According to VTB Capital, reported by BNE Intellinews, initial guidance was projected at 3.9-4.4% for five years and 4.7-5.2% for ten.
South African mining firm Sibanye Stillwater attracted over USD2.5 billion for its two-part sale of five and eight-year debt, first callable after two and four years. Final guidance was set at 4-4.125% and 4.5-4.625% respectively.
ESG: Ford/ Other
Ford Motor Company ("Ford") announced plans on 4 November to issue USD1 billion of Green Bonds, to help it fund the development of new electric vehicles. It announced plans to repurchase up to USD5 billion of high-coupon debt, including liabilities with coupons of 8-9.5% on bonds issued for emergency liquidity in April 2020 during the COVID-19 pandemic. Overall, the tender, announced on 4 November, covers ten issues with coupons ranging between 6.375% and 9.98%, with maturities from 2025 to 2047. Prior proceeds from 0% convertible debt sold this year also will be used to help fund the repurchases. Treasurer Dave Webb initially suggested that the initial Green Bond sale would bear a coupon of 3.5-4% for ten years. Overall, the firm plans to "aggressively restructure" its balance sheet with the eventual goal of regaining investment-grade status for itself and its credit subsidiary, which were downgraded to junk in March 2020.
It marketed the deal on 8 November, raising USD2.5 billion at 3.25% versus initial guidance of 3.625% area. According to the Wall Street Journal, demand was assisted by the passage of a government infrastructure bill that contained a USD7.5 billion commitment for electric charging station build-out.
Peru sold EUR1 billion of 15-year social bonds, the top of its indicated EUR750-1000 million indicated range, pricing the deal at 2.071%, 175 basis points over mid-swaps and 25 through guidance. The deal, its social bond debut in Euros, gained over EUR2 billion in demand from over 120 accounts, with 80% of allocations to European purchasers and roughly two-thirds to asset managers. Peru's USD4 billion sustainable sale in October had gained some USD10 billion in demand.
Westpac continued the heavy recent financial sector supply on 8 November with a record USD5.5 billion five-part package which included 15 (non-call 10-year) and 20-year Tier 2 tranches, priced at 153 and 123 basis points over comparable US Treasuries. Both tranches and a seven-year senior portion were priced 22 basis points inside initial guidance. On the same day, Bank of New York Mellon sold USD1.3 billion of perpetual non-call five-year preference shares, priced at 3.75% versus price talk of 4-4.125% area. Société Générale and NatWest Markets also funded, selling EUR1 billion each of five and four-year debt respectively, and Deutsche Bank raised USD2.1 billion, largely from six non-call five-year bonds.
On 9 November, two banks raised junior debt. ING placed EUR1 billion of 11 year (non-call six-year) subordinated Tier 2 bonds at 1,053%, 115 basis points over mid-swaps and 20 basis points inside guidance. Banco de Sabadell sold EUR750 million of perpetual non-call six-year Additional Tier 1, priced at 5% to first call, 50 basis points tighter than initial guidance.
US cellular firm DISH DBS, which is junk-rated, raised USD5.25 billion of five and seven-year bonds on 10 November, pricing these at 5.25% and 5.75%.
Overall, in the period following the Federal Reserve's tapering announcement, markets have proved highly active, with sizeable emerging market and IPO supply - notably the well-received. The sizeable and diverse debt calendar validates our prior forecast that a "taper tantrum" would be avoided. As a further positive indicator of market conditions during 2021 IFR announced that 2021 investment-grade supply reached USD1.342 trillion by 8 November, surpassing the 2017 full year total as the second-highest issuance level on record (behind 2020).
Ford's Green Bond success is unsurprising: in addition to the benefits of incremental demand from ESG buyers, as a relatively strongly-rated firm within the sub-investment debt category, the company's debt is in a category favored by investors this year, given the combination of potential economic recovery and higher returns. Further Green Bond issuance from the automotive sector is near-certain during refocusing towards electric vehicle production.
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