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Capital Markets Weekly: Record single-tranche EU sale

17 June 2021 Brian Lawson

The EU started its Next Generation EU (NGEU) program with a record EUR20 billion 10-year sale which enjoyed demand of EUR142 billion, while Turkey gained over USD9 billion for a USD2.5 billion 5.125% five-year sukuk issue.

Emerging markets

Turkey sold USD2.5 billion of five-year lease certificates on 15 June at 5.125% versus initial guidance of 5.5%. The deal came shortly after it announced a USD3.5 billion expansion in its swap line with China to USD6 billion.

Dubai Islamic Bank sold a five-year dollar-denominated sukuk deal on 15 June, with initial guidance of mid-swaps plus 135 basis points, for which it attracted demand of over USD2.8 billion. It sold USD1 billion at a 110-basis point spread to yield 1.959%. On the same day, Dubai Aerospace sold USD1 billion of three-year debt at a 140-basis point spread to yield 1.74%, 35 basis points inside guidance.

Brazilian airline Azul became the first Latin American airline credit to raise bond debt since the start of the pandemic. It sold USD600 million of five-year (non-call three-year) bonds on 10 June at 7.375%, versus 7.625% area. Brazilian payments firm StoneCo also sold debt, raising USD500 million of seven-year debt at 3.95%, its first dollar sale. According to the company's statement on 11 June, the deal was "multiple times oversubscribed". Light, an electricity utility based in Rio de Janeiro, placed USD600 million of five-year debt at 4.375% versus mid to high 4% area guidance, with proceeds to repay existing debt.

Sierra Col Energy, a Columbian oil company, placed USD600 million in a debut bond sale. It sold the seven-year (non-call three-year) deal at 6.125%, versus initial talk of 6.5% area.

Other debt

The EU sold its first Next Generation EU (NGEU) financing, a ten-year deal for which demand reached over EUR142 billion. The EU sold EUR20 billion, the largest single-tranche Euro-denominated deal on record and the EU's largest financing to date. Pricing was set at 0.086%, two basis points under mid-swaps (32.3 basis points over the 0% 02/2031 bund yield). 30% of NGEU funding will be in Green bond format.

The EU penalized 10 banks deemed to have broken EU antitrust rules in prior government bond sales by member states, excluding them from the sale. However, with 39 primary dealers for the program, the exclusion clearly had minimal impact on the deal's success.

French mutual insurer MACIF, part of the Aéma Group, sold a three-part subordinated debt offering on 14 June. It placed EUR400 million of perpetual debt first callable in 2029 at 3.5%, a EUR850 million Tier 2 deal due in 2052, and first callable in 2032, priced at 2.125%, and a six-year Tier 3 note priced at 0.625%. The company's release reported that final demand reached EUR12.1 billion from over 400 accounts, describing the operation as the first three-tranche issuance by a European insurer.

Commerzbank sold a EUR500 million Additional Tier 1 perpetual deal first callable in October 2027, attracting over EUR 1.75 billion of final demand for the issue. At its peak, the issue enjoyed a book of almost EUR3 billion before Commerzbank tightened pricing to 4.25% to initial call.

Other bank supply remained active, with Australia's Macquarie Group gaining USD5.7 billion in demand for a three-tranche package worth USD2.25 billion. It placed fixed and floating rate debt due after six years (callable after five) and USD1 billion of 11-year (non-call 10-year) bonds priced at 2.691%, 115 basis points over US treasuries (UST) and 24 basis points inside guidance.

CIBC and ANZ New Zealand also issued. The latter placed USD1 billion for five years at 1.282%, 50 basis points over UST and 25 basis points tighter than initial price talk: IFR claims this is the tightest spread on record for a five-year dollar deal by a New Zealand bank.

Spanish bank Bankinter also sold subordinated debt, placing an 11.5-year Tier 2 deal with a 1.25% coupon first callable after 6.5 years, with demand exceeding EUR1.9 billion.

Bank of Cyprus placed EUR300 million of five-year notes at 2.5%, 25 basis points inside initial guidance. It gained over EUR600 million in demand from around 65 investors. The latest issue is expected to strengthen the bank's MREL ratio.

Poste Italiane, the Italian postal service and a provider of financial services, also sold a EUR800 million perpetual non-call eight-year hybrid issue, priced at 2.625%. Demand exceeded EUR3 billion.

Royal Caribbean Cruise has lowered its debt costs by the sale of USD650 million of five-year debt priced at 4.25%, in line with guidance. Proceeds will redeem 7.25% 2025 debt issued by subsidiary Silversea Cruise Finance.

ESG

Edenred, a French digital payments provider, brought a sustainability-linked convertible bond, only the second such instrument using this format according to IFR. The EUR400 million seven-year deal bears a yield to maturity of -0.12% with conversion at a 37.5% premium.

Spanish development agency ICO brought its third Green bond, a EUR500 million short six-year deal, which gained over EUR2 billion in demand. Pricing was tightened to six basis points over comparable Kingdom of Spain debt, versus initial guidance of a 10-basis point spread.

UK specialist mortgage lender Kensington Mortgages has completed the first Green bond in the UK Asset Backed Securities market, upsizing the deal from an initial GBP480 million to GBP750 million. The senior tranche of the three-tranche offering is structured as Green, targeting lending to properties with EPC energy certification of B or better, placing them in the top 15% of UK residential properties for energy efficiency. The senior bonds were priced at 65 basis points over SONIA, with the package costing 70 basis points for duration of 4.6 years.

Equity

Ten IPOs were completed last week, of which nine traded to a premium in a week where the Renaissance Capital US IPO index appreciated 3.9%. Nine SPAC deals also priced. Marqueta, the payment card system bringing the week's largest deal priced above its indicated price range to raise USD1.2 billion and gained 17% in value in subsequent trading. Kanzhun, a Chinese recruitment platform, gained 96% after pricing at the top of its range to obtain USD912 million.

Against this more receptive background, 12 IPOs and seven SPACs have filed for new listings. Chinese ride-hailing firm Xiaoju Kuaizhi (known as DiDi) has filed for an IPO that might seek as much as USD10 billion, potentially making it the largest US IPO since Alibaba in 2014. The company is described as China's largest taxi application operator. In the year to 31 March 2021 it claimed to serve 493 million active users and to have a daily average of 41 million transactions, based on a network spanning 4000 locations in 15 countries By comparison, Uber had 93 million active users in Q4 2020.

Implications and outlook

The EU's first NGEU sale was an impressive success, setting a record for a single tranche Euro-denominated sale. EU funding under the program will be heavy (although far less than countries like Italy have borrowed regularly), with the very strong demand reportedly helped by the choice of the popular ten-year term to start the program, and by a relatively generous new issue premium.

Turkey's latest sale is also impressive. Despite recent volatility in its currency, its EMBI+ bond index has tightened by a full percentage point since peaking in late March at 569 basis points (over UST), setting a positive background for the country's new sale. Together with its expanded swap line with China, the new offering boosts its liquidity. Once again, despite the uncertainties around its policy direction, the country has managed to fund successfully.

Further sales of financial sector perpetual debt and the ability of Royal Caribbean to refinance debt at significantly reduced levels are further indicators of market receptivity ahead of this week's FOMC meeting.

The DiDi equity offering is noteworthy both for its size and in that a major Chinese firm is seeking its new primary listing in the USA (on NYSE or Nasdaq) rather than in Hong Kong or mainland China, despite recent US regulatory actions against selected Chinese firms and wider issues over disclosure requirements. One positive factor favoring a US listing is the existing presence of Uber and Lyft as pricing references.

Posted 17 June 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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