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Capital Markets Weekly: Sizeable emerging market deal-flow indicates post US-electoral bond demand recovery

20 November 2020 Brian Lawson

Emerging market supply revived this week, involving a strongly-received USD8 billion package for Saudi Aramco, a two-part liability management sale by Mexico and China placing EUR4 billion including negative-yielding five year bonds: Uzbekistan also is marketing dollar debt.

Emerging markets

Emerging market supply has revived considerably this week. In sequence:
Mexico sold a two-tranche USD3.625 billion ten and 40-year package. It priced USD1.825 billion for 10- years at 2.65%, 175 basis points over comparable US treasuries, versus guidance of low 200 basis points. The 40-year tranche priced at 3.771%, 210 basis points over UST, versus mid-200 b.p. area guidance. The package gained some USD16 billion in demand, according to Latin Finance. Proceeds will redeem existing debt including the country's outstanding 3.625% 2022 issue.

Saudi Aramco arranged a USD8 billion senior unsecured debt package with maturities of three, five, ten, 30 and 50 years. Media sources attributed the financing to funding the firm's dividend commitments, described by Reuters as worth USD37.5 billion in H2 2020. In its USD12 billion debut sale in April 2019, the company had raised USD12 billion with then-record demand of over USD100 billion.

On 17 November it attracted an impressive USD48.1 billion for the package. Pricing was tightened by 30 basis points on the three shorter-dated tranches and by 40 b.p. on the 30 and 50 -year portions: the two long-dated tranches priced at 3.3% and 3.55% respectively, with the shorter portions priced at spreads of 110, 125 and 140 basis points over comparable Treasuries.

China followed its recent dollar bond sale with a multi-tranche Euro-denominated issue. The deal also followed a EUR4 billion sale last year, China's first Euro-denominated borrowing in 15 years. China placed EUR4 billion of five, ten and 15-year debt, attracting EUR16 billion in demand. The EUR750 million five-year tranche was priced at -0.15%, the country's first negative yielding bonds, a margin of 30 basis points over mid-swaps (59 basis points over comparable German bunds). The longer-dated tranches priced at 0.318% and 0.665%.

Peruvian healthcare group Auna sold USD300 million of five-year debt at 6.5%, versus initial guidance of 7% area. The transaction was the firm's debut international bond.
It was followed by Brazilian digital retailer B2W which raised USD500 million of 10-year debt. The debut deal priced at 4.375% versus high 4% guidance.

Fisterra borrowed through its Tierra Mojada unit to raise an upsized USD953 million of 20-year bonds, increased from USD920 million, with pricing set at 5.75% versus low 6% area guidance.

Uzbekistan has mandated banks and started pre-marketing seeking 10-year dollar debt: it raised 10-year funding in February 2019 at 5.375%.


World Bank sold a USD8 billion sustainability bond on 17 November, its largest such deal to date. It raised USD3 billion for three years and USD5 billion for seven years, pricing at 0.322% and 0.77% respectively, spreads of 10.1 and 14.8 basis points over the corresponding US Treasuries. Demand reached over USD15 billion from 300 accounts, described by IBRD as "the most interest it has ever attracted for a benchmark bond". The seven-year tranche is described by lead managers as the largest ever SSA issue at this maturity. Its dollar sale came one day after it sold a GBP1 billion July 2026 sustainable bond priced at 0.305%. IBRD VP and Treasurer Jingdong Hua stated that the offerings will help World Bank to support member states "in their efforts to safeguard development gains" when responding to the COVID-19 pandemic.

LafargeHolcim sold a debut sustainability-linked bond, the first from the building materials industry. The EUR850 million 2031 deal has a 0.5% coupon: it gained EUR2.6 billion of demand. Investors will be paid an incremental coupon if the firm fails to meet a target of 475 kg net CO2 emissions per tonne of cementitious material by 2030.

Société de Financement Local undertook a debut direct Green Bond sale on 13 November. The entity is 100% owned by public sector entities (99% by Caisse des Dépôts) and operates as a state development bank funding French local authorities and export credits. The EUR500 million November 2028 bond was 5.5 times subscribed.

Brazilian paper and pulp company Suzano added USD500 million to its 3.75% 2031 sustainable issue, pricing at 3.1% versus guidance of 3.35% area. The sale showed improving conditions: it placed the original USD750 million bond in early September at a 3.95% yield.

Other debt

On 16 November, Spanish infrastructure company Abertis launched a perpetual hybrid issue first callable after 5.25 years, amidst market forecasts of multiple hybrid corporate sales prior to year-end. On 17 November, Cinco Días newspaper reported that it attracted EUR5.25 billion in demand for the EUR1.25 billion sale, priced at 3.25% to first call, 50 basis points inside initial guidance. Proceeds will be used to redeem five issues worth EUR3.65 billion maturing between 2024 and 2027.

As a further positive indicator of risk appetite, Mediobanca gained over EUR1.75 billion in demand for a EUR250 million 10-year subordinated deal, at price guidance of mid-swaps plus 340 basis points. This was then tightened by 30 basis points to reflect the strong demand, with the deal pricing at a 2.3% coupon. Finally, the deal was nine times subscribed.

Also from Italy, BPER Banca sold a EUR400 million 10-year subordinated deal at 3.625%.

Italy raised dollar debt at sovereign level. It offered a February 2026 issue placing USD3 billion at 85 basis points over mid-swaps, versus guidance of 100 basis points. Final demand was USD9.25 billion, versus a peak level of USD10 billion pre-tightening. In October 2019, it had raised USD7 billion from the sale of five, 10 and 30-year debt, its first dollar sale since 2010, with this designed to broaden its investor base.

Four UK borrowers arranged high-yield financing in the week to 13 November, benefitting from the improvement in market sentiment. The largest was for PureGym, which sold EUR445 million due in February 2025, with a 5.5 coupon and issue price of 95%: proceeds will fund its purchase of FitnessWorld. The deal represents one of the last pre-COVID refinancings of bank bridge facilities granted before the COVID-19 pandemic, with the "take-out" sale having been pending since the initial loan was granted last January. Building supplier Travis Perkins gained over GBP1 billion in demand for a GBP250 million February 2026 deal, priced at 3.75% versus 4% area guidance. Thames Water sold GBP250 million of 5.5.-year bonds at 4.625%, versus price talk of low 5% area, with supermarket group M+S also in the market. These will be followed by food group Boporan, marketing a five-year deal.

Our take

This week's successful sales by China - notably its negative-yield five year tranche, Saudi Aramco, Mexico, Abertis's perpetual debt success, Latin American corporate issuance, the strong oversubscription for Mediobanca and the rush of UK junk bond deals all indicate a return to risk-receptive bond market conditions after recent supply reductions, which had reflected US electoral uncertainties and bond market corrections in light of progress with vaccines for COVID-19.

Additionally, as forecast, the sustainable bond issuance flow appears to be gathering greater momentum, indicated by LafargeHolcim bringing the first deal from the construction materials sector. Given the flexibility in use of proceeds and scope to apply these to making "brown" practices cleaner, we continue to expect this segment to grow significantly, boosted by ICMA's new guidelines, as a convenient alternative to Green and Social bond sales by climate-sensitive corporate borrowers.

Posted 20 November 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit



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