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Capital Markets Weekly: Sizeable US equity supply further indicates market consolidation

25 June 2020 Brian Lawson

As the Nasdaq index reached a new record high, this week's market highlight has been a sizeable US equity calendar including large-scale offerings involving T-Mobile US, PG&E and American Airlines. Trinidad and Tobago's 10-year bond sale also represented a positive indicator of the continuing risk appetite, as does DP World's plans to sell perpetual debt.

Equity

On 23 June, T-Mobile US Inc undertook a USD14.8 billion share placement on behalf of SoftBank Group. The company is repurchasing 198 million of shares - two-thirds of SoftBank's stake - and redistributing the shares. 143.3 million shares were placed in the underwritten offering, which has a 10.75 million share green-shoe feature. In its filing, the company also announced a USD1.86 billion private placement of mandatory convertible debt, a rights issue distribution to existing shareholders, and a sale to officers of SoftBank. The share sale was conducted at USD103 per share, a 4% discount to the prior close, a small discount despite the company trading at all-time high levels.

According to Refinitiv data published by the Financial Times, the operation took the 2020 volume of US secondary share placements to over USD100 billion, close to record levels.

PG&E is continuing its recapitalization on its emergence from bankruptcy. On 22 June it announced the underwritten sale of USD4 billion of equity and USD1.23 billion of mandatory convertible debt, each with 10% greenshoe provisions.

American Airlines announced plans to raise USD750 million in equity, the same amount in convertible debt, and a USD1.5 billion privately placed bond issue. Proceeds are for general corporate purposes and to improve the firm's liquidity. Part of the bond proceeds, and those of a parallel USD500 million term loan, will repay an existing one-year bank facility obtained in March. According to Bloomberg, the debt portion is secured by a pool of gates and slots, with the bond reportedly being marketed at 11%, and the loan having a four-year term. The same source suggests that United Airways is planning a large (USD5 billion) bond offering shortly.

Grocery chain Albertsons plans to sell 65.8 million shares at USD18-20 each on the NYSE. The sale is entirely a secondary offering by existing shareholders, led by Cerberus Capital Management with a pre-IPO stake of 177.3 million shares or 37% of the firm, privately controlled since 2006: Cerberus plans to sell 28 million shares in the offering. The sale should price on 26 June.

The Renaissance Capital IPO index gained 9.7% in the week to 19 June, bringing it to a 2020 gain of 32.1%. With this index including recent IPOs, its strength shows that deals have been "priced to work", offering highly positive early returns to investors.

Asian markets also have been busy:

South Korea's SK Biopharma was reported on 22 June to have raised KRW959.3 billion (USD792 million) from its domestic IPO, the largest since July 2017. The sale originally targeted between KRW705-953 billion at pricing of KRW36000-49000 per share, involving the sale of 19.6 million shares or 25% of the company. According to The Investor website of Korea Herald, proceeds are to help the firm's global expansion, particularly US marketing and production of its anti-epilepsy treatment cenobamate.

Chinese medical devices producer Kangji Medical Holdings raised HKD3.59 billion (USD464 million) from a Hong Kong listed capital increase. It offered 225.4 million shares plus 33.8 million under its greenshoe arrangements, pricing on 22 June at HKD13.88, top of the range. Trading starts on 29 June.

Sri Trang Gloves, a Thai company which claims to be the world's third largest maker of rubber gloves, has raised roughly THB15 billion (USD484 million) from an IPO on the Stock Exchange of Thailand placing 31% of the company, priced at the top of its indicated range. The deal was to place up to 444.8 million new shares at THB32-34 each. Trading will start on 2 July. According to Bangkok Post website, the company plans to double its production capacity, with the issue proceeds helping to fund its expansion and the repayment of debt. Jarinka Jirokul, CEO, noted in a statement that "COVID-19 has greatly affected the demand for health and hygiene products".

Emerging market debt

Trinidad and Tobago completed its first issue for almost four years. On 22 June, it raised USD500 million of 10-year debt at 4.5%, versus guidance of 4.75%. Demand reached USD1.66 billion. In a statement the Minister of Finance Colm Imbert described the deal as "very successful" and a "tremendous achievement" to have funded at the same rate as in the past given the impacts of the COVID-19 pandemic and weak oil prices, attributing this in part to the 'successful attainment of good credit ratings within the last two months". On 26 March, S&P downgraded the country by one notch but left it with an investment grade rating of BBB- while on 22 May Moody's confirmed its Ba1 rating.

Mexican conglomerate beverage firm FEMSA re-tapped its 3.5% 2050 notes, selling USD700 million at 102.62% to yield 190 basis points over US Treasuries. The issue indicates improving cost levels for the company's borrowings: when issued originally on 13 January, FEMSA sold USD1.5 billion at an issue price of 98.03%, before tapping the deal on 12 February with USD300 million at 101.43%.

Indonesian power utility Perusahan Listrik Negara sold USD500 million of 10-year debt at 3.1% and USD1 billion of 30-year bonds with a 4% coupon, priced at a 240-basis points margin over US Treasuries.

The issue follows the sale of USD2.5 billion of Indonesian sovereign debt in the sukuk market last week, where it raised USD1 billion of ten-year instruments and USD750 million each for five and 30 years. The instruments bear profit rates of 2.3, 2.8 and 3.8% respectively, being described by Jakarta Post as "the lowest in the country's history of global sukuk offerings". Pricing was tightened sharply, by up to 70 basis points from early guidance, with the deal eventually pricing below its outstanding yield curve.

Uruguay has appointed banks and held discussions with investors on 22 June regarding potential issuance in US dollars and local currency, reportedly looking to redeem short-dated domestic debt and replace it with longer-term liabilities.

Kimberly-Clark de Mexico is also seeking a USD500 million ten-year deal.

APICORP (Arab Petroleum Investments Corporation), a Saudi-based development bank, is marketing a five-year dollar deal with price guidance of 130 basis points over US treasuries.

After holding investor calls early this week, DP World has appointed banks to sell dollar-denominated perpetual sukuk debt, first callable after 5.5 years. It is reported to have opened books with guidance of 6.625% until initial call. It is also reportedly planning a Euro-denominated perpetual sale first callable after six years.

Other

The Republic of Austria has appointed banks to arrange a EUR2 billion 100-year offering. Austria already has a "century bond" outstanding, its EUR3.5 billion 2.1% 2117 issue. Latest reports suggest the new deal will be priced at 0.88% yield.

Unicredit has brought a 15-year non-call 10 year Tier 2 deal, priced at 5.459% until initial call, a margin of 475 basis points over US Treasuries, versus initial guidance of 510 basis points. Demand reached USD5.5 billion from 260 accounts, mainly asset managers from the US/Canada.

Our take

High activity levels in the US equity market, including the very large offering in T-Mobile US, are a clearly positive indicator of market risk appetite. The large size and small discount for T-Mobile's offering are impressive. PG&E's ability to gain nearly USD5 billion of underwritten equity finance on emergence from bankruptcy similarly appears a positive development.

The plans by DP World, the Dubai based port operator, to issue perpetual debt is a further indicator of a positive risk environment. Its decision to appoint banks followed investor soundings, suggesting that these proved positive. Its sale of perpetual debt would follow BP's impressive issuance last week in the hybrid segment shortly after announcing sizeable asset write-offs, and further confirms the generally positive issuance climate.

While less of a stand-out event, FEMSA's second tap of its 2050 issue is also noteworthy, with the company issuing a further USD700 million at tighter levels than in either January or February.

Posted 25 June 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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