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Capital Markets Weekly: S+P 500 reaches new record

21 August 2020 Brian Lawson

This week's notable issuance included a sizeable issue by investment-grade rated Bermuda and reports of Egypt having obtained a USD2 billion one-year loan, but the most notable development was the achievement of a record high for the S+P 500 index, with this having appreciated by around half from its early-pandemic lows, accompanied by extremely strong performance in last week's IPO offerings, including a large Chinese US-targeted share sale.

Emerging markets

On 18 August, Bermuda issued USD1.35 billion in 10 and 30-year debt, split equally between the two tranches. It sold the 10-year bonds at 2.388%, 170 basis points over US Treasuries, with the 30-year liabilities priced at 3.39%, a 195-basis point margin. Proceeds are to repay existing debt and meet increased government outlays related to the COVID-19 pandemic. The issue is linked to a tender offering for USD500 million of outstanding liabilities due between 2023 and 2029.

According to International Financing Review, Egypt has arranged a USD2 billion one-year syndicated term loan. In mid-June, it had been reported to be seeking at least USD1 billion in this format from banks based in the UAE. It raised USD5 billion in international bond finance in May.

Indian commodity firm Vedanta Resources has raised USD1.4 billion in three-year amortizing bonds, priced at 13% versus guidance of 13.25%. According to Economic Times of India, demand reached USD2.25 billion. Together with a planned loan, the issue will permit the planned delisting of the firm's Vedanta Ltd. unit in India, with any surplus proceeds planned to repay or tender for the firm's outstanding 2021 dollar bonds. For Vedanta, completion of an issue culminates a dramatic recovery in the performance of its debt securities, with its 2021 and 2022 bonds having traded at debt-distressed levels of under 40% of nominal value between late March and mid-May 2020.

Equity

The S+P 500 index reached an all-time intraday high of 3395, and closed at 3389.8 on 18 August, establishing a new record. The index has gained around 50 percent from its 23 March low of 2237, although the sharpest appreciation was already realized by June.

The equity market has been active in recent days with two outstandingly successful new flotations:

Chinese real estate firm KE Holdings priced its US IPO at USD20, versus initial guidance of USD17-19 per ADS, and enjoyed a 75% surge in price, with the shares opening at USD35.06. It ended first-day trading on 13 August with an 87% gain, the largest appreciation for a billion-dollar IPO in two decades.

Even more spectacular appreciation was recorded by Curevac, a German vaccines company. The firm - which is developing an mRNA vaccine for COVID-19 and vaccines for other viral infections, placed 13.3 million shares at USD16 each, versus a range of USD14-16, but enjoyed a 249% appreciation on first day trading, closing on Nasdaq on 14 August at USD55.80 per share.

StoneCo Ltd, a Brazilian payments company, has sold 27.4 million of its NASDAQ-listed shares at USD47.5 each to raise USD1.3 billion, with a greenshoe facility for a further 4.11 million shares (worth USD195 million). Its shares had closed on 11 August at just under USD54 each, prior to the deal's announcement. Proceeds will be used for the acquisition of Linx S.A., a software solutions company.

On 14 August, Brazilian rail logistics firm Rumo filed to sell 235 million new shares as a capital increase funding investment in the Malha Paulista rail concession. The filing gave room to increase the deal by 35% to meet demand. Based on the closing price of BRL22.81 on 14 August, the deal would be worth BRL 5.36 billion, or BRL 7.24 billion (USD1.24 billion) if increased fully. Pricing will be set on 24 August.

According to Latin Finance, a growing queue of companies in Brazil is planning flotations. Regulatory filings with Brazil's CVM show that almost 30 firms have filed documents for share sales, with four firms including supermarket chain Grupo Mateus joining the list this week.

Indian private sector lender ICICI Bank is seeking up to INR150 billion (USD2 billion) from a qualified institutional placement, priced at INR351.36 per share, versus the INR363.6 closing price on 10 August when the deal was first announced. The offering followed an INR140 billion capital increase by mortgage lender HDFC and share sales by Axis Bank and Kotak Mahindra Bank. Overall, Indian banks face growing pressure from likely future asset quality deterioration to reflect both pre-COVID impairment, which had been in the process of being cleaned up, and new loan impairment to reflect the pandemic.

The potential IPO calendar also includes two high-profile US flotations, although details are still at an early stage:

Several media reports suggest that Airbnb is close to arranging a confidential filing, potentially clearing the way to a flotation in late 2020.

The idea that it would seek to raise new equity is potentially challenging, at least in valuation terms, as the firm has been badly affected by the COVID-19 pandemic: its second-quarter revenues fell nearly 70% year-on-year and it recorded increased losses of USD400 million (versus USD340 million in the first quarter) as tourist activity collapsed. One media report claimed that its current valuation would be in the order of USD18 billion versus USD31 billion prior to the pandemic. However, Barron's suggests that it might consider a direct listing, obtaining a market quotation for existing shareholders but without raising new funds.

In July CEO Brian Chesky advised that Airbnb was intending to continue its preparations for potential flotation, stating that "when the market is ready, we will be ready". The firm raised USD1 billion of emergency debt and equity funding in April from private sources.

There are also suggestions that Palantir, which has previously held back from public listing reportedly over concerns regarding disclosure, might move to float shortly. According to Bloomberg reports, this is likely to take the form on a direct listing. Precedents have been set by Spotify in 2018 and by Slack Technologies last year.

Outlook and implications

While the S+P 500's new record provided the headline event, much of its recovery already took place by June in response to strong fiscal and monetary policy responses, with gradual appreciation for much of the subsequent period.

While Curevac's IPO showed exceptional positive performance, the success of KE holdings is more noteworthy, representing the largest Chinese share sale in US markets for over two years. Given the adverse focus on Chinese corporate disclosure standards in recent months, and the intervention of the US administration against selected Chinese firms, the offering's successful completion and its strong price performance appear particularly impressive.

Reports of major new flotations involving Palantir and Airbnb also indicate the market's positive tone, although it would perhaps be surprising if Airbnb were to seek to sell new shares at present given the sharp recent decline in its valuation. In both cases, a direct listing - gaining a quotation without selling new shares into the market - would offer existing shareholders scope to realize their investments without dilution.

Vedanta Resources' ability to access the bond markets is impressive given the slump of its debt levels between March and May 2020, when its 2021 and 2022 deals consistently traded at under 40% of nominal value, implying market expectation of default and significant haircuts.

Lastly, Egypt's reported funding in the syndicated loan market provides it with additional resources, at a time when its official reserves have been rising slightly. The use of a one- year loan avoids locking in term funding at costs that remain higher than pre-COVID levels but runs a considerably greater refinancing risk. Oman was previously reported to be seeking a similar facility, having failed to raise bond finance early in 2020. Egypt's bond trading levels suggest it could have returned to longer-term markets: its current spread of 653 basis points over US Treasuries is close to levels in May when it raised USD5 billion, and well below its Match peak of around 10 percent over UST. Repeated use of such short-term facilities would increase refinancing risks in the region.

Posted 21 August 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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