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Following Estonia's market re-entry last week, multiple
sovereign and supranational deals have been completed successfully
after the ECB's announcement, including syndicated issuance by
Spain, Ireland, Greece, Germany, Croatia, Finland, the UK, and
Albania. Despite strong market receptiveness, further adverse
fundamental indicators also have emerged, with two Eurozone states
announcing sizeable increases in their 2020 borrowing needs.
Sovereign, supranational and agency debt
This week's SSA calendar has been highly active, following
Estonia's very successful and rare market return last week:
On 3 June, ahead of the ECB meeting, Estonia sold an upsized
EUR1.5 billion of 10-year debt priced at 0.235%, its first public
issue since 2002, increasing its offering from EUR1 billion after
gaining EUR7.7 billion of interest from 280 investors. Märten Ross,
Deputy Secretary General of the Ministry of Finance announced that
the government "expects to need additional borrowing in the coming
years" making one or two further issues likely in 2020 or 2021.
Following the expansion of the ECB's PEPP facility, sovereign
and agency supply has surged:
First out was the European Investment Bank, which sold an
"ECOOP" 20-year EUR1 billion issue on Friday 5 June, priced at
0.266%. The deal gained EUR8.4 billion in demand, a record for
"ECOOP" issuance, EIB debt syndicated through European cooperative
banks. The offering also gained the largest order book for a
non-sovereign SSA issuer at the 20-year term.
On 9 June, Spain, Ireland and Greece all successfully completed
syndicated issuance, gaining over EUR160 billion in aggregate
demand:
Spain undertook a 20-year EUR-denominated sale. It gained EUR78
billion in demand, selling EUR12 billion at 1.251%. 460 investors
participated, of which 83% were international. 25% was taken by
French and Italian buyers, followed by UK and Ireland with 18%.
Ireland gained a record EUR69 billion of demand for the
syndicated sale of EUR6 billion of October 2030 debt, priced at
0.285%. The deal involved 400 accounts, led by UK buyers with 24%,
France/Benelux with 13%, Ireland with 12% and the Nordic region
with 11%. 37% was placed with asset managers followed by banks with
36%.
Ireland's National Treasury Management agency plans to raise
EUR20-24 billion in 2020, versus an initial funding target of
EUR10-14 billion. Ireland projects a budget deficit of between 7.4%
and 10% of GDP in 2020, versus a surplus in 2019. Before its sale,
it had raised EUR12.5 billion, including a EUR6 billion deal in
April that gained its prior record demand of EUR33 billion.
Greece sold EUR3 billion of June 2030 debt. The offering was
priced at 1.568%, after attracting EUR17 billion of demand, almost
three times the interest in Greece's prior sale. Pricing is "one of
the lowest all-in yields" achieved by Greece. Fund managers took
59% of the deal, followed by banks with 21%. 27.5% was placed with
UK buyers, followed by 15% taken domestically and 13% by French
purchasers.
In addition, the Netherlands auctioned a reopening of its 0% 15
July 2030 issue, placing EUR2.805 billion at -0.154%.
Also on 9 June, the UK completed the syndicated sale of its 2050
gilt, gaining final demand of GBP72.8 billion from 192 investors.
It sold GBP9 billion at a 0.625% coupon to yield 0.76%, pricing 0.5
basis points over the 1.75% 2049 gilt, the bottom end of guidance.
Domestic investors bought 91% of the offering, reflecting its long
maturity.
Albania sold a Euro-denominated seven-year deal, opening books
at 4.125% guidance. It raised EUR650 million with Prime Minister
Edi Rana claiming the deal achieved a "spectacular rating from the
markets": the offering, Albania's fourth, is its largest to date,
and the first since 2018. According to Monitor website in Albania,
the deal was priced at 3.65% after gaining demand of EUR3.2
billion.
On 10 June the supply continued strongly:
In its second syndicated sale this year, Germany added EUR6
billion to its 0% 2050 issue, selling the increase at 94.51% to
yield 0.187%. Peak demand reached EUR44 billion but fell to EUR31.5
billion when final pricing was set effectively without a new issue
premium. The issue is four times the size of prior German taps of
30-year debt and attracted a record demand level for the
maturity.
Croatia raised EUR2 billion of 1.5% June 2031 debt, with demand
reaching around EUR8.4 billion. Finance Minister Zdravo Maric
stated he "can't remember such a big interest among quality
investors across the world". The issue will repay a maturing
USD1.25 billion 6.6% 2020 issue raised a decade ago, lowering debt
service costs going forward. Remaining proceeds will help cover
Croatia's May revised budget, within which its deficit is projected
to rise to 6.8% of GDP with borrowings rising from HRK30.5 billion
to HRK63.4 billion.
Finland raised EUR3 billion of September 2040 debt, priced at
0.3% yield, with demand of EUR25 billion from 220 investors. Deputy
Director Anu Sammallahti noted that demand was a "record high",
while the investor base was "diverse as usual".
Portugal raised the maximum scheduled EUR1.5 billion from taps
of its 2.875% 2026 and 0.475% October 2030 issues, gaining almost
EUR2.6 billion of demand: the additions, of EUR585 and 920 million,
cleared at 0.137% and 0.595% respectively.
Also on 10 June Unédic priced a EUR4 billion social bond, with a
November 2029 maturity and 0.25% coupon, priced 25 basis points
over comparable French government OAT bonds.
The successful rush of supply comes despite growing borrowing
needs in Europe:
Spain has increased its net issuance target for 2020 to EUR130
billion, according to an investor call with Pablo de Ramon-Laca,
Director General of the Treasury and Financial Policy on 5 June. In
its initial 2020 financing plan, Spain had targeted raising EUR32.5
billion of net issuance, with gross sales to reach EUR196.5
billion, from EUR117.5 billion of term debt sales and EUR79 billion
of bills.
Austria's Federal Finance Agency announced that it had adjusted
its Financing Plan for 2020 to incorporate raising EUR60 billion of
new liabilities, versus its initial forecast of EUR31-34 billion,
of which at least EUR35 billion will be from government bond sales:
previously, it had forecast issuance of EUR18-21 billion.
Hybrid debt
On 8 June, three hybrid capital deals were launched in
Europe:
ABN AMRO launched a EUR1 billion additional tier 1 perpetual
deal, first callable after five years. Within hours of launch,
books exceeded EUR10 billion, with the deal priced at 4.375% until
first call.
Commerzbank also raised perpetual non-call six-year AT1 debt,
with its EUR1.25 billion deal gaining EUR9.5 billion of demand and
pricing at 6.125% to first call
Deutsche Boerse placed EUR600 million of 1.25% 27-year hybrid
debt first callable after seven years. According to the company
press release, the deal was seven times oversubscribed proceeds
will be used to refinance a tender for an outstanding EUR600
million hybrid deal.
Hybrid supply continued on 10 June with a EUR3 billion
two-tranche hybrid deal for Volkswagen, which gained peak demand of
EUR7.25 billion. The issue offered initial guidance of 3.875% and
4.375% for perpetual debt callable after five and nine years, with
pricing set at 3.5% and 3.875%.
Additionally, Nationwide Building Society sold perpetual no-call
seven-year debt, raising GBP750 million priced at 5.75% to first
call, 50 basis points inside initial guidance with GBP4.5 billion
of demand.
Outlook and implications
The issues for Spain and Greece are probably the strongest
positive indicators of the potency of ECB quantitative easing
measures in supporting debt markets. In both cases, countries with
heavy and rising debt burdens raised attractively priced
longer-term debt with strong oversubscription despite underlying
deterioration of their debt sustainability.
In parallel, the UK's latest success continued to demonstrate
heavy levels of oversubscription despite the UK's unprecedented
funding needs and its efforts to raise these promptly through
market sales. Similarly, Albania's deal flags the improving climate
for risk appetite, with spreads on weaker rated corporate debt also
easing gradually.
The very positive response to perpetual bank debt and a hybrid
corporate issues further confirms the growing renewed appetite for
risk.
Overall, policy intervention appears to be working well, but
positive sentiment risks reversal if QE policy faces technical
challenges - notably that from the German Constitutional Court
challenging future Bundesbank participation in the ECB's asset
purchase program. However, we see little risk of revived EU
inflation near-term to encourage a more fundamental adjustment in
policy direction. Monetary policy appears likely to continue
providing strong support to financial markets.
Posted 12 June 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit