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Capital Markets Weekly: Supply affected by Thanksgiving holiday and renewed COVID-related concerns

30 November 2021 Brian Lawson

US bond market issuance declined to USD3.7 billion in the week to 26 November, versus USD44.1 billion in the prior week, while sales in Euros fell from EUR33.9 billion to EUR23.4 billion. This reflects the Thanksgiving holiday, a time when market activity traditionally declines, along with market volatility reflecting renewed COVID-related concerns.

Despite the aggregate decline, a significant amount of business was transacted with a successful deal for Albania accompanied by diverse supply from mainland China. Other highlights included the Philippines announcing plans for a debut Green Bond in 2022, and El Salvador’s plan to raise “Volcano Bonds”, an instrument whose performance – and use of proceeds – would be linked to Bitcoin, along with renewed pressure on both Turkey’s currency and debt.

Emerging markets

Albania raised EUR650 million of 10-year debt with a 3.5% coupon and issue price of 97.94% to yield 3.75%. On 19 November, Albanian Daily News reported that a government statement described the deal as 1.8 times subscribed. The issue represented the country’s fifth international financing and proceeds will be used to service foreign currency debt. In October, Finance Minister Delina Ibrahimaj had targeted raising EUR500-700 million: in June 2020, its last issue had been for seven years at 3.625%.

Sinochem, a state-owned enterprise incorporating China National Chemical Corporation, raised USD800 million and EUR500 million on 18 November. It placed three and five-year bonds in dollars at 1.536% and 2.268%, 70 and 105 basis points over comparable US Treasuries and 40 and 35 basis points respectively inside initial price talk. Demand exceeded USD3 billion. In Euros, it sold four-year debt at 0.841%, with demand almost twice the issue size.

In addition to a coal-related deal described under ESG below, further Chinese corporate supply included the sale on 23 November of a USD600 million deal for Chengdu Communications Investment Group, a transport infrastructure firm in Chengdu City, Sichuan Province. The offering attracted USD2.2. billion of demand for three-year bond priced at 2.2%, versus initial price talk of 2.7%.  Shenzhen-based Chinese wealth manager East Money Information sold its debut issue the following day, pricing the USD300 million deal at 2.022%, 110 basis points over comparable US treasuries versus guidance 50 basis points wider. On the same day, China Everbright Bank priced USD300 million of three-year debt at 33 basis points over comparable US Treasuries, 37 bps inside price talk and offering 1.27%.

Colombian holding company ISA (Interconexión Electrica) placed USD330 million of 12-year debt on 18 November, gaining around USD1.4 billion in demand for its debut issue. The issue is priced at 3.825%, versus price talk of low 4% area. Proceeds will repay existing debt.

Turkey

After a further rate cut despite high inflation, the Turkish Lira has fallen to new lows, reaching an intraday level of TRL13.45/USD on 23 November, implying a 25% devaluation in little more than a week. It followed comments by the Turkish President that the country was fighting an economic war of independence with its Central Bank arguing currency movements were unrealistic and completely detached from prevailing economic fundamentals. Turkey’s EMBI+ spread index widened 6.67% on 23 November and closed the week at 554 (close to its March high of 569 basis points).

El Salvador

El Salvador announced plans to sell USD1 billion of 10-year debt at a 6.5% yield in early 2022 using a tokenized structure via the “Liquid Network”, a blockchain-based settlement system. Half the proceeds would be converted into Bitcoin and the remainder used for the development of the country’s planned “Bitcoin City” next to Conchagua volcano in the country’s south-east, which proposes to develop a new airport, commercial and residential areas in a “Bitcoin-shaped” city, with construction starting in 2022.  The country is planning to use volcanic thermal energy to support Bitcoin mining and has dubbed the planned issue “Volcano Bonds”. After a five-year lock-up, investors would qualify for additional returns related to Bitcoin’s price, although details have still to be provided.  Pricing bears little relation to conventional market debt, with El Salvador’s January 2023 bonds yielding 15.53% on the Luxembourg Stock Exchange on 22 November, while the Financial Times reported that 2032 bonds were yielding over 13%, levels implying an expectation of elevated default risk. Given its planned coupon, the reported deal appears to target a more blockchain-oriented investor base rather than conventional bond buyers and assumes that El Salvador will have the capacity to mine Bitcoin to cover whatever options are granted to investors.  

ESG

In its latest quarterly report, ICMA’s Green and Social Bond Principles Secretariat flagged that sustainable issuance in 2021 had reached USD741 billion equivalent by end-October, over 80% above the volume in the same period of 2020.  Green Bonds remain the largest ESG segment with half the market total. Sustainability linked debt has grown 10 times in the ten months to end-October versus the same period in 2020, with EMEA issuers dominating the segment with a 71% share, while social and sustainability bonds have grown almost 70% over the period. 

The Philippines announced through Finance Secretary Carlos Dominguez on 19 November that it is in the process of “completing our sustainable finance framework” and preparing the issue of “our first-ever sovereign green bonds”. He did not specify the exact timing for or the currency or duration of the planned debut sale.

Manila Bulletin noted that the country already had issued its “Sustainable Finance Roadmap” on October 20, detailing its nationwide approach to ESG financing for climate transition. The statement noted that government support would be a blend of grants, investment in green projects, and subsidies “for the financial costs and risks of communities transitioning to a climate-resilient economy”.

Coal-related issuance remains active.

  1. Australia’s largest coal-exporting facility, Port of Newcastle, sold USD300 million of 10-year debt on 18 November, with the weak investment grade-rated deal pricing at 6%, in line with price talk.  The transaction was structured as secured debt.
  2. It was followed by Warrior Met Coal, a US Alabama-based firm that describes itself as an “environmentally and socially-minded supplier to the global steel industry”, producing and exporting premium met coal. On 19 November, it priced a private placement of USD350 million of secured debt at 7.875%, stating that proceeds will be used to redeem its 8% 2024 outstanding issue.
  3. Shandong Energy Group, indirectly owned by the Shandong government, also sold USD500 million of 3-year debt at 2.9% versus 3.3% guidance, with demand reaching USD1.55 billion on 23 November. The firm is described as the largest coal producer in Shandong Province.

A broad range of ESG supply was completed. Danish shipping company Maersk sold its first bond since 2018, USD500 million of 10-year Green debt priced at 0.875%, alongside French bank supply, a sustainable issue by Spain’s Galicia region, and sustainability-linked debt for Irish food company Kerry Group. 

Implications and outlook

The decline in supply is heavily influenced by the Thanksgiving holiday. Given the traditional tendency for issuers to avoid sales during the period, the range of deals completed is encouragingly broad.

The latest ESG data confirms the sector’s impressive expansion this year, a trend we expect to continue into 2022, with more countries following the Philippines, New Zealand, and Austria in debuting with Green bonds, and many others likely to expand their use of ESG structures. This reflects the economic benefit of a wider and more diversified investor base, plus the political benefits of a clearer focus on climate transition.

El Salvador’s plans appear less convincing, with the proposed issue offering barely half the return on the country’s conventional debt, which is showing ongoing signs of debt distress. A guarded response by conventional emerging market buyers suggests that the issue – on which more detail is needed – instead will focus on crypto-asset buyers as a form of “convertible bonds” into Bitcoin.  Given the often highly-questionable marketing practices in the crypto-sector, successful issuance cannot be ruled out, but with investors taking significant credit risks that might well be inadequately explained. Even if a deal were completed, it would not represent a lasting solution to the country’s debt stress, although both the low proposed coupon and additional investor base would help its near-term funding position.

Posted 30 November 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence

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