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Capital Markets Weekly: Supply eases in week overshadowed by Federal Reserve and ECB meetings

29 July 2019 Brian Lawson

Emerging markets

Panama gained USD11 billion of demand for a USD2 billion sale of long-term debt on 17 July. This comprised USD1.25 billion of long ten-year bonds (due 2030) at 3.16% and USD750 million of 2060 debt at 3.875%. Panamanian President Laurentino Cortizo tweeted that the deal was a "historic" event for Panama: the deal was its "largest and cheapest in history". He claimed that proceeds will enable the government to clear arrears with suppliers and add liquidity to Panama's economy. The issue followed rating upgrades by both Moody's and S+P earlier this year, each by one notch to Baa1 and BBB+ respectively.

Mexico has raised a further USD3.6 billion from international markets. It sold USD2.1 billion of new 2050 debt at final guidance of 192.5 basis points over US Treasuries at a 4.5% coupon with issue price of 99.147%. In parallel it tapped its existing 4.5% 2029 deal for USD1.5 billion at a 165-basis point spread. Pricing of both tranches was tightened given total demand of USD9.5 billion from 217 investors and represents a minimal new issue premium according to Refinitiv data. USD933 million of the proceeds will be used to retire Mexico's existing 3.5% January 2021 notes with USD2.5 billion applied to its wider liability management program.

YPF Luz, Argentina's fifth largest power generator and a joint venture involving YPF and an affiliate of GE, has added to Argentine supply, becoming the fourth corporate borrower to raise debt in the last three weeks. On 18 July, it raised USD400 million of seven-year debt at 10.25%, with demand of USD925 million. The deal was increased from USD300 million.

Mexican leasing company Docuformas also has completed successful issuance. It raised USD300 million at a 10.25% coupon and issue price of 99.248%. The company claimed, "significant oversubscription", but media reports suggested that initial price guidance had been at high 9% levels.

El Salvador's Deputy Finance Minister Oscar Anaya has suggested that the country is preparing international issuance ahead of a USD800 million redemption later this year. He claimed that the authorities have been "working towards" a potential sale in August.

Chinese banks

According to a Reuters report, Chinese banks will sell large amounts of Additional Tier 1 perpetual debt shortly. It suggested that Agricultural Bank of China will seek CNY120 billion (USD17.44 billion) while Industrial and Commercial Bank of China will sell CNY80 billion.

Other debt

Italian 10-year sovereign yields briefly dipped below 1.6%, a full percentage point lower than at end March. Banca Populare de Sondrio is the latest Italian issuer to benefit from this, with an inaugural Tier 2 deal. It gained EUR250 million of demand for the USD200 million issue, priced at 6.25% in line with initial guidance.

It follows Terna, majority operator of Italy's electricity grid, which sold EUR500 million of six-year debt on 18 July, which was roughly four-times covered. The company's statement noted that it had issued 70 basis points more cheaply than the corresponding Italian government BTP of the same maturity, and at a fraction of its average (1.6%) cost of debt under its current Strategic Plan.

Its success follows that of Italgas, which gained "more than EUR3 billion" of demand for its EUR600 million 0.875% 2030 deal announced on 17 July, designed to "optimize the cost of debt while extending its maturities". Additionally, Banco di Desio e Della Brianza sold a seven-year covered bond last week.

Diamond Sports Group, part of Sinclair Broadcast Group, has raised USD4.9 billion in debt to fund its purchase of regional sports networks from Walt Disney. The deal, which included both secured and unsecured tranches, is the largest junk-bond package since April 2016.

Equity

Following the decision to withdraw its flotation of Budweiser APAC, its Asian unit, AB Inbev has sold its Australian subsidiary to Asahi Group for USD11.3 billion. As a result, Asahi is reportedly planning a share sale worth JPY200 billion (USD1.85 billion) along with the issue of additional debt.

On 24 July, Petrobras raised BRL8.56 billion (USD2.28 billion) from the sale of a 30% stake in Petrobras Distribuidora, the country's largest gas station chain. The proceeds could rise to BRL9.6 billion if a 30-day green-shoe feature is exercised, which would take Petrobras's residual holding to 37.5%. The shares were reportedly 4.5 times subscribed and opened at a 6% premium. The Rio Times reports that 160 investors globally were involved in the distribution, which it describes as Brazil's largest share issue since 2015.

An impressive nine US IPOs were completed last week, of which seven opened at premiums which spanned gains from 1% to 72% in first-day trading. A further seven deals are slated for this week, including a USD450 million flotation of Wanda Sports Group, a spin-off from China's Wanda Group.

Our take

This week's activity is clearly impacted by pending key rate decisions in both the USA and Europe. Within the activity cited, we are encouraged by the continued strength in the US IPO calendar, and the growing demand for Italian risks. Mexico's deal shows its resilience in accessing markets despite underlying concerns over Pemex and its potential adverse impact on Mexico's overall debt standing over time.

The ability largely to ignore adverse risk indicators given the urgent search for adequate returns is further indicated by Turkey's resilience to the dismissal of its central bank head and the prospect of rate cuts. As of 23 July, its EMBI+ spread had tightened by over 4% in July, while the global EMBI+ EM index tightened by 3.2%. The risk climate is further indicated by Argentina's performance: so far in July its EMBI+ spread has declined 6.6%, moving from 875 basis points over US Treasuries on 25 June to 780 b.p. as of 23 July's close.

Large amounts of capital-raising by Chinese banks are indicators of the adverse impact of slower economic growth on its major banks, along with the impact of state policies seeking increased exposure to riskier SME borrowers. However, China's largest banks are clearly of systemic importance and highly likely to enjoy state help if needed, giving positive potential momentum to the pending sales. The status of China's largest banks - and the global appetite for risk - should assist deal completion.

Petrobras's share sale in its filling-station subsidiary looks an impressive success. The levels of demand were clearly substantial, and the sale gives tangible momentum to the Bolsonaro administration's plans to reduce the presence of the state in Brazil's economy while helping to reduce its fiscal deficits.

Posted 29 July 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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