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Capital Markets Weekly: Tunisia tests market risk appetite

05 February 2021 Brian Lawson

This week's highlight is the announcement that debt-stressed Tunisia is planning to seek sizeable US dollar denominated issuance, although its prospects of success would be transformed if it gains guarantee support from USAID: Belgium, Finland, Cyprus and Portugal sold debt, continuing the trend of sovereign borrowers extending duration.

Emerging markets

On 1 February, Reuters reported on 1 February that Tunisia is planning sizeable dollar issuance. Finance Minister Ali Kooli stated in an interview that it might seek up to USD3 billion in additional debt.

The report noted that Tunisia has difficult debt sustainability metrics, with public debt of around 90% of GDP and a fiscal deficit estimated at 11.5% of GDP in 2020.

Kooli stated that Tunisia was seeking US government support for USD1 billion, which could permit a US backed bond sale, a route previously employed by the country (last used in 2016), along with arrangements with the IMF. Following similar guaranteed deals in 2012 and 2014, it sold USD500 million of five-year debt in 2016 at 1.416%, with both principal and interest payments fully supported by a USAID guarantee.

He suggested that "there is a real possibility to go to markets for at least USD1 billion during 2021", while also citing the larger amount of USD3 billion.

Overall, Tunisia appears to face stressed debt requirements, with Fitch reporting heavy reliance on foreign credit, reporting that this represents 73% of total government debt at end-2019. Its 2021 budget forecasts external needs of up to USD 5 billion with the country reported to face heavy debt repayment requirements of USD6 billion, making IMF support highly important. A Fitch report cited USD2.2 billion of external debt maturities in 2021, including two USAID-guaranteed bonds, each for USD500 million. The report also claims that Tunisia has held discussions with bilateral lenders to reschedule obligations, but that it is not eligible for DSSI relief.

Commercial Bank Qatar plans to raise USD500-650 million of dollar-denominated Additional Tier 1 capital. Chief Executive Joseph Abraham is quoted as stating that planned issuance, which also will involve the subsequent sale of senior debt, aims to "diversify the investor base in our bonds, and also the tenor".

Moscow's Domededovo Airport launched the USD350 million seven-year deal marketed last week, with price guidance of 6% area. It gained demand of over USD900 million and sold an upsized USD453 million at 5.35%.

Mexican state-owned electricity utility CFE sold USD1.2 billion of 10-year bonds at 3.348% and USD800 million for 30 years at 4.677%. Proceeds are to refinance existing debt and general purposes. It will be followed by PetroPerú, which is seeking intermediate to long term debt to fund refinery upgrades.

ESG

Kensington Mortgages, a UK lender which describes itself as helping property purchases by the self- employed, first-time buyers and those seeking help to buy arrangements, is arranging the first residential mortgage backed security formally structured as a social bond. The portfolio, called Gemgarto 2021-1, comprises five tranches and is worth GBP472 million. Gemgarto is the company's vehicle for standard securitization: it has published a social framework which stipulates that it aims to grant 50% of its 2021 lending to "social borrowers" this year. In 2020, the firm introduced a "Hero" mortgage product for essential key workers such as healthcare personnel who provide community services during the COVID-19 pandemic and need better access to their work locations.

First Abu Dhabi Bank has sold a CHF260 million (USD293 million), the first Swiss Franc-denominated Green Bond by a MENA issuer. The six year deal, the bank's fifth Green Bond, following prior sales in USD and HKD, was priced at 0.068%, which the bank described as "well inside" both its outstanding Swiss Franc curve and after a currency swap, its dollar outstanding debt. In its statement the bank claimed that the deal is the largest Swiss Franc denominated Green bond to date. Managing Director and Head of Group Funding Rula AlQadi highlighted that 60% of the offering was allocated to ESG dedicated buyers, thereby "diversifying our funding base further".

Spanish electricity utility Iberdrola marketed a new two-tranche Green hybrid issue, having attracted over EUR6.5 billion of demand last October for a EUR3 billion two-part perpetual Green Bond sale callable after 5.5 and 8.5 years, with coupons of 1.874% and 2.25% respectively, its largest international funding to date. The new operation was for EUR2 billion, equally split between tranches first callable in 2027 and 2030. These were priced at 1.45% and 1.825% respectively, versus guidance of 1.5-1.625% and 1.875-2%. Demand for the two portions were EUR5.2billion and EUR4.3 billion respectively.

It was followed by Telefonica, which sought a Euro-denominated perpetual sustainability hybrid, first callable after 8.25 years.

Also on 2 February, CaixaBank sold EUR1 billion of 8-year Green debt at 90 basis points over mid-swaps, versus guidance of 115 basis points.

Other debt

Three European sovereign syndicated sales were marketed on 2 February:

Cyprus gained demand of EUR8.5 billion for a EUR1 billion sale of five-year debt, with pricing tightened to 50-55 basis points over mid-swaps versus initial guidance of 60 basis points. The deal was priced with a 0% coupon. Proceeds will help repay EUR1.25 billion of bills sold to domestic banks last April.

Belgium placed a EUR5 billion 50-year OLO: the June 2071 bond was priced to yield 0.69%, 7 basis points over Belgium's prior 50-year bond which matures in 2066. Within 2021, it already raised EUR6 billion of October 2031 debt, priced at -0.216%. The country's Debt Agency has projected gross borrowing requirements of EUR43.6 billion in 2021, versus EUR51.5 billion in 2020, with EUR36.4 billion to be sought from OLO (term debt) sales, versus EUR44.5 billion last year.

Finland attracted EUR19 billion from 130 investors for a EUR3 billion April 2052 bond, priced two basis points over mid-swaps. Deputy Director Anu Sammallahti described the deal as Finland's "inaugural issue in benchmark size in the 30-year maturity", noting the "strong" demand but flagging that investors would enjoy a positive yield despite "historically low" pricing parameters. The issue was priced with a 0.125% coupon to yield 0.151%.

It will be followed by Portugal, which has mandated banks for a 30-year syndicated deal.

Corporate supply also remains active, including a USD5.5 billion four-part bond for Altria to fund a USD3.65 billion tender offer for existing debt, and Apple, seeking USD12 billion.

Equity

The London flotation of boot and shoe manufacturer Dr. Martens has proved a clear success. The issue initially raised GBP1.29 billion, from the sale of 350 million shares at 370 pence each, the top of its range of 330-370p. Shares ended first-day trading up 21.6%. According to a company statement, the offering was eight times subscribed. Reuters reports also suggest that the greenshoe facility of 52.5 million additional shares was exercised rapidly, bringing the total sale close to GBP1.5 billion. The offering was secondary sale: the company was owned primarily (around 75%) by Permira, a primary equity specialist which bought the firm in 2014 for EUR380 million: it is now capitalized at GBP3.7 billion.

The deal's success is reported to be encouraging additional UK-based IPOs. Electronic card retailer Moonpig was among these, with its shares opening on 2 February at a 25% premium. Moonpig's IPO raised GBP471 million for existing shareholders including private equity firm Exponent, but just GBP20 million in new shares for the company: Blackrock and Dragoneer acted as cornerstone buyers with a combined new investment of GBP130 million.

UK food delivery firm Deliveroo is preparing for a flotation later in 2021. It has appointed banks for the sale, having just raised private funding at an implied valuation of GBP7 billion. The offering, which comes after Amazon bought shares in the firm, is widely expected to be sizeable, looking to benefit from the growth of at-home dining during the COVID-19 pandemic. UK rival Just Eat reported a 400% growth in activity last year as a result.

The two UK IPO successes followed that of Poland's InPost, a parcel delivery and storage firm, which conducted the largest European IPO since 2018. The company sold 175 million existing shares at EUR16 each, raising EUR2.8 billion for its existing shareholders, again from the private equity sector, who are selling with very sizeable gains. The shares opened at a 26% premium on 27 January.

InPost's successful sale shows the dramatic change in value of e-commerce business. The company provides a network of locations to collect goods called "automatic parcel machines", rather than waiting for courier deliveries, and was purchased by its main shareholder Advent for just PLZ430 million in 2017. Three anchor investors, Blackrock, Capital World and GIC, reportedly placed orders worth EUR1.03 billion of shares.

Kuaishou Technology has priced its IPO at HKD115 per share, the top of its indicated range, with exceptional retail interest. Retail interest is reported by South China Morning Post to have reached HKD1.28 trillion (USD164.8 billion), leaving the retail portion of the sale 1200 times subscribed. According to the Standard newspaper's website, only 2.5% of the initial sale of 365 million shares were reserved initially for retail buyers, although this can be increased to six percent. Speculative interest is being encouraged by banks in Hong Kong, including HSBC and Bank of China, offering loan facilities for IPO subscriptions, with low interest rates and high loan proportions (up to 90% for BOC).

Equity markets reversed last week, but larger IPO deals continued to fare well: Shoals gained 36% during first-week trading while Qualtrics gained 52% on its first day.

Using data from Renaissance Capital, a record 91 SPAC deals were completed in January, raising USD22.9 billion. The same source reports that after an unsuccessful direct IPO attempt in 2019, WeWork is now exploring a SPAC-based flotation. The IPO-focused broker describes developments as "it's not all sane", echoing our recent concerns over apparent SPAC overheating.

Nine conventional IPOs were slated this week. The largest is for Telus International, a Canadian outsourcing and digital services firm. Webinar provider ON24 is also in the market.

Implications and outlook

Tunisian access to funding would be transformed by US backing, but on a stand-alone basis Tunisia looks a challenging risk. Despite the ambitious targets mentioned, Tunisia's Finance Minister Kooli accepted that "our situation is tough" but argued that "it doesn't mean that we aren't in a position to pay salaries or reimburse our debt".

As reference points, Bahrain is projected to have reached a debt stock well over 120% of GDP in 2020, versus 103.4% in 2019, yet recently accessed international bond markets successfully for USD2 billion of term debt. Oman's debt stock is materially lower, and the country raised USD3.25 billion last month. Comparing these risks, however, the bid yield of 8.4% on Tunisia's Euro-denominated 6.375% 2026 issue is relatively high and questions potential market capacity for this risk. Nevertheless, the bond trades some 16 percentage points in price above its April 2020 levels, when they gave double-digit yields, a clearer indicator of perceived debt distress.

Cyprus's 0% coupon funding is a positive indicator of its progress away from past debt distress. The country recently reported that its 2020 fiscal deficit is likely to have reached 4.5% because of the COVID-19 pandemic, but initial budget forecasts already had projected a 4.3% deficit given economic slowdown. Its debt stock rose sharply, from 94% in 2019 to 119% at end-2020, but this reflects the build-up of "sizeable cash reserves (estimated at over 17% of GDP) in 2020 to deal with any further negative developments". The latest deal reinforces the downward trend in borrowing costs for Cyprus, which estimated its average cost of public debt at a manageable 1.8% in 2020.

Portugal's 30-year sale - still pending at the time of writing - has been rumoured in the markets for some time. It comes against a background of favourable investor sentiment: the country recently sold 10-year bonds at auction at negative yield for the first time. Portugal's debt metrics have suffered during the COVID-19 pandemic, with the prior downward trend in its debt to GDP ratio, 117.7% at end-209, reversing sharply last year to 137.2%. However, in its latest forecasts the IMF projects that Portugal will force this back to 115.9% by end-2025: it projects that its debt stock at that time will entail a lower debt to GDP ratio than those in France, Belgium, Spain and the UK. The long duration for its syndicated sale, along with those for Finland and Belgium, reinforce the trend of borrowers locking in very long-term funding at nominally small cost, a clearly positive debt sustainability indicator. For investors, the longer-term position is far less comfortable, as highlighted by Finland's statement noting how its 30-year tenor had allowed investors to achieve a positive yield.

Lastly, while we are not in a position to comment on the individual merits of recently-floated companies in Europe, the ability of private equity firms to exit at considerable multiples of their investment cost, which in several cases involved a relatively short holding period, combined with the strong market performance of the newly-floated shares, serve as further clear indicators of the current market strength and the impact of loose monetary policy.

Posted 05 February 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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