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Turkey has been a focus of adverse attention this week.
Turkish President Recep Tayyip Erdoğan abruptly dismissed the
Turkish Central Bank governor, Naci Ağbal, on 19 March, four months
after his appointment. He replaced him with Sahap Kavcioğlu, an
academic and a former MP from the ruling Justice and Development
Party (AKP) who previously has advocated a policy of lower interest
rates, aligning with Erdogan's own preferred unorthodox position.
Ağbal was removed a day after the Turkish Central Bank increased
interest rates by 200 basis-points, from 17% to 19% (versus annual
CPI inflation of 15.6% and core "goods" inflation of 17.3% in
February)
After the removal of Naci Agbal, the Turkish Lira initially
weakened as much as 14% in Asian markets, trading around 8.4
against the US dollar, and Turkey's 2031 bond fell eight percentage
points, before recovering after a pledge by Finance Minister Lutfi
Elvan to continue efforts to control inflation.
In response to these developments, Turkey's international bond
spreads have worsened sharply, with the average margin of its
dollar bonds rising on 22 March from 427 to 533 basis points over
comparable US Treasuries according to its EMBI+ index. Yields on
domestic 2030 government bonds widened by four full percentage
points to above 18%.
Elsewhere, Liberty Latin America sold USD820 million of
8.25-year debt for its Puerto Rican subsidiary. The deal was priced
at 5.125% versus guidance of 5.25-5.5%, at a spread of 366 basis
points over US treasuries. Proceeds will refinance existing bank
debt.
Banco de Crédito del Peru sold USD500 million of 10.5-year Tier
2 subordinated debt at 3.267%, 245 basis points over US treasuries
versus initial price talk of 280 basis points. Demand reached
USD1.9 billion.
Indonesia's Bank Negara raised USD500 million of Tier 2 debt at
3.75%, versus 4.2% initial guidance. The bank is majority owned by
the Indonesian government.
Several Chinese borrowers also have been active raising finance,
with three deals on 23 March (from GLP China Holdings, Science City
Investment Group and SCE Group Holdings).
On 25 March, Power Construction Corporation of China marketed
perpetual debt, gaining over USD2.2 billion of interest for the
issue at price guidance of 3.55% to the initial call after five
years, with final pricing set at 3.08%.
According to an (unconfirmed) media report, Laos has pulled its
planned dollar bond for the third time, citing unfavorable market
conditions, despite offering an 11% coupon.
Pakistan is reported to have mandated banks to arrange a
three-tranche dollar bond. The local The News website previously
suggested Pakistan would seek a USD750-1000 million volume, with
the deal replacing prior plans for sukuk issuance. The report also
suggested Pakistan is preparing a USD500 million Green Bond sale to
fund hydropower development.
The Maldives is reported to be preparing a five-year dollar
sukuk sale. , while Pakistan is also reportedly considering dollar
issuance in the near future.
Kuwaiti Islamic bank Boubyan Bank sold an unrated USD500 million
perpetual deal, with a 3.95% coupon to the initial call after 5.5
years, versus 4.25% guidance.
ESG
Indian renewables energy firm Greenko sold USD940 million of
3.85% five-year Green bonds on 22 March, with demand reaching over
USD2.5 billion. A Mint website source described the offering as
"the lowest priced and largest bond in non-investment grade" by an
Indian corporate issuer. The firm operates wind, solar, hydro and
other renewable facilities in 14 Indian states.
The EU arranged another SURE facility sale, this time targeting
5 and 25-year maturities for its third deal in 2021 (having already
issued earlier in March). This time it sold EUR13 billion of which
EUR5 billion was for the longer tenor, with the two tranches priced
at -0.488% and 0.476%.
Demand reached EUR46.5 billion and EUR50 billion respectively
for the two tranches with involvement of over 600 investors. Fund
managers and official buyers dominated demand for the five-year
tranche, taking 45% and 42%: by geography the UK (27%) and Asia
(27%) were most prominent. For the 25-year debt, asset managers
took 44%, followed by banks, central banks/official institutions
and pension funds with 17%, 15% and 13% respectively: Germany, the
UK and Benelux led demand with 28%, 18% and 15% respectively.
In its statement, the European Commission noted it has raised
EUR36 billion within 2021 for the program, within total SURE
issuance of EUR75.5 billion. It flagged that it has EUR13-14
billion projected for Q2 2021, before starting on funding for its
EUR800 billion Next Generation EU program.
Portuguese gas and electricity grid operator REN plans a debut
Green Bond issue "in March or April". The offering is slated to be
for seven to 10 years and for EUR300-500 million.
South Korean internet form Naver has conducted its debut bond
issue by way of a sustainable issue. It raised USD500 million of
1.5% five-year debt priced at 68 basis points over comparable US
Treasuries, versus initial guidance of 90 basis points.
Other debt
Oracle sold a USD15 billion six-part package on 22 March, the
second-largest corporate offering this year. The package included
30 and 40-year tranches, priced at margins of 155 and 170 basis
points respectively.
Following its acquisition of Refinitiv the London Stock Exchange
Group is arranging a large, multi-currency bond financing spanning
US dollars, Euro and sterling, with maturities of 3-20 years, 4-12
years and nine years slated for the three currencies. The dollar
sale on 25 March raised USD4.5 billion in five tranches.
Cruise line Royal Caribbean has sold USD1.5 billion of high
yield debt: the seven-year sale was priced at 5.5% versus guidance
of 5.5-5.75%. The issue will cover debt maturities in 2021 and
2022, along with general corporate purposes.
The UK's Debt Management Office arranged the country's second
sukuk issue on 25 March. It placed GBP500 million of July 2026
instruments with a profit rate of 0.333%, in line with its
outstanding 1.5% 2026 gilt. Demand reached over GBP 625 million.
The issue is underpinned by rental income from government owned
office properties.
Implications and outlook
Turkey's latest move is part of a long politically driven
process, stemming from President Erdoğan's view that high interest
rates are both inflationary and damaging to Turkey's economy. The
replacement of the central bank governor came after Turkey had
followed a more orthodox policy to control inflation and support
its currency, which had encouraged positive portfolio inflows,
needed to fund Turkey's persistent current account deficits and
replenish its foreign exchange reserves.
Even if Turkey holds rates stable at its next monetary policy
meeting - which it may well do to avoid exacerbating market
nervousness - the longer-term position points to increased risk of
currency weakness, higher borrowing costs and reduced market
access. Prior suggestions that Turkey would raise more sovereign
dollar debt soon would now seem ambitious, with the risk of major
financial dislocation having increased. Given the government's
refusal to seek IMF support, eventual default risks appear to have
worsened.
If Laos has failed for a third time to access bond finance, the
feasibility of public debt finance seems increasingly in doubt. Its
external solvency would then be heavily dependent on China's
support. However, Laos is a small borrower and its plight is
unlikely to impact broader conditions in Asia.
Conversely, this week's supply - particularly that from Asia -
further reinforces our prior message that despite increases in key
reference bond yields, financial markets have suffered only limited
supply disruption. This week's Greenko deal took Indian dollar bond
sales in 2021 to USD10.7 billion, up 70% versus the same period in
2020. Aggregate non-Japanese Asian sales have reached USD70
billion, USD4 billion above corresponding levels in 2020. The
iTraxx Asia ex-Japan CDS Index recently reached a spread of 58
basis points, more than a full percentage point below levels in
March 2020 and close to all-time lows.
Longer-term US bond yields have deteriorated sharply within
2021, but the US authorities appear relaxed as evidenced by the
ending as scheduled on the exemption for bank holdings of US
treasury bonds as scheduled at end-March. By contrast, the European
Central Bank appears keener to preserve the prevailing yield
environment, having stepped up its asset purchases and pledged
increased intervention to assist market stability, leading to some
recent market divergence.
Posted 26 March 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit