Capital Markets Weekly: Ukraine benefits from improved sentiment

This week's issuance highlight was the USD1.25 billion eight-year sale by Ukraine at its lowest cost to date. Additionally, the Maldives tapped its recent initial publicly distributed sale: issuance by borrowers from Argentina and Oman also indicated ongoing investor risk appetite.

Emerging markets

Ukraine raised USD1.25 billion of eight-year debt priced at 6.875%, the lowest coupon on record in its eleven international issues. In its statement, Ukraine's Finance Ministry stated that the transaction is meeting its plans for external borrowing, "most of which we expect to fulfill with concessional financing from international partners". Initial price guidance had been set at low 7% area.

The Maldives tapped its 9.875% 2026 sukuk, raising a further USD100 million, priced at 10.5% in line with guidance. In late March, it placed USD200 million priced at a discount with a 10.5% yield, with demand of over USD370. The initial sale fell short of the benchmark size the borrower reportedly had targeted, but widened its investor base, with its prior two-dollar deals having been for small size and placed with few buyers.

Pan American Energy, an Argentine firm, has accessed the international markets, raising USD300 million of six-year bonds at 9.125%. The company is a joint venture between BP and Argentine firm Bridas, itself 50% owned by CNOOC. In April, Fitch rated the planned offering BB-, three notches above Argentina itself, citing its external cash flow generation capacity from assets in Mexico and Bolivia.

Oman's state-owned energy company OQ (formerly called Oman Oil Company) attracted over USD4.5 billion in demand for a USD750 million seven-year deal, priced at 5.125% versus initial price talk of 5.625%. The sale follows Oman itself raising USD3.25 billion during January. Sohar Aluminium - 40% owned by OQ - recently raised USD600 million from a bank loan, adding to foreign exchange inflows to the country, following Oman Electricity raising the same amount from banks in January, according to Reuters. Oman itself raised USD2.2 billion in bank facilities in early March.

Abu Dhabi Ports also sold debt, pricing a USD1 billion ten-year offering at midswaps plus 110 basis points versus initial guidance of a 145 basis point spread. The firm is reported by Gulf News also to have raised USD1 billion in bank funding.

UzAuto Motors, a car manufacturer owned by Uzbekistan's government, sold USD300 million of unsecured five-year debt at 4.85% versus price guidance of 5.375%.

Standard Profil, which makes automotive sealing products, is marketing EUR275 million of five-year debt. The Turkish company (rated B3/B-) will thus test the degree of appetite for corporate risk from the country, with pricing slated for (Friday) 30 April.

Additionally, Petronas has sold USD3 billion in a two-tranche offering. It placed USD1.25 billion of ten-year bonds at 2.482% and USD1.75 billion for 40 years at 3.404%, pricing 42.5 and 40 basis points inside initial guidance of 135 and 155 basis points respectively over US Treasuries.

Indonesian real estate firm Pakuwon Jati placed USD300 million of seven-year bonds at 4.875%, versus 5.2% guidance. Demand reached USD2 billion. 85% of the issue was allocated to Asian investors with asset managers taking 87%. Proceeds will be used to redeem the firm's USD250 million 5% 2024 issue.

ESG

A Financial Times article on 26 April has highlighted the growing role of ESG funds globally and in Europe.

It cites TrackInsight data to claim that exchange traded funds (ETFs) investing according to ESG principles grew their total global assets under management from USD59 billion in 2019 to USD174 billion in 2020.

Additionally, according to Morningstar data used in the same article, first quarter 2021 inflows into European ESG ETFs reached EUR 25.8 billion, for the first time surpassing the total for non-ESG ETFs (EUR22.3 billion). By comparison, inflows ESG ETFs had represented under 20% of the total in the last two quarters of 2019.

Morningstar data further shows that the stock of assets in ESG ETF funds now represents over 10% of the total stock of ETFs.

Despite some positive growth indicators, ESG ETF inflows in the US totaled only USD7.6 billion of the USD248 of net inflows to such funds during the first quarter of 2021.

Andorra has arranged its inaugural sustainability issue, a Euro-denominated benchmark transaction. On 28 April it launched a 10-year issue, with demand reaching EUR2.5 billion from 157 investors in 19 countries. It priced EUR500 million at 1.25%.

For 2021-22, its presentation lists EUR591 million of planned social outlays, dominated by healthcare (including COVID-9 related measures) with EUR334.7 million, along with socio-economic and education spending of EUR149.2 million and EUR76.9 million respectively. EUR91.4 million of eligible Green outlays are forecast. The country's presentation notes that its government deficit reached 4.4% of GDP in 2020, from just 0.13% in 2019, with a 2.61% deficit forecast for 2021: its debt stock rose from 33% at end-2019 to 44% last year.

Brazilian cosmetics firm Natura sold USD1 billion of seven-year sustainability linked notes at 4.125% versus mid-4% initial guidance. The deal contains KPIs relating to carbon emissions and recycling, according to Latin Finance sources, with an unusually steep 65 basis point coupon penalty if these are missed.

South Korea's largest airport, Incheon International Airport (which serves the Seoul area) attracted over USD1.5 billion for the sale of USD300 million of five-year Green Bonds. The deal priced at 1.361%, 52.5 basis points over US Treasuries.

Other debt

The UK attracted GBP69.4 billion in demand for its latest syndicated gilt sale, a GBP6 billion offering due in 2051 priced at 1.3115% with orders from 174 accounts. 89% of allocations went to the UK.

Italy arranged sizeable dollar issuance, for three and 30 years:

It sold USD2 billion of three-year debt at 0.986%, attracting over USD4.8 billion of demand from some 90 accounts. The USD1.5 billion 30-year portion was priced at 3.938%, attracting over USD6.2 billion of interest from 100 buyers.

Elsewhere, Citigroup added to recent US bank supply with a USD5.5 billion package, howbeit in smaller scale and with shorter-term than other leading US banks.

Greek bank Eurobank placed EUR500 million of six-year bonds, first callable after five years, priced at 2.125%, versus 2.375% guidance.

Orange has sold EUR500 million of hybrid perpetual debt first callable after eight years at 1.45%, with demand exceeding EUR1.9 billion. The deal is in parallel to a tender for outstanding perpetual debt with first call dates in 2021, 2022, and 2023.

Implications and outlook

The latest funds flow data confirms that the ESG market has advanced far more rapidly in Europe than in the USA and indicates the degree to which such investment criteria are gaining increased traction. Such momentum is, in turn, facilitating the placement of ESG-oriented securities, as the pool of funds dedicated to such assets expands, and helps to explain the more visible price differential that has emerged in recent months between ESG and non-ESG bond pricing.

Over time, a developing risk is that if the proportion of assets under management with an ESG orientation increases, issuers deemed to have more carbon-intensive footprints may face greater pressure to adjust their conduct or suffer increasing investor rejection.

Counterbalancing this, the performance of ESG funds - particularly those with an equity orientation - is relatively untested and there is no guarantee that first-mover advantage for firms with an ESG orientation will provide superior long-term returns.

Elsewhere, Ukraine's successful sale is a clearly positive indicator, representing the best pricing level for the country to date, although its high-risk profile is shown by the large premium paid relative to regional peers such as Armenia. The combination of Ukraine and Maldives issuing this week is a further positive indicator of risk appetite, following late-March sales by Ghana and Pakistan and the Maldives itself, as is the wide range of emerging market issuers, including credits from Argentina and Oman.

Italy's dollar sale does not reflect a change in funding strategy. It conducts occasional but regular dollar issuance to broaden its investor base, generally swapping proceeds back into Euros through currency swaps, with timing often designed to reflect scope for arbitrage.

Posted 29 April 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit