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Capital Markets Weekly: US tariffs and Uber discount challenge equity appetite

16 May 2019 Brian Lawson

The failure of US/Chinese trade negotiations to avoid new US tariffs is a key adverse indicator challenging upcoming stock market performance. So is the weak initial market performance for Uber, which opened at a discount of nearly 8% despite pricing towards the bottom of its indicated range.

Despite the greater uncertainty, emerging market debt remains well-received. A complex and long-dated structured deal from Paraguay was upsized, with Philippines enjoying clear success with its first Euro-denominated deal in over a decade. Kenya's sizeable planned dollar sale is the most obvious pending test of sentiment although the calendar spans several regions and issuers without signs of risk aversion so far.

Emerging Markets

On 10 May, Philippines announced a EUR750 million sale of eight-year debt priced at 0.875%. The deal was six-times subscribed and increased from EUR500 million. Pricing tightened from initial guidance of mid-swaps plus 90-100 basis points to mid-swaps plus 70 basis points. Philippines is reportedly also opening books on a CNY2.5 billion (USD367 million) Chinese Panda bond shortly, and to be planning further issuance in Japan's Samurai market.

Despite the imposition of additional US tariffs, Chinese (and related) borrowers have continued to issue. On 10 May, Yankuang Group, a coal mining firm located in Shandong, sold a USD500 million tap priced inside its outstanding notes. During last week CCB Leasing also sold USD700 million of five and ten-year debt, and MGM China - which operates casino facilities in Macau - placed USD1.5 billion of five and seven-year debt at 5.375% and 5.875% respectively.

Kenya has announced marketing plans for its projected sizeable dollar sale, expected to seek around USD2.5 billion. In addition, the Eastern and South African Trade and Development Bank (TDB) is marketing for potential dollar issuance, after a two-year absence from international capital markets. The multinational treaty-based institution specializes in funding trade, regional economic integration and sustainable development. TDB operates from multiple African locations including Nairobi, Harare and Addis Ababa, and enjoys a low investment-grade rating from both S+P and Moody's.

Chile started marketing on 9 May for the internationally-targeted sale of peso-denominated bonds clearable through Euroclear, tapping existing domestic government issues due in 2023, 2030 and 2050. No specific size target has yet been released.

Paraguayan toll road concession Consorcio Corredor Via Bioceánico increased its planned debt sale to USD732 million from an initial USD600 million. The issue is a securitization backed by construction payment obligations of Paraguay's Ministry of Public Works and Communications. With a maturity of 15.1 years, and average life of 8.9 years, it offered indicative pricing of 5.75% which was tightened to 5.375%. The deal will assist Brazil's Queiroz Galvão and local construction firm Ocho A to fund a highway construction project in Paraguay.

UAE property developer and shopping mall operator Majid Al Futtaim sold USD600 million of 10-year sukuk liabilities at 4.638% using a Green Bond format. After giving initial price guidance of 245 basis points over mid-swaps, pricing was tightened twice to 220 basis points, with demand reaching USD3 billion.

Czech Railways is road-showing for a seven-year Euro-denominated bond. The company is 100% state owned and enjoys investment grade ratings.

Equity

Uber's IPO was priced at USD45 per share, raising USD8.1 billion and valuing the firm at USD82.2 billion. The deal started trading poorly and closed first-day trading on 10 May down 7.6% at USD41.57 a share. Lyft also continued falling, reaching USD51.09 versus its USD72 issue price, after announcing new heavy losses.

Outlook and Implications

The lackluster start to trading in Uber's shares, and the clearly-weak performance of Lyft are adverse indicators for the primary equity market: both are large and high-profile primary deals. Investor losses are likely to encourage greater caution towards new share offerings, especially for technology firms with limited history of profitable trading, potential for further losses, complex share structures (as in Lyft), and legal concerns.

This does not imply that all IPOs now face resistance, nor that the market will dry up. Indeed, in total, 12 IPOs were priced last week in the US markets, with Jiavin Group, a Chinese on-line lender- opening NASDAQ rising 53.8% in first-day trading. This week's supply includes seven more deals, including Luckin Coffee, a fast-growing alternative to Starbucks in China, but with a very short trading history. The response to such deals should help to indicate if sentiment has worsened more broadly. Overall, we'd expect that investors should show greater selectivity and sensitivity to pricing after losing money initially with Uber and Lyft and expect more caution in equity markets more generally given the uncertainties stemming from tariffs.

So far, there are few signs that this has hurt debt-market demand. Kenya's pending dollar deal will be an interesting test, as a large deal and coming against a background of debt accumulation. However, Kenya has enjoyed strong prior market interest and appears potentially well-backed.

Philippines is well-regarded by the markets. Its success in Euros was boosted by rarity, but also helped by a recent S+P upgrade moving its long-term sovereign rating to BBB+ from BBB. Lastly, we were encouraged by the Chinese bond supply last week. Given the adverse background relating to trade talks and tariff increases, such deals would appear obvious candidates to have suffered if bond investors were reducing their risk appetite, making their completion - on fine terms - an encouraging sign.

Posted 16 May 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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