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Capital Markets Weekly: Worldline convertible bond sets new record for negative coupon

02 August 2019 Brian Lawson

Negative-yielding debt

A seven-year convertible bond for French company Worldline established a record negative return in the public bond markets. The EUR500 million deal offered a zero coupon and was priced at 107% to yield -0.96%, with a conversion premium of 60%, versus a indicated 55-60% range. Proceeds will repay a bridging facility.

According to Reuters, by early July a record EUR13 trillion of debt was at negative yields. As of 26 July

  • Portugal's curve was negative-yielding to 6 years
  • Spain's was negative to 7 years
  • Those of Slovakia and Slovenia were negative to eight years, Ireland's to nine years and Belgium's to 10 years
  • Denmark's entire curve, out to 20 years, also was negative
  • The Netherlands, whose 10-year bond recently moved into negative territory, now offers negative yields on its 15-year bonds.

By 9 July, the JP Morgan high yield index contained EUR4.8 billion of Euro-denominated junk bonds - involving 10 issues - at negative yields.

Lastly, a Morgan Stanley estimate suggests that EUR74 billion of outstanding emerging market debt, largely from Central and Eastern Europe, is now at negative yields, some 19% of the total outstanding Emerging Market stock denominated in Euros.

Emerging markets

El Salvador raised USD1.1 billion of 30-year debt at 7.125%, versus initial guidance of 7.5% area. Treasury Minister Nelson Fuentes noted that total demand reached USD5.3 billion, with investors from 25 countries. USD820 million will be used to repay debt maturing in December this year.

Shinhan Financial Group has become the seventh Korean issuer this year to raise sustainable bond finance. It placed a USD500 million Tier 2 deal which attracted demand of USD4.3 billion from some 200 institutional investors. The deal was priced at 150 basis points over US Treasuries, with a 3.34% yield. According to Business Korea, the deal is the first environmental and social subordinated bond placed by a Korean issuer with US institutional buyers.

Indian Finance Minister Nirmala Sitharaman has denied claims that the country was rethinking plans to undertake international funding. On 27 July, she advised the Economic Times of India that "I am not doing any review. I have not been asked by anybody to do a review" of her previously-announced plans, while noting that the government has not yet worked out the timing and details of the planned sale, previously indicated as likely to raise USD10 billion.

Other debt

The largest pre-FOMC debt sale this week was a six-tranche USD5.5 billion offering by Boeing, which was well received and included a 40-year portion (priced at 140 basis points over Treasuries, versus initial guidance of 155 basis points). It was followed by Honeywell with a USD2.7 billion four-part deal. Additionally, Philip Morris raised a three-part EUR2 billion sale, including a 20-year tranche sold at a 1.45% coupon and issue price of 98.461%.

German utility Energie Baden-Wuertenberg (EnBW) became the first German issuer to sell Green hybrid bonds. It sold two EUR500 million deeply-subordinated instruments each maturing after 60 years. These are callable after five and eight years with initial coupons of 1.125% and 1.625% respectively.

Sweden has asked its National Debt Office to prepare for Green issuance "at the latest" by 2020. Its "first step" will be to establish a Green Bond framework for sustainable state projects, giving investors "easy" access to information on the effects of the projects selected. The process also includes working with spending departments to identify which projects will be eligible, which will define the eventual deal size.

Irish packaging firm Ardagh Group has sold approximately USD1.8 billion of sub-investment grade debt. It placed EUR350 million senior secured euro-denominated debt for seven years at a 2.125% coupon, having tightened versus initial guidance, alongside USD600 million of secured dollar debt for the same term and eight-year dollar senior (unsecured) bonds at 5.25%. The sale will refinance the early redemption of the company's USD1.65 billion 7.25% 2024 issue, the firm's most expensive outstanding borrowing. The deal was one of four sub-investment grade offerings announced this week.

Equity

Media reports suggest that office-space provider WeWork is planning its IPO as soon as this September. A Wall Street Journal report claimed that it is seeking to complete a secured debt transaction and will then look to raise up to some USD5-6 billion from its share flotation, although the share requirement may be reduced by the sale of debt.

Within the US IPO calendar, eight deals were completed in the week to 26 July. Two technology deals, for Health Catalyst and Livongo Health, made initial gains of over 35%. By contrast, Wanda Sports was one of the worst-performing deals on record: it targeted pricing of USD12-15 a share, priced at USD8 and traded down to USD5. Six deals are slated this week.

Implications and outlook

The growing volumes of debt at negative interest rates show the overwhelming force of quantitative easing, and its impact on credit markets. From first principles, it does not appear logical from a capital allocation or risk perspective that some emerging market and sub-investment grade borrowers trade at negative yields. However, if European economies stay weak, the current market configuration does not look likely to go away soon and could even get worse. Those committed to holding bonds may well buy more debt in search of capital gains rather than deferring purchases and facing potentially larger negative yields in the future, if the reference discount rate is lowered further, and the risk that banks increasingly could need to charge for taking larger deposits. Careful application of a tiering system could mitigate this last factor, but at least some bond buyers currently seem willing to lock in negative longer-term rates assuming further reduction in ECB reference rates without tiering, despite the significant risk of capital loss in the event of economic recovery.

In a week overshadowed by the FOMC meeting, El Salvador's heavy oversubscription with 30-year debt, and the large Ardagh junk bond package both indicate the continuing positive sentiment in debt markets.

India's entry to the international markets remains a highly-attractive new investment opportunity, given the country's lack of international outstanding debt. However, progress towards issuance appears hindered by significant domestic opposition with the latest statement responding to claims the project would be delayed by further review. Ideally, a debut sale would enjoy greater clarity over India's market strategy, notably whether its issuance represents a one-off event or forms part of a wider ongoing process.

Sweden's move to issue Green debt illustrates the sector's ongoing expansion, with Germany having announced in early July its intention to review Green issuance. Ireland and the Netherlands are among European sovereign borrowers to have debuted recently, and others - like Spain - are likely to face increasing market pressure to follow suit given the sector's growth, and its deepening dedicated investor base.

Posted 02 August 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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