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Capital Markets Weekly: Zambia seeking rescheduling: EM supply unaffected given prior warnings

24 September 2020 Brian Lawson

On 22 September Zambia announced plans to miss three interest payments on its outstanding international public bond debt, seeking broadly similar relief to that already granted on its official debt: however, this had minimal market impact as debt restructuring has been publicly on its agenda since May, and Panama successfully raised USD2.58 billion on the same day, following well-received issuance by Dominican Republic late last week.

Zambia debt rescheduling

Some months after appointing restructuring advisers, Zambia has requested debt restructuring. On 22 September its Ministry of Finance announced a consent solicitation affecting its USD750 million 5.375% 2022, USD1 billion 8.5% 2025 and USD1.25 billion 8.97% 2027 notes, requesting the suspension of debt payments for six months from 14 October and covering payments due on 14 October 2020, 30 January and 20 March 2021. It cited a "very challenging macroeconomic and fiscal situation" worsened by the COVID-19 pandemic as having a "material impact" on its debt service capacity. It noted that it previously had applied for relief under the G20 Debt Service Suspension Initiative and was now seeking similar debt service suspension from its private-sector creditors. It claimed to be negotiating with the IMF for support associated with reforms to stabilize its macroeconomic outlook and fiscal stability. Finally, it claimed that it was seeking a "consensual and collaborative" approach.

Zambia has already obtained Paris Club relief on its official debt, requested in early June and granted on 14 August, for the period 1 May - 31 December 2020, with the resources freed up to be used to increase COVID-19 related spending.

Emerging markets

The Dominican Republic has sold a USD3.8 billion three-tranche deal, comprising USD1.8 billion of new 2032 dollar-denominated notes, a USD1.7 billion tap of its 2060 issue and a tap of its 9.75% local currency issue. According to a Treasury statement, the deal achieved a record by size for the country. It attracted USD9.6 billion in demand, according to José Manuel Vicente, Treasury Minister. The dollar tranches were priced at 4.875% and 6.25% respectively, while the domestic portion was set at DOP17.5 billion (USD300 million) and priced at 10%.

Panama sold USD2.58 billion of debt on 22 September, covering an estimated gap of PAB3 billion (USD3 billion) in fiscal revenues due to the COVID-19 pandemic. It sold USD1.25 billion of new 2032 notes at 2.252% and tapped its 3.875% 2060 issue with an extra USD1 billion at 3.28. Additionally, it added USD325 million equivalent to its 3.75% 2026 domestic notes. Demand for the package reached close to USD10 billion. In its statement the Ministry of Economy and Finance noted that part of the proceeds will be used to repurchase domestic debt maturing in 2021 and 2022. It also flagged that the 12-year offering achieved the lowest rate on record for a Panamanian issue at that maturity.

Brazilian oil and gas firm Petro Rio withdrew its planned USD450 million five-year deal, citing oil market uncertainties and recent price volatility. In a CVM filing statement on 17 September it described conditions as "unfavorable".

Taiwan Semiconductor Manufacturing, described by media as the world's largest contract chip manufacturer, has hired banks to arrange a USD3 billion funding.

Late last week, ICBC issued USD2.9 billion of AT1 perpetual debt, with a 3.58% coupon until the initial call in 2025. A larger transaction previously had been expected: earlier Reuters reports referred to a target of over USD4 billion. In addition, Chinese property investment company Kaisa Group is marketing a senior sustainable perpetual issue, first callable after three years. The deal is reported to have attracted USD900 million in demand (as of 23 September). Power Corporation of China also sold perpetual debt, raising USD300 million at 3.45%.

ESG

European Commission President Ursula von der Leyden suggested on 16 September that 30 percent of the EU's EUR750 billion recovery program should be issued as Green Bonds, prompting market expectations of a sizeable boost to Green issuance levels.

On 22 September, Bank of America sold a USD2 billion sustainability bond designed to reduce inequalities affecting the black and Hispanic communities in the US. The deal will fund affordable housing and entrepreneurship boosting minority-owned businesses and neighborhoods. It includes scope for both Social and Green funding. The five-year issue was priced at 72 basis points over US Treasuries, versus initial guidance of 90 basis points.

AIB issued EUR1 billion of Green Tier 2 debt on 23 September, the first Green Bond issue by an Irish bank, and only the second such transaction by a European bank. The 10.5-year deal was priced at 2.9%, with demand reportedly reaching EUR2.5 billion.

Other debt

On 21 September, Julius Baer Group withdrew an Additional Tier 1 deal in unusual circumstances. It initially opened books on a USD350 million perpetual seven-year no-call deal at 4.5% area, tightening to 4.375% with books of USD875 million, a record low for the structure. The deal was then withdrawn against the background of risk aversion stemming from concerns over the evolution of the COVID-19 pandemic, with banks also receiving adverse focus over sector-wide alleged AML/CFT breaches. The bank attributed its withdrawal to "deterioration in market conditions throughout the day".

On the same day, New Development Bank and Asian Infrastructure Investment Bank both entered the dollar market, with five and three-year deals respectively, raising a combined USD5 billion. Both issues will help member states to fund COVID-19 related measures.

By the following day, issuance activity had recovered with sizeable corporate supply. T-Mobile US, Inc, sold a USD4 billion four-part deal spanning eight, eleven, 21 and 31-year debt. Proceeds are to refinance existing debt. In April, it had raised USD19 billion (with demand of over USD65 billion) to help refinance its purchase of Sprint Corp and followed this with a USD4 billion sale in June. BAT also was in the market, with a USD6.25 billion five-part offering, launched on the same day as it announced a tender to repurchase USD2 billion in up to seven issues

It was followed on 23 September by biopharmaceutical company Gilead Sciences, which launched a seven-tranche dollar package - its first deal since 2017 - to help fund its USD21 billion acquisition of Immunomedics. According to media reports first-day demand exceeded USD32 billion. Pricing has been tightened by up to 30 basis points.

Equity

In the week to 18 September, 15 corporate IPOs worth USD8.7 billion and eight special purpose acquisition companies all were priced. This represents the busiest week in the US primary market during 2020.

Outlook and implications

European Commission President von der Leyden's suggestion that the EU would seek EUR225 billion in Green bond sales clearly indicates that the EU will be a major contributor to future growth in the sector, but this is no surprise. Given that much of its borrowing also will be for healthcare and social security purposes, we also expect a large volume to be raised as Social bonds. Importantly, the EU's funding program extends over six years. While borrowings may be front-end loaded, there is a good likelihood they will be spread over more than one year, spreading the "transformational" impact of the EU's activities within the ESG sector, rather than almost doubling full-year global Green supply in 2021.

Zambia's announcement is risk-negative but no surprise. In May, Finance Minister Bwalya Ng'andu announced Zambia's intention to restructure its debt after years of "over-ambition" in borrowing to address its infrastructure weaknesses, with a restructuring advisor appointed shortly thereafter. Zambia's problems are long-standing, with the country's borrowings having failed to yield the desired boost to economic activity and export earnings capacity, and facing allegations of misuse of proceeds.

The withdrawal of Julius Baer's AT1 deal appears to reflect unfortunate timing. The deal was on track to set a new low for a dollar AT1 non-call seven-year deal, undercutting Paribas's 4.5% record, and with comfortable oversubscription, but seemingly faced rapid withdrawals of orders, making it prudent to delay. The subsequent large sales by BOC, T-Mobile, Gilead, AIB and Panama clearly indicate that risk-aversion has been relatively brief, and probably was caused primarily by COVID-19 related concerns given the rising recent spread of infection. Debt markets remain firmly underpinned by monetary policy measures and this is unlikely to alter near-term.

Posted 24 September 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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