Capital Markets Weekly: Italian and Greek debt successes highlight continuing yield-driven diversification

High-grade debt
According to Refinitiv data, the Euro-denominated investment grade market enjoyed record issuance of EUR53.25 billion in September. The Financial Times reported that corporate issuance also set a global record, of USD434 billion, according to Dealogic figures.

On Friday 27 September, Italy tendered five and ten-year debt at the lowest rates on record.

• It offered EUR3.25-3.75 billion of five-year bonds, selling the maximum amount at 0.26% yield, with demand of EUR5.193 billion.
• The 10-year auction offered EUR2.5-3 billion, with the larger amount placed at 0.88% with EUR4.084 billion of demand.

On 2 October, Italy also brought a syndicated inflation-linked deal, its first for over two years. The May 2030 BTPei, linked to the European consumer price index, attracted EUR22 billion of demand, permitting Italy to place EUR4 billion versus the EUR2 billion minimum sought initially.

Banca Monte dei Paschi di Siena launched its fifth international financing this year, a seven-year covered bond.

• Initial marketing was at mid-swaps plus 135 basis points.
• The deal was sized at EUR1 billion and tightened to a 125-basis point spread.
• Demand reached EUR5.4 billion from over 300 investors, the most broadly-distributed covered bond sale this year.

European Investment Bank has brought the first sizeable €STR-related floating rate note, a three-year deal sized at EUR1 billion. The deal was marketed on 2 October at 12 basis points over the €STR compounded rate, attracting demand exceeding EUR2 billion. The deal was priced at an 11-basis point margin.

On the same day, Ireland’s AIB Group sold a EUR500 million AT1 deal, which gained demand of over EUR3.6 billion. It was priced at 5.25% to the initial call, 50 basis points inside initial guidance.

Royal London Mutual Insurance sold GBP600 million of Tier 2 subordinated debt, with a 30-year term, callable after 20 years.

• The issue was slightly increased after gaining a “strong response”, according to Global Capital website.
• Also in the market is Hannover Re: the German insurer launched a 20 year non-call 10 year subordinated deal, priced at initial guidance of mid-swaps plus 160-165 basis points.

Emerging markets
Argentine Peronist presidential candidate Alberto Fernández, the clear front-runner to win the upcoming October elections, has suggested that Argentina “can face the debt with a serious and sensible negotiation with the creditors”.

• He suggested that it would follow Uruguay’s example in 2003 of a debt exchange extending maturities but without imposing capital haircuts, stating that “due to international conditions, it will not be difficult to do something similar to what Uruguay did”.
• Argentine bonds rallied on the news but the country’s EMBI+ spread was little changed over September.

A Bloomberg report claims that Saudi Arabia is planning a dollar-denominated sukuk issue in October. The report noted that the Kingdom has raised USD10.9 billion from international markets within 2019, within a total funding requirement (including domestic markets) of USD32 billion.

Hellenic Petroleum raised a EUR500 million bond, increased from EUR400 million after attracting EUR1.5 billion of demand.

• The deal was priced at 2.125%, versus guidance of 2.5%.
• Proceeds will improve the firm’s debt profile. During initial marketing, the company suggested it would use EUR157 million to repay 4.875% 2021 obligations with EUR243 million to redeem bank debt.
• It will be followed by Wind Hellas, a telecommunications firm which has mandated banks for a EUR500 million five-year (non-call two year) issue.

Russian private-sector bank Sovcombank marketed a USD300-400 million 2030 Tier 2 deal, with 8% initial price guidance.

• The deal is callable in April 2025.
• The deal was priced at 8%, and sized at the bottom of the range, amidst reports that it had struggled to gain full subscription.

Ukraine’s Metinvest placed USD500 million of 10-year debt at 7.95% and EUR300 million due July 2025 at 5.75%. Up to USD440 million of the proceeds will be used to repurchase existing 2023 debt. Also from Ukraine, Kernel, the world’s largest producer of sunflower oil, is seeking a five or seven-year callable issue to raise USD300-350 million.

• Also in the market is Czech energy distributor EP Infrastructure, with a nine year dealChilean power company AES Gener has hired banks to arrange a new debt issue to fund the repurchase of USD2.1 billion of 5.25% 2021 and 5% 2025 debt.
• Mexican brewer Femsa is reported to be preparing to issue USD2 billion of debt, possibly including a perpetual hybrid.
• Colombian gas distribution company Promigas has mandated banks for a debut unsecured senior deal.
• Chilean power company AES Gener has hired banks to arrange a new debt issue to fund the repurchase of USD2.1 billion of 5.25% 2021 and 5% 2025 debt.

Amidst heavy competing sovereign supply last week, Mexico’s Crédito Real became the first non-bank financial institution from the country to issue Euro-denominated debt.

• Its press release also claims it is the first Latin American sub-investment grade bond denominated in Euros in the last five years.
• It placed EUR350 million of 2027 notes at 5%, callable after three years: the issue was 2.3 times subscribed.
• Proceeds will be used to redeem outstanding 7.25% 2023 (dollar) obligations.
• The company’s statement describes the deal as part of its ongoing financial innovation strategy, which involves “continually developing and issuing securities denominated in different currencies”: it also highlights that the deal allows it “to extend its maturity profile and decrease its funding cost”.

Cathay Pacific, the Hong Kong based airline, is preparing an international issue, its first since 1994 when it sold floating rate debt.

• The deal comes at a challenging time for the company, whose group-level August passenger figures were 11.3% lower than in the same month in 2018, reflecting the recent violent disturbances in Hong Kong.
• In a statement, Ronald Lam, the Group’s chief Customer and Commercial Officer stated that “August was an incredibly challenging month, both for Cathay Pacific and for Hong Kong. Our inbound Hong Kong traffic was down 38% while outbound was down 12% year-on-year, and we don’t anticipate September being any less difficult”.
• In recent months both the Chair and CEO of the company resigned after Chinese regulatory pressure over the involvement of the firm’s employees in protests in Hong Kong.

Implications and outlook
Italy’s auction success – and the further successful supply from Greece – continues to show market focus in Euros on positive-yielding debt instruments that avoid both negative returns and very long maturities at low yields.

Italy’s fundamentals are potentially further boosted by suggestions that its new government will soon be able to pass a budget.

• Its new Finance Minister Roberto Gualtieri has warned that the target agreed by the prior government of 2.04% of GDP might be slightly exceeded, but that it would avoid formally declaring a goal outside EU limits and risking market dislocations.
• Instead he promised to take a “wise middle ground”, which would be likely to entail seeking additional borrowing room from the EU if the Italian economy, along with other EU economies, shows weaker than expected performance.
• Italy’s debt stock is forecast – according to official source information published by Reuters – to rise in 2019 from the 134.8% of GDP recorded in 2018, but then to decline in 2020 and the following two years.
• The successful Crédito Real deal is a further example of Euro-denominated bond buyers seeking positive-yielding instruments with improved returns without taking extremely long duration. According to Global Capital, it also reflected a growing participation by European buyers in Mexican dollar debt. However, its success is a positive indicator for other high-yield issuers to consider funding in Euros. Similar comments apply to the healthy appetite for Greek corporate deals.