Capital Markets Weekly: China and Brazil achieve long-dated debt successes
Overview
This week's debt highlights include a near five-times subscribed EUR4 billion return by China to the Euro-denominated sector and tightly-priced long-dated funding for Brazil, while South Africa has avoided losing its last domestic investment-grade rating.
The Kingdom of Saudi Arabia is proceeding with the initial
flotation of Saudi Aramco, while successful sizeable
financial-sector share sales were completed in India and
Australia.
South Africa
South Africa avoided the loss of its last domestic investment-grade rating after Moody's review, announced on 1 November, lowered its Outlook to negative but did not lower its rating outright. However, unless policy direction changes, a downgrade to junk could come early next year. Finance Minister Tito Mboweni described the situation as "now or never".
China
China sold Euro-denominated debt for the first time since 2004. On 5 November it placed a EUR4 billion package comprising EUR2 billion of seven-year bonds and EUR1 billion each for 12 and 20 years. Demand surpassed EUR19.5 billion.
Six Chinese property companies all sold debt on 4 November, with deals ranging from one to four-year maturities. They were accompanied by Sinopec, which placed a three-tranche USD2 billion package, spanning five, ten and 30 years.
Emerging markets
Brazil raised USD3 billion from a two-tranche sale. On 4 November, it captured USD2.5 billion of 2050 liabilities, priced at 4.914%, along with USD500 million of May 2029 debt, priced at 3.809%. Both tranches were priced at the second-lowest rates achieved to date by Brazil for such maturities (with the record lows set in late 2011 and early 2012 respectively). The issue was conducted in parallel with a tender for existing debt maturing between 2027 and 2047: on 5 November, Brazil announced that this had generated USD895 million of repurchases.
Serbia has announced a EUR500 million tap of the 2029 issue it placed in June this year, with the additional funds being used to repay liabilities maturing in 2020.
Ukraine's Naftogaz placed USD500 million of seven-year debt, priced at 7.625%, a 127-basis point spread over Ukrainian sovereign debt, the lowest margin in 2019 for a state-owned Ukrainian entity. At peak levels, the deal was 2.9 times subscribed.
Other debt
Luxembourg is making a rare visit to the public syndicated bond market, launching a seven-year benchmark on 6 November.
Colgate Palmolive has joined the growing list of US firms raising Euro-denominated debt, announcing EUR500 million two and 20-year sales on 4 November. The 2021 tranche, for EUR500 million, was placed at a negative yield, with a zero coupon and issue price of 100.421%. The 20-year portion was priced at 1.02%.
Shell sold EUR3 billion split equally between 8, 12 and 20-year portions.
Royal Bank of Scotland has mandated banks for its first social bond at holding company level. It will target a sterling or Euro-denominated offering of intermediate maturity. The issue will fund SME lending in economically-deprived areas of the UK.
DBN gained over USD5 billion in demand for a USD850 million AT1 deal. The deal was priced at 4.875% until the initial five-year call, one of the first sub-5% dollar-denominated AT1 deals.
Equity
On Sunday 3 November, Saudi Aramco issued a statement announcing the intention of the Kingdom of Saudi Arabia to undertake an IPO on the local Tadawul stock exchange. Its statement gave no further details of pricing or size. Reuters reports suggested that pricing would be announced on 17 November with trading starting on 11 December. Media suggest the deal may be the world's largest IPO to date, raising up to USD60 billion.
India's Bajaj Finance - a non-bank financial lender - has raised INR84.6 billion (USD1.2 billion) from a secondary placement to qualified institutional buyers. The issue was offered at INR3860-3900 per share, a 5.4-6.2%. discount to the prior closing price (on 4 November). The issue was five times subscribed. Bajaj is India's best-performing non-bank lender. Its profits grew 63.1% in the September quarter versus the same period in 2018, while total consolidated assets grew 38% to INR1.35 trillion.
Westpac Banking Corp has raised an underwritten AUD2 billion (USD1.38 billion) share placement conducted on 4 November at AUD25.32 per share, a 9% discount to the prior close. The bank is also seeking a further AUD500 million from a non-underwritten offering.
Spanish telecommunications group Cellnex enjoyed an exceptional success with a EUR2.5 billion rights issue, designed to fund the company's purchase of English firm Arquiva's telecommunications division for EUR2.24 billion. The deal was 38 times subscribed.
A placement worth HKD7.9 billion (USD1.01 billion) has been announced for WuXi Biologics, a Chinese pharmaceutical firm. HKD3.95 billion is a capital increase by the company while its largest shareholder Biologics Holdings is raising an equal amount.
Postal Savings Bank of China has filed to raise CNY 32.71billion (USD4.7bn) from a secondary share offering on the Shanghai A-share market, involving the placement of 5.95 million shares at CNY5.5 each. If completed, this would represent the largest A-share sale since 2015. The bank has not set a specific timetable for the sale: media commentary suggests it will be completed within 2019.
Our take
Media commentary continues to warn that eventual South African downgrade could force heavy investor sales - estimated at up to USD 15 billion - of domestic debt held by international funds that track major indices such as the FTSE Government Bond Index, from which South Africa would be excluded if wholly junk-rated.
We assess that dislocation should be mitigated both by the extended period in which the country has been at risk of losing its investment grade ratings, providing holders ample time to adjust their portfolios, and by the global search for yield encouraging international emerging market funds to seek "carry trades" in local markets.
To avoid downgrade, the country urgently needs to design fiscal measures to control government outlays and stabilize the financial (and operating) position of its troubled electricity utility Eskom. Our South African economist Thea Fourie assesses that "presenting a credible fiscal strategy…will be crucial" in the February 2020 Budget.
Brazil's recent progress with pension reform and plans to broaden its privatization program both provided a positive background to its latest bond sale. Its pension reform was a crucial hurdle to improve fiscal sustainability. However, wider fiscal reform is still proving a complex and gradual process, constraining the scope for further tightening in the country's margins. Nevertheless, we assess that GDP growth next year may be higher than previously expected while PMI numbers are encouraging.
China's extreme rarity in the Euro sector was a near-certain guarantee of its success. The new deal is potentially designed to assist other Chinese entities to make greater use of Euro-denominated funding and to reduce dependence on US investors.
This week's equity market developments are clearly sizeable and important. In this regard, media-based market commentary shows a very wide range of opinions over potential enterprise valuation for Saudi Aramco, spanning levels from USD1.2/1.3 trillion to over USD2.2 trillion. For the initial tranche, a key factor is likely to be local cornerstone support, reportedly an area of extended focus prior to the announcement. Depending on the amounts placed, the deal could well prove the largest IPO to date, surpassing the USD25 billion raised by Alibaba.
The completion of sizeable share sales for both Westpac and Bajaj Finance are both risk-positive, improving the vendors' capital buffers in both cases and facilitating continued rapid growth by Bajaj. The planned Postal Savings Bank of China offering is widely assessed as pre-emptive: the bank is well capitalized and not under pressure to improve its buffers. Given the bank's huge domestic footprint, it will enjoy strong local recognition, assisting its fund-raising efforts.