Emerging markets issuance
Investment grade EM borrowers continue to achieve positive demand.

Most notably, the Kingdom of Saudi Arabia sold a new six-year dollar sukuk issue and ten-year conventional dollar debt, with initial price guidance on 18 October of 135 and 180 basis point margins over comparable US Treasuries. It placed USD5 billion with demand exceeding USD26.5 billion, of which USD7.5 billion was obtained for the sukuk tranche: pricing was tightened by 30 basis points on both portions, leading to a 5.268% coupon for the sukuk and a 5.5% coupon on the longer tranche. The issue is to help fund a tender offer for USD3 billion of 2023 bonds, along with USD12.5 billion of liabilities maturing in 2025 and 2026.

Also on 18 October, Emirates NBD gained USD1 billion in demand for a USD500 million five-year issue priced at 5.745%, 155 basis points over US Treasuries and 20 basis points tighter than initial guidance.

Investment-grade-rated Lithuania also sold EUR1.2 billion of new debt, comprising a EUR900 million new 5.5-year issue priced at 120 basis points over mid-swaps with a 4.125% coupon and discount issue price of 99.26%, and a EUR300 million tap of its prior 10-year deal at a 135 basis point spread. Prior reports claimed demand of close to EUR2 billion. After its completion, Latvia mandated banks for a further Euro-denominated sale.

Wider SSA debt restructuring discussions

In addition to Ghana's ongoing negotiations with the IMF, which we have forecast are likely to lead to renegotiation of its debt under the G20 Common Framework Nigeria and Kenya have been in focus.

The former was triggered by Nigeria's Minister of Finance, Budget and National Planning Zaineb Ahmad stating on a Bloomberg TV interview that the country is considering debt rescheduling, both internationally and domestically. Her statement mentioned that the Ministry has appointed a consultant to investigate "restructuring and negotiating to stretch out the repayments to longer periods". This Day newspaper added that she highlighted the need to use 65% of projected 2023 revenue to cover debt service in 2023. Although Nigeria's debt has been rising rapidly, reflecting poor fiscal capture and heavy spending on subsidies, its debt stock as a proportion of GDP is modest (only just over 23% in mid-2022), but its debt service costs are projected by the World Bank to exceed state revenues by next year.

Nigeria had already shown some signs of debt distress by seeking a broader extension of DSSI official debt payment relief to the sub-Saharan African region, but until now had not used the term "restructuring". The suggestion that it wishes to extend maturities appears to indicate that it is not seeking capital haircuts, but instead to extend the term of its liabilities.

A subsequent statement by Nigeria's Debt Management Office (DMO) has denied that restructuring was being planned and instead claimed it was looking to manage its liabilities through the "spreading out of debt maturities" and "refinancing short-term debt using long-term debt", suggesting it was also exploring bond buybacks and exchanges as liability management tools. The subsequent statement claimed "Nigeria remains committed and will meet all its debt obligations", but that it will seek to apply liability management tools to its international obligations, including bilateral and concessional loans.

According to a Bloomberg report on 20 October, Kenya plans to negotiate to extend the term of Export-Import Bank of China loans for the development of a rail link between Nairobi and Mombasa port. Transport Secretary-designate Kipchumba Murkomen warned that the "Belt and Road Initiative" project "will never break even" and that it "becomes impossible" to repay the loan from revenues from the project. He mentioned a 50-year term as a goal for renegotiation, versus the current 15-20 year terms.

Under recently-elected President Ruto, users of the line have been given greater flexibility in how they transport goods to Mombasa, ending a prior policy of forcing them to be transported to inland hubs before shipment. Even then, the line is unprofitable with passenger and freight revenues of 15 billion Kenyan shillings, versus running costs of 18.5 billion. Exim lent KSH500 billion (USD4.13 billion) to the project. Reportedly, in early October, a KSH1.3 billion (USD930,000) penalty was imposed on the Kenyan Treasury for non-payment of debt service obligations, following prior issues over non-payment of AfriStar, the Chinese-owned operator of the railway.

Bank capital "extension risk"

Banco Sabadell has failed to call an Additional Tier 1 deal (its EUR400 million 6.125% issue) on its first call date, which falls in November. The bank announced its decision ahead of the 23 October call notification deadline "taking into account the cost of substituting AT1 instruments under current market conditions".

On 23 November, the instrument's coupon will be reset at the five-year swap rate (currently 3.08%) plus a 6.051% yield margin, implying a new coupon of around 9.13%. The issue already had traded to a 10 percentage point price discount
Its decision did not prevent the Bank of Nova Scotia from issuing an AT1 deal, USD750 million of 60-year non-call five-year debt at 8.625%, versus 8.75% early guidance. If not called, the bonds would reset to the 5-year US Treasury yield plus 438.9 basis points.

Later in the week, Ireland's Permanent TSB also sold EUR250 million of perpetual AT1 debt callable after 5.5 years with the unusually sizeable coupon of 13.25%, a record for the sector, versus the 7.9% coupon it had needed to sell similar instruments in late 2020. The issue is to strengthen its balance sheet ahead of the purchase of EUR6.8 billion of loans from Ulster Bank, which is primarily being funded by the sale of shares to vendor NatWest Group.

Our take

Both the Kingdom of Saudi Arabia and Emirates NBD enjoyed healthy demand, further confirming the strong investor sentiment towards stronger GCC credits, given the positive windfall effects on their finances from higher energy prices. The healthy appetite for investment-grade EM risk also extended to Lithuania's two-part sale.

Nigeria's debt stress should not currently require full-scale restructuring. Even after projected growth this year, its debt-to-GDP ratio is unlikely significantly to exceed 30%. Its major problems stem from excessive spending on subsidies and ineffective fiscal capture. However, the growing burden of its debt service costs versus modest fiscal income does require policy attention. Kenya's position is more heavily strained (with the debt-to-GDP ratio at 67% in mid-2022) but is far stronger than that of Ghana.

Banco Sabadell's decision not to call an AT1 instrument when possible is an isolated event so far and may well be temporary. Nevertheless, it has revived investor focus on "extension risk": the possibility that banks will not call AT1 and subordinated debt in worsening market conditions, leaving investors holding instruments of longer (and potentially perpetual) tenor, despite their initial expectation that these would be called when possible, in line with the normal market practice. Nevertheless, subsequent supply shows that it has not blocked new issuance, but it may have contributed to the record coupon paid by Permanent TSB.

Banco Santander previously elected to miss an AT1 call opportunity in 2019, before redeeming the issue shortly thereafter, and both Deutsche Bank and Lloyds Bank also missed first call dates in 2020, but the norm to date has been to use the first call opportunity.

Sabadell's decision highlights the growing "extension risk" on AT1 instruments as rates rise. As banks face higher refinancing costs, there is a stronger temptation to retain such instruments uncalled and allow them to switch to less favorable post-call coupons. Sabadell has stressed that it may call the issue at a subsequent quarterly call date, but the difficult conditions for refinancing do increase "extension risk. Investors face the risk of heavy losses if the practice becomes more widespread, which would hinder the future issuance of AT1 capital instruments.

Posted 25 October 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.