Summary

Within 2021's first week of issuance, Mexico and Indonesia successfully raised 50-year debt and Slovenia raised 10-year funding at negative cost for the first time, while an Argentina-based e-commerce firm attracted strong demand for its debut bond sale: a highly-successful 15 year offering by Italy and a clearly-sub-zero 10 year sale by Ireland reinforced investor appetite for longer duration instruments.

Emerging markets

Mexico is the first Latin American sovereign borrower in 2021. On 4 January, it sold USD3 billion of 3.75% 2071 notes, targeted at the Formosa market in Taiwan. The deal reportedly gained USD10 billion in demand, with pricing tightened from guidance of 4.1%.

Asian debt markets started 2021 strongly. On 3 January, four Chinese property company companies launched dollar-denominated bonds, two of which were in Green Bond format, within an initial calendar of six-dollar deals. On 5 January, IFR Asia reported that daily supply was the busiest on record, with 15 issuers reported as issuing.

Exim Bank of India set a record low coupon of 2.25% on its USD1 billion 10-year deal. Pricing was tightened by 40 basis points versus initial guidance with the deal over 3.5 times subscribed.

On 6 January, State bank of India arranged USD600 million of 5.5-year senior funding through its London branch, gaining demand of over USD2 billion according to Livemint reports. The deal attracted six major lead managers and a positive reception despite the use of proceeds reportedly being linked to finance of Adani's Carmichael coal project in Australia.

Indonesia also issued, placing USD3 billion in a three-tranche offering alongside a EUR1 billion offering. It placed 10, 30 and 50-year debt at 1.9%, 3.1% and 3.4% respectively, placing USD1.25 billion each of the first two tranches.

Late in 2020, on 21 December Laos had delayed its planned dollar issue. In a government statement it advised that it "looks forward to continuing its engagement with the market in a few weeks", noting that it was "late in the year" to complete an offering. It had been reported to have started marketing a six-year amortizing deal with 10% area guidance on 17 December, but its announcement shows this failed to gain suitable traction. The country faces redemptions of around USD1.1. billion annually for the next few years, including a Thai baht issue and USD150 million of dollar debt due in June 2021, while its reserves are a modest USD1.35 billion, under three months import cover.

ESG

Brazilian paper manufacturer Klabin completed a sustainability-linked bond, incorporating coupon penalties if the firm fails to meet goals related to water consumption, recycling and ecosystem performance indicators. The company already has been a regular issuer of Green Bonds since 2017. It placed USD500 million of 10-year debt at 3.2%, versus initial guidance of 3.75% area, on the back of strong demand. Proceeds will be used to redeem outstanding amounts of the company's 5.25% 2024 issue and other corporate purposes.

Brazilian investment bank BTG Pactual also undertook sustainability-linked issuance with a five-year dollar deal. It sold USD500 million of five-year bonds at 2.875% yield versus low 3% initial guidance, with the firm claiming demand to have reached USD1.1 billion. Proceeds will be used to fund green projects.

InterAmerican Development Bank started the year with a USD4 billion 10-year sustainable development deal, which was doubled in size after demand exceeded USD5 billion. IADB's statement to Latin Finance flagged that the deal was its "largest ever 10-year USD global benchmark".

Within Latin American supply, MercadoLibre, an Argentine-headquartered e-commerce firm that enables digital and mobile payments, enjoyed clear success with a two-tranche offering including a five-year sustainable deal, its debut in the international capital markets. It placed USD1.1 billion: it offered USD400 million of five-year sustainability bonds at 2.375% and USD700 million of ten-year debt at 3.125%. Demand reportedly exceeded USD15 billion.

Other debt

US supply enjoyed its traditional early-January rush, with almost USD50 billion of debt sold in the first two working days of the year: total issuance this week will amply have exceeded the prior USD52 billion record from 2017.

Within Europe, sovereign supply also started strongly with Italy announcing a syndicated 2037 deal on 4 January.

Italy's deal was launched on 5 January, rapidly gaining EUR105 billion in demand from over 520 investors. It priced a EUR10 billion deal at 0.99%. 57.8% of the deal was bought by asset managers and 26.3% by banks. Domestic buyers took 26.3% of the deal: UK subscribers led international demand with 29.1% of the allocations.

These deals were accompanied by Ireland, which gained EUR48 billion in demand for a long 10-year deal from 240 accounts.

Ireland's 2021 borrowing needs were announced in December as being EUR16-20 billion, versus EUR24 billion of issuance of long-term debt in 2020. The country flagged at the time that it has no bond redemptions due in 2021 and lower redemptions for the next four years, permitting it to enjoy "flexibility in meeting future borrowing requirements".

Ahead of the sale, Ireland's 10-year bond yield reached a record low of -0.34% on 4 January. NTMA's cheapest issuance to date was a seven-year auction at -0.42% last October. Pre-launch, market commentary had estimated it would seek EUR3-4 billion at around -0.25%: the strong demand permitted a EUR5.5 billion offering priced at -0.257%.

Also on 5 January, Slovenia mandated banks for a new 10-year issue and a tap of its October 2050 outstanding deal, placed in October 2020 at 0.493%. Slovenia raised EUR1.75 billion of ten-year funding at -0.096% with demand reportedly exceeding EUR10.6 billion. Its Finance Ministry noted that "for the first time in its history Slovenia issued today a long-term bond with a negative yield to maturity". It also tapped the 2050 deal with EUR250 million at 0.381%, with the add-on oversubscribed.

European Investment Bank attracted over EUR30 billion in demand for its first Euro-denominated reference bond in 2021, a 10-year sale. It has slated 2021 issuance at EUR60 billion, with authorization to fund up to EUR70 billion, the same amount it raised in 2020 including 2021 pre-financing

Spanish regional bank Abanca sought Additional Tier 1 funding with a perpetual non-call 5.5-year offering. On 7 January, it attracted over EUR2.1 billion for the deal at guidance of mid to high 6% area until first call: it priced EUR375 million at 6%, largely with European institutional buyers.

Overall, US high-grade primary supply has been very sizeable: seven borrowers priced USD23.5 billion on 4 January, including a USD10 billion package for Broadcom, linked to a USD2.75 billion liability management exercise, which gained USD28 billion in demand, followed by 15 issuers with USD19.25 billion on 5 January. This bettered estimates for likely supply for the full week with total issuance breaching the 2017 record.

Our take

This week's heavy supply reflects traditional deal-flow at the start of the calendar year, when both borrowers and investors have new programs, and is a regular annual seasonal feature of the markets.

Nevertheless, there are several encouraging indicators, including both Mexico and Indonesia accessing 50-year funding, strong demand for Italy's 15-year sale and both Ireland and Slovenia's impressive 10-year placements, the latter being Slovenia's first sub-zero 10-year borrowing.

Mexico's successful long-dated issue fits within the wider trend in recent months of Emerging Market borrowers extending the duration of their borrowings at historically low rate levels. It also reflects a diversification of Mexico's investor base, coming despite ongoing concerns over policy direction and the heavy debt burdens of state-owned energy company Pemex.

MercadoLibre can be viewed as a pan-regional rather than an Argentine transaction. The company operates in 18 countries across Latin America including Brazil, Chile, Colombia, Mexico and Peru. Its 2019 Annual Report noted that 63.6% of its consolidated net revenues were earned in Brazil, 19.9% in Argentina, 12.0% in Mexico and 4.5% elsewhere.

Against the positive trend, Laos's inability to issue late in 2020 appears risk negative. Laos is a relatively weak credit, and its timing in planning a sale late in 2020 seemed far from optimal. Ability to complete a sale in January will clarify Laos's market access with its overall debt sustainability currently under review by IHS Markit.

Posted 08 January 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence