Aided by large scale quantitative easing, corporate and bank issuance is running well ahead of 2019 levels, assisting their coverage of urgent COVID-19 related funding needs, while equity supply also remains active. The main event of the week, Argentina's formal default, has been shrugged off by investors amidst greater optimism over scope for an eventual negotiated settlement.

Argentina/ Emerging markets

On 23 May, Ámbito Financiero claimed Argentina's default on 22 May leaves it with over two months to reach an agreement with creditors before it faces acceleration of part of its international public debt. The report claimed that the current default - on interest of USD503 million relating to its 2021, 2026 and 2046 Global issues - benefits from "anti-holdout" clauses incorporated in bonds sold during the Macri administration, limiting scope to seek acceleration in New York courts. However, its next major payment due is on its "Discount" bond, an 8.28% 2033 issue issued under the prior Kirchnerist administration without such protection. USD566 million are payable on 30 June, with a 30-day grace period.

On 26 May, Argentina's EMBI+ spread fell by 259 basis points (9.3%) to 2520 basis points over US Treasuries, closing at 2631 b.p., its lowest level since March. This was driven by reports that the gap between Argentina and its creditors was narrowing. Ámbito Financiero suggested that from initial proposed workout levels of 40 and 58-60% of nominal value respectively, the issuer and key creditors now standat 45% versus 53%.

Hong Kong based Bank of East Asia sold a USD600 million Tier 2 bond late last week, the first Asian subordinated bank supply during the COVID-19 pandemic. Peak demand reached 8.5 times the deal volume. The ten year no-call five-year deal was priced at 4.05% to first call, 375 basis points over comparable US Treasuries, versus guidance of 425 b.p.

Chinese technology company Tencent Holdings held discussions with global investors (on 26 May) about potential issuance under its USD20 billion debt programme. USD8 billion of unused headroom is available.

High grade debt

According to International Financial Review (IFR) sources, European high-grade supply is becoming likely to abate. The trade medium noted that such supply has reached EUR121 billion since April. It cited Citigroup data suggesting that European corporates have issued a total of EUR220 billion equivalent in all currencies within 2020, 80% above the comparable year-to-date volume for 2019. It suggests that many companies have now met their revised funding needs, while investors are also showing some indicators of saturation. IFR noted that average subscription levels were 2.6 times offer size in the week to 22 May, versus 4 times in the preceding week.

A Financial Times article on 25 May, using Refinitiv data, claimed that US companies have issued USD97 billion in 2020 to refinance commercial paper. It cited Coca-Cola, PepsiCo, Pfizer, Walt Disney and others as having taken the step. In turn, it flags a decline in commercial paper outstanding.

Citigroup and Wells Fargo became the latest US bank issuers to sell debt with offerings on 26 May. According to IFR, bank issuance in 2020 has reached USD209 billion, up 44% on 2019 levels.

After the Memorial Day US holiday, markets reopened focused towards longer-duration: UK utility Severn Trent sold 20-year debt, gaining GBP1.2 billion of interest for its GBP300 million deal, while Total Capital offered 20-year bonds at 205 basis points over comparable US Treasuries, placing USD2.5 billion at 3.127%, a 170-basis point spread.

Equity

Sizeable equity offerings continue to be completed, amidst lower volatility and recovery in several equity indices:

Moderna, Inc, a biotech company working on a vaccine for COVID-19, raised USD1.34 billion before green-shoe from a block placing. It sold 17.6 million shares at USD76 each, with a 30-day option for a further 2.64 million shares. The company's value has been transformed by its COVID-19 work: its share price started 2020 at USD19.23, peaking at USD80 before the offering.

SelectQuote's IPO has become a clear success. The company sold 28.5 million shares at USD20 each, versus indicated pricing of USD17-19 each, peaking on first-day trading on 21 May at USD28.25 and closing the week at USD26.5.

According to the Financial Times on 24 May, only 34 IPOs have been completed in the US so far in 2020, raising USD9 billion, the lowest tally since 2016 and in clear contrast with 2019, when the flotations of Lyft and Uber drove volumes to USD25.5 billion. However, it suggested supply is now reviving, noting that six filings have been made in the last two weeks, including IPOs for Vroom, an internet auto sales firm, and Shift4 Payments.

Warner Music also has revived its planned IPO, re-filing on 26 May for the sale of 70 million shares at USD23-26, representing 14% of the company. The proposed sale involved no new capital, wholly representing a disposal by Access Investments.

The Renaissance IPO index - based on US IPOs over the last two years - has now gained 15% in 2020 (to 22 May), versus an 8% drop in the S+P500. It has strengthened 65% from its low point in late-March.

The European calendar also has a sizeable IPO being marketed, the flotation of Dutch packaged coffee manufacturer JDE Peet, owner of Douwe Egberts and Jacobs brands. The company is raising 23.3 million shares to reduce debt while its existing shareholders JAB Holding and Mondelez are selling up to 25.8 million shares. Price guidance is at EUR30-32.25 per share. The offer will run until 2 June, with trading starting the following day.

Infineon Technologies placed 4% of its equity - 55 million shares - at EUR19.30 each in an oversubscribed offering, raising EUR1.06 billion to help fund its USD10 billion purchase of Cypress Semiconductor, which it closed in April.

South Korea's SK Corp will seek to raise KRW959.3 billion (USD780 million) by floating its SK Biopharmaceuticals subsidiary on the Seoul stock exchange. This would be the largest Korean IPO since Netmarble's KRW2.7 trillion offering in May 2017.

Implications and outlook

In Argentina's ongoing negotiation, the two key sticking points are the three-year grace period sought by Argentina, and the degree of haircut. In terms of the net present value of new debt versus the country's prior liabilities, there was an initial 20-percentage point gap between the 40 and 60 percent levels sought respectively by the issuer and those counter-proposed by bondholder groups. A compromise is likely to fall somewhere around 50% of prior value.
Given the very sizeable volumes issued, many major firms are now likely to have raised enough to cover their needs for 2020, and to cover remaining periods of COVID-19 restrictions on their business activity. The heavy use of term debt to replace commercial paper is also unsurprising: for stronger companies, bond funding is available at still historically attractive terms while the commercial paper market showed temporary dislocations in March. Many firms are likely to use shorter-dated debt such as three or five-year liabilities to replace commercial paper, reducing refinancing risks at limited additional cost.

Growing equity supply is encouraging and risk-positive for the corporate sector. It is being assisted by declining levels of volatility. From a peak of 82.69 in mid-March, the VIX (CBOE) index of volatility declined to 27.16 on May 272, although this is still over double pre-COVID 19 levels. As previously discussed, we assess that quantitative easing underpins stock markets through the provision of sizeable additional liquidity within the financial sector. Further successful stock raisings will reduce corporate bankruptcy risk, as does the provision of state aid in selected sectors. The latter is likely to be crucial in several badly affected sectors, such as airlines.

Posted 28 May 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence