Despite the ongoing yield reversal Emerging Market issuers have been active this week with Costa Rica completing a USD1.5 billion sale, while Morocco and Egypt are planning euro and dollar-denominated sales respectively, the latter potentially including 12 and 40-year tranches.

Yield reversal

From a peak of USD17.03 trillion on 29 August, the global stock of negative-yielding debt has fallen to USD11.94 billion as of 8 November according to Bloomberg data. Having traded around -0.4% in late August, France's 10-year bond has now reverted to positive territory (0.06%) while 10-year Bunds now yield -0.24%, half a percentage point above their 2019 low of -0.74%.

Emerging markets

Morocco has mandated banks for a Euro-denominated issue.

• In late October, its Finance Minister Mohamed Benchaaboun had announced the country's intention to undertake international issuance, its first bond sale for four years.
• At the time he announced that deal size would not exceed USD1.5 billion, while leaving open the choice between dollar and Euro-denominated issuance.
• In March Central Bank governor Abdellatif Jouahri had suggested that one issue was likely in both 2019 and 2020, each to raise around USD1.1 billion equivalent, or MAD 11 billion.

Egypt also has mandated, but for dollar issuance.

• A Reuters report claims it will issue in benchmark size at four, 12 and 40-year terms.
• In September Minister of Finance Mohamed Ma'it stated that Egypt plans to raise USD3-7 billion internationally during fiscal year 2019-20.

According to a Fitch report, Mozambique's bondholders have completed the restructuring of its USD727 million 10.5% 2023 bond.

• Under the settlement the debt will be extended to 2031, with a 5% coupon until 2023 and 9% thereafter.
• On 9 September, the country had announced that 99.5% of its bondholders had approved the proposal, versus the 75% required threshold under its collective action clause.

Costa Rica placed a USD1.5 billion package on 12 November, the maximum amount for which it had Congressional authorization.

• This comprised USD1.2 billion due in February 2031 priced at 6.25% and a USD300 million tap of its 2045 debt at 7.25%.
• According to La Republica.net, initial price guidance had been set at 6.5-6.9% and 7.5% respectively.
• The deal reportedly was five times covered, but its pricing reflected the country's deteriorated fiscal position. According to Freddy Quesada, director of INS Valores cited by La Nación website, the 2031 tranche was priced at a spread of 426 basis points over US Treasuries, while in 2013 the country's original sale of 2045 debt had been at a 267-basis point margin.

Mexican cement manufacturer Cemex placed USD1 billion of ten-year debt at 5.45%, versus guidance of 5.5-5.625%.

• The issue is callable after five years.
• Media reports highlight that this is the company's first dollar deal since 2016, when it paid a 7.75% coupon.

From Brazil, both Banco Itaú Unibanco and steelmaker Gerdau are marketing 10-year dollar issue. However, digital financial institution Banco Original has withdrawn plans for a USD150 3-year debut transaction.

Green and social finance

According to a Moody's report, Green Bond issue volumes reached USD189.5 billion in the first three quarters of 2019, surpassing the 2018 full-year total of USD171.1 billion.

Apple has issued Green debt denominated in Euros for the first time.

• On 8 November it placed EUR2 billion split between six-year debt at 0.032% and 12-year bonds at 0.565%.
• Apple pledges to apply the proceeds to reducing its carbon footprint, using greener materials in its products and processes, and to transition to use recycled and renewable resources.
• It also promises to produce an annual report on the environmental impact of its Green initiatives and to have this independently verified.
• The short-dated tranche was priced below yields on conventional outstanding debt, as Apple had debt maturing in 2025 with a 0.049% yield at the time of the sale.

On the same day, Royal Bank of Scotland launched its first social bond. The EUR750 million offering attracted demand of over EUR2 billion.

Junk-rated Owens Illinois, a glass manufacturer, increased a EUR300 million 2025 Green issue to EUR500 million in response to strong demand, while pricing below its indicated range.

Other debt highlights

Abbvie is preparing a jumbo offering, expected to be the largest corporate debt sale this year. It is reported to be seeking USD28 billion towards funding its purchase of Allergan.

Allied Irish Bank attracted over EUR3.5 billion of demand for a EUR500 million dated subordinated Tier 2 issue, and tightened price guidance by 20 basis points.

Bayer's USD1.75 billion hybrid issuance was more than five times subscribed. The sale comprised two tranches of 60-year debt, callable after 5.5 and eight years, with coupons of 2.375% and 3.125%.

Equity

Alibaba's large-scale secondary offering in Hong Kong is expected to be revived this week. Latest reports suggest that it might open books on 15 November for a sale worth up to USD15 billion. A listing approval hearing was completed successfully on 13 November. The transaction previously was withdrawn in August against the background of the US/China trade conflict and instability within Hong Kong.

The sizeable planned flotation from Canadian waste management firm GFL Environment has been withdrawn. The company had sought up to USD2.42 billion, targeting pricing of USD20-24 per share. The deal was withdrawn after market feedback pushing for pricing at USD18 per share. The firm intends to "revisit the public markets at a later date".

Outlook and implications

The reversal of earlier expansion of the stock of negative yielding debt, and the associated back-up in yields, comes as no surprise.

• In part, this can be attributed to improved perceptions over the scope to resolve the US/China trade dispute, and to signs of reluctance by the Federal Reserve to cut rates rapidly.
• However, it is also a logical reaction to growing investor concern about locking in negative returns for very lengthy periods, with the risk of sizeable subsequent capital losses during economic recovery.
• Additionally, longer dated bonds in Europe had made very sharp capital gains within 2019, increasing the incentives for profit-taking to lock in capital appreciation.
• Overall, media claims that the environment of negative-yielding debt is ending may be unduly optimistic, given the weak underlying growth trajectory in Europe.
• However, for German 10-year rates to have risen 50 basis points from their low point, and for French 10-year OAT to be back at positive yields, clearly shows that international bond market sentiment has changed recently.
• Ahead of calendar year-end, profit taking is a relatively normal seasonal feature: how yields behave in January 2020 could well provide better guidance on subsequent market trends.

Costa Rica is a deteriorating credit. The country's central bank projects a deficit of 6.3% of GDP in 2019. Its debt stock has risen from 29.9% of GDP in 2011 to 41% in 2015: according to Treasury forecasts, it will rise from 53.6% in 2018 to 59.9% this year.

In early 2019, we downgraded it by two notches. However, we retain a negative Outlook, given our concern that external borrowings and the overall debt stock may continue to grow despite some government efforts at fiscal consolidation. Country Economist Cristina Arbelaez warns that "without the proper implementation of fiscal reforms, the sovereign rating will come under pressure … as debt levels rise, coupled with evidence of increasing funding pressures".

By contrast, while relatively-weakly rated Egypt appears on a more positive trajectory. Its debt stock is more manageable at 44% of GDP, while the country's IMF agreement has led to it making headway in reducing the fiscal burden of previously-heavy subsidies.

Finally, we view Morocco as a relatively healthy risk: our latest Sovereign Risk report describes its position as "supported by prudent government policies, low debt-service costs, and a relatively stable political system".

Posted 15 November 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence