The most notable issue this week was the EU's debut Green Bond which was heavily oversubscribed and achieved a cost-saving aligned with the recent ESG debuts by the UK and Spain. Another positive feature was that despite growing signs of downside market imbalance relating to Chinese property sector bonds, three Chinese issuers successfully sold debt on 12 October, indicating that contamination is being limited to the property sector.

Emerging markets

Data released by China Central Depository & Clearing Co. showed that foreign holdings of Chinese government bonds rose 3.5% in September to a new record of CNY2.28 trillion (USD354.3 billion), continuing the positive trend encouraged by China's index inclusion. At the end of August, foreign holdings of all Chinese bonds stood at CNY3.58 trillion, 3.8% of the outstanding stock. According to Asian Investor, this represented a year-on-year increase of 38%.

The turmoil in China's property sector has worsened with further sharp falls affecting bonds from the sector. On Monday 11 October, Evergrande failed to make coupon payments due on several USD notes. Compounding the bad news, a smaller Chinese property developer, Modern Land, announced that it was delaying a USD 250 million bond repayment which was due in October, for another three months, while another distressed Chinese developer, Sinic Holdings, stated that it was likely to default next week. Following this news, some issues recorded 15 percentage point price falls on 12 October after Monday's US Columbus Day holiday in the dollar bond market on contagion fears, albeit without any adverse news being released directly relating to these firms. According to BondeValue research, some two-thirds of the Chinese property sector bonds it monitors now yield over 10%, with almost a quarter of the sample (over 80 issues) now yielding over 50%, levels that indicate expectations of default and sizeable haircuts.

Counterbalancing this, three Chinese borrowers successfully sold debt on 12 October, indicating that investor contagion is currently limited to the property development sector:

Beijing Infrastructure Investment (rated A+/ A1 by S&P and Fitch) placed USD400 million of three-year bonds at 1.352%, with demand of over USD1.5 billion enabling it to price at 1.352%, 75 basis points over comparable US Treasuries and 40 basis points inside guidance. Zhuji State-Owned Assets Management, an unrated entity in Zhuji City, Zhejiang province which provides multiple functions for the municipality including investments and urban construction, placed USD520 million of three-year bonds at 3.2%, versus 3.5% guidance, after attracting USD1.3 billion of demand. Additionally, Dongfeng Motor issued EUR725 million of three-year debt at 0.425%, 70 basis points over mid swaps and 30 basis points tighter than initial price guidance, with demand of EUR1.7 billion.

According to IFR reports, mainland China is preparing to issue more US dollar-denominated debt. Its report cited a Ministry of Finance website statement that it plans to offer USD4 billion of 3,5,10 and 30- year bonds in the week of 18 October: it raised USD6 billion using the same maturity schedule in October 2020 with demand of USD27.2 billion.

Chilean retailer Falabella sold USD650 million of 10-year debt, pricing a "well-supported" deal at a 190-basis point margin versus US Treasuries, 10 basis points inside guidance. Proceeds will fund the repurchase of debt due in 2023 and 2025.

State-owned copper producer Codelco is planning a new dollar sale. It is seeking to extend the duration of its liabilities, purchasing up to USD1.75 billion of existing debt (its 4.5% 2023, 2.25% 2024 and 4.5% 2025 issues, of which USD386 million, EUR600 million and USD671 million are outstanding).

Poland is planning a Panda issue, debt in local currency sold in the mainland Chinese domestic market. The issue is slated to be for three years and in an amount of CNY3 billion (USD466 million). Poland debuted in the Panda market in 2016 with a CNY 3 billion 3.4% three-year deal, with Portugal also acting as a sovereign issuer in the segment in May 2019 with CNY2 billion for three years at 4.09%. Books for the new deal open on 13 October.

ESG

The EU has arranged its first Green Bond. The issue - a no-grow EUR12 billion 0.45% 15-year deal -is the largest Green Bond on record, narrowly ahead of the UK's GBP10 billion debut (equating to USD13.87 billion versus USD13.63 billion for the UK's deal). 30% of the Next Generation EU program, now worth around EUR800 billion, will be in Green format. The issue was marketed at mid-swaps minus eight basis points and gained EUR135 billion in demand, the largest Green Bond order book to date, pricing at guidance.

Johannes Hahn, EU budget commissioner, is cited by the Financial Times as having stated that the issue "will help strengthen the role of the EU and euro in the sustainable finance market". Hahn claimed that the deal had achieved a cost-saving or "Greenium" of some 2.5 basis points relative to a conventional financing of the same size and maturity, broadly in line with the savings recently achieved in debut Green bonds by the UK and Spain.

According to the European Commission, 29% of the deal was allocated to UK-based buyers, 12% to the Nordic region, 11% each to Benelux and France and 10% to Germany. 39% was bought by fund managers, 23% by bank treasuries, and 16% and 13% respectively by insurance and pension fund investors, and by official institutions. While the issuer flagged that the large size and strong rating of the deal should "provide access to the green bond market to a wide range of investors" and noted that it "will be able to diversify its investor base, tapping the pool of dedicated green investors", no specific data is provided to estimate the share taken by ESG buyers.

Export-Import Bank of Korea has raised a two-tranche Green debt package, achieving a yield of -0.142% on EUR850 million of three-year bonds, priced at 15 basis points over mid-swaps versus guidance of 30-35 basis points. The Euro-denominated tranche gained over EUR2.5 billion of demand. It then issued USD1 billion of seven-year bonds at 1.754%, a margin of 35 basis points over US Treasuries, and 25 basis points inside guidance. Demand reached USD2 billion. Demand data for the US portion shows that 43% was sold in Asia, with 56% placed in EMEA, with banks leading demand with 58% of allocations.

Also from Korea, KEB Hana Bank sold a USD350 million AT1 sustainability issue, funding eligible green and social projects: the perpetual debt is first callable after five years and was priced at 3.5% to first call. Demand reached USD625 million, with the deal pricing in one with initial guidance.

Mexican chemical firm Braskem Idesa is marketing a USD750million - 1 billion sustainability-linked deal due in 2032. The issue sets a key performance indicator of reducing greenhouse gas emissions by 15% in seven years.

Our take

The EU's Green Bond debut was clearly very successful, as expected. Its "Greenium" aligned with that achieved in recent debut deals by the UK and Spain: while there is no data specifying what proportion of the sale was taken by ESG-dedicated buyers, given the size and long maturity of the deal, the cost-saving from use of an ESG format appears significant. The EU's NGEU program will involve 30% of the EUR800 billion program being funded through Green Bond sales, adding further momentum to the already rapid growth of ESG issuance this year.

The sharpness and severity of price falls affecting mainland Chinese property sector bonds appears to indicate market imbalance, as well as growing investor fears of defaults affecting multiple firms beyond Evergrande. Forced selling by existing holders combined with a lack of potential buyers is likely to be exacerbating the sharp price falls in the sector. Against this background, we view the successful sale of three Chinese deals on 12 October as a positive indicator, suggesting that contagion is limited to the property sector. This is reinforced by other Chinese bond sales in recent weeks and the pending sovereign issuance. Earlier, adverse developments at Evergrande initially had impacted prices throughout the Asian region, but the success of the new supply shows that such wider dislocation appears to have abated.

Posted 14 October 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence