Emerging markets

This week Indonesia, Croatia, Lithuania, Ukraine, Peru and Serbia all have announced issue plans, with the first three successfully completing debt sales.

Indonesia was first to market on 11 June, with over USD1 billion of tightly-priced funding in dollars and Euros.

Croatia was next out. On 12 June it sold EUR1.5 billion of 10-year debt, gaining EUR6.4 billion of demand. Pricing was tightened from initial guidance of 135 basis points over mid-swaps to 105 basis points, seven basis points through Croatia's existing curve.

On the same day, Lithuania opened books on 10 and 30-year Euro-denominated deals. Final pricing was set at 33 basis points over mid-swaps and 88 basis points for the two tranches versus guidance of 40-45 b.p. and 95-100 b.p. respectively. It placed EUR650 million of 10-year debt at 0.603%, Lithuania's lowest borrowing cost to date, and EUR850 million at 1.732%. Proceeds will fund redemption of Lithuania's EUR1.3 billion 7.375% issue due on 11 February 2020.

Ukraine is next most advanced, already having started marketing a seven-year Euro-denominated deal, while Serbia has mandated banks and started preparations for investor meetings. Ukraine is marketing. Earlier in 2019, Ukraine raised USD350 million of ten-year debt by private placement, and it obtained USD2 billion of five and ten-year dollar funding (at 9% and 9.75% respectively) in October 2018.

According to a Medium-term Strategy for State Debt Management approved by the Cabinet of Ministers in early June, Ukraine also plans to seek to extend the maturity of its domestic profile and introduce amortizing bonds to reduce the concentration of its maturity schedule. The Strategy flags that Ukraine faces heavy debt service in the period 2019-2022, with debt service of UAH483.4 billion (USD17.6 billion), UAH491.5 billion, UAH482.9 billion and UAH481 billion in successive years. Interfax notes that this represents an estimated 12% of GDP and 52.7% of state budget revenues for 2019, with GDP shares of 10.8%, 9.5% and 8.6% projected for the three following years. To smooth these burdens, a debt exchange program is being considered according to the Finance Ministry.

Peru is meeting US investors between 10-14 June and reportedly has appointed banks to sell dollar and sol-denominated debt, having sold PEN10.4 billion (USD3.12 billion) of internationally-targeted domestic instruments last December.

European markets

With 10-year bunds continuing to trade around all-time lows - of -0.24% - other European markets have benefitted, prompting longer-dated sovereign supply from Spain and Italy.

On 7 June, Spain's 10-year yield reached 0.55%, an all-time low, and remained close to this level subsequently. In response, on 11 June, it announced plans for a 10-year syndicated deal. Prior to this being launched on 12 June, it already gained EUR20 billion of interest for a potential EUR6 billion sale. Initial price guidance was set at 37 basis points over mid-swaps, equating to a 0.65% yield (versus 0.58% on Spain's outstanding 10-year bond at the time of launch). The book grew to EUR31 billion and pricing was adjusted to a 33 b.p. margin.

Italy's 10-year bond traded down to two successive closes at 2.36%, a new 2019 low, which prompted the country to announce a new 20-year deal, also launched on 12 June. The new offering gained EUR24 billion of demand with pricing tightened from 16 to 12 basis points over Italy's March 2038 benchmark. It was sized at EUR6 billion and priced to yield 3.149%.

Within regular debt auctions, two new records were set on 12 June. Portugal sold EUR625 million of 10-year debt at 0.639%, with over 1.8 times cover. This is the country's first ever 10-year sale at sub-1%: the prior 10-year auction cleared at 1.059%. Portugal also placed EUR625 million of 15-year debt at 1.052%.

On the same day, Germany placed EUR2.55 billion of ten-year bonds at -0.24%, with 1.7 times coverage: its prior low yield for a 10-year sale was -0.11, set in 2016.

Equity

Up to five US IPOs are planned this week. The largest is for on-line pet-food retailer Chewy, being floated off by Petsmart, which sought up to USD750 million from an NYSE listing, offering its shares at USD17-19 each. The company is selling 5.6 million shares as a capital increase for general corporate purposes, alongside 36 million shares being offered by Petsmart, which will retain 70% of the share capital after the offering. The deal was well received with pricing increased to USD19-21 per share on 12 June.

Also floated was Crowdstrike Holdings, a security software company enjoying rapid sales growth. The firm sought over USD500 million as a capital increase, offering 18 million shares at USD28-30, having started the sale with initial guidance of USD19-23. Crowdstrike grew its revenues 110% to USD250 million last year, with a loss of USD140 million. The deal was priced above the range at USD34 after healthy oversubscription and opened trading on 12 June at an impressive USD63.50, closing first day trading at USD58.

The first issue under the Shanghai-London Stock Connect scheme is significantly larger than expected. Huatai Securities is seeking to raise USD1.7-2.0 billion from its sale of global depository receipts on the London Stock Exchange, with indicated pricing of USD20-24 per GDR for the 82.5 million GDRs on offer. This represents 10% of Huatai's capital. One of the arranging banks claimed that the deal was fully covered on 11 June. The deal should price on 14 June. Proceeds will fund both domestic and international expansion.

Our take

This week's sovereign issuance is clearly impressive. The rush of sovereign supply shows an unsurprising desire by borrowers to issue with key reference rates at attractive levels, with record yield lows in European markets.

Within the current supply mix, planned bond issuance by weaker credits (notably Ukraine) and the reception for the sizeable equity calendar will indicate the depth of risk appetite. So far, indicators of policy softening in both the USA and EU have proved beneficial for both bond and equity markets, despite the underlying slower growth projections driving such policy adjustment. As such, we have avoided a flight to "quality", with no recent signs of risk-aversion towards new equity and riskier credits.

Posted 14 June 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence