This week's calendar included France's second Green bond (a EUR7 billion 2044 deal at 0.526%), Greece's EUR1.5 billion 30-year syndicated issue, a highly successful sustainable bond sale by the Community of Madrid, and perpetual debt sales by Repsol and Charles Schwab. Emerging market supply was light pre-FOMC but has since revived with Laos attempting its five-year sale for the third time.

Emerging markets

After the FOMC release, on 18 March Laos restarted efforts to issue internationally. It launched its five-year bond for the third time, with initial guidance of 11%, reportedly seeking at least USD300 million.

Krung Thai Bank, Thailand's third largest by assets with around 15% of sector assets also announced an Additional Tier 1 issue.

Although the bank has a Tier 1 capital ratio of 15.4%, its reported non-performing loans ratio was 4.2% in Q3 2020 versus a sector average of 3.1%. Bank of Thailand requested the bank in June 2020 to stop distributions to use retained profits to reinforce its capital buffers, a likely factor behind the new issue. The perpetual non-call five-year deal was issued with a 4.4% coupon to first call, versus 4.85% guidance.

Malaysia's Petronas sold a USD600 million seven-year deal priced at 2.112%, 85 basis points over comparable US Treasury bonds, which enjoyed "overwhelming demand" according to the company.

ESG

Agence France Tresor (AFT), the country's debt management agency, announced on 15 March its sale of a second Green Bond due on 25 May 2044, and on 16 March placed EUR7 billion at 0.526%. Total demand reached nearly EUR35 billion.

AFT reported that some EUR4 billion were allocated to Green investors in a book involving over 300 accounts, of which 36% were asset managers, 27% banks and 20% insurance companies: pension funds took 8%. By geography, 22% were placed with domestic buyers, 21% in the UK, with 15% taken by German subscribers and 12% allocated to Italy.

The issue will be reopened subsequently to increase its liquidity. AFT also will continue also to tap its OAT1.75% 2039, France's first Green Bond, which has been expanded to EUR28.9 billion.

Despite having called early regional elections, Community of Madrid arranged a 10-year sustainable Euro issue, the first by a Spanish autonomous region in 2021 to fund environmental and social projects. It placed EUR1 billion at 0.42%, 12 basis points over comparable Spanish government debt (the region's lowest margin to date for this maturity) and five basis points tighter than initial guidance. Demand reached EUR3.5 billion from over 150 purchasers. 69% of the allocations were taken by ESG-focused buyers.

Indonesian animal feed producer Jamfa Comfeed has arranged the first sustainability-linked issue from the country. It sold USD350 million of five-year bonds at 5.5%, versus guidance of 5.875% area. The issue includes a key performance indicator relating to reducing pollution from untreated wastewater.

On 18 March, Toyota Motor Corporation arranged a USD2.75 billion sustainable bond to fund environmental and social projects under its JPY500 billion (USD4.7 billion) Woven Planet framework: it also plans domestic Yen-denominated retail issuance.

Deutsche Bank has arranged its first dollar-denominated Green Bond. It sold USD800 million of five-year debt, increasing the issue from USD500 million, and pricing at 87 basis points over US Treasuries, versus guidance of 110 basis points. Proceeds will fund eligible projects including renewable energy projects, reducing energy usage and green commercial real estate, within the bank's goal of funding EUR200 billion of sustainable projects by 2025.

Late last week, Ahold Delhaize priced an inaugural sustainability-linked bond with a nine-year term. The issue was priced with a 0.375% coupon and issue price of 99.63%, at 75 basis points over mid-swaps. Global Capital website described this as seven basis points tighter than fair value.

Other debt highlights

A nine-part package by Verizon Communications raised an impressive USD25 billion on 11 March and gained total demand of USD115 billion. The package is to fund a USD36 billion payment to the Federal Communications Corporation for 5G licenses. According to Dealogic data the issue is the joint-sixth largest on record, equaling Boeing's offering on 30 April 2020. Verizon continues to hold the record for the largest corporate sale, having issued USD48.9 billion in 2013.

Verizon followed its jumbo dollar sale with a three tranche Euro-denominated offering spanning eight, 11 and 14.5-year tranches, and by issuing Kangaroo debt in Australia.

Greece sold a EUR2.5 billion 30-year bond, its first "long bond" since 2008. It gained EUR26 billion in demand, pricing at 1.5 percent over mid-swaps at 1.956%.

The extension of Greece's curve to this term had been recommended by Greece's primary dealers in recent months, with the Public Debt Management Agency reportedly cautious to avoid investor trust being damaged by adverse performance during periods of market reversal. Last week's signals by the European Central Bank that it would expand its purchases appears a relevant trigger in proceeding.

Improving sentiment also was indicated by Charles Schwab and Repsol launching hybrid offerings on 15 March:

Repsol raised EUR750 million of perpetual non-call six-year debt with a 2.5% coupon: demand reached around EUR1.75 billion. Pricing was tightened from initial guidance of 2.875% area. By comparison, in June 2020, the company had sold EUR1.5 billion of perpetual debt, split equally between tranches with initial call after six and 8.5 years, which had gained EUR11.5 billion in demand but at a materially higher cost.

Charles Schwab sold USD2.25 billion of perpetual non-call five-year debt at 4%. The deal initially was marketed at 4.5%.

UK bank Barclays arranged a EUR1 billion Tier 2 subordinated deal, with the ten-year deal enjoying almost four times subscription. It was priced at 1.206%, 155 basis points over mid-swaps and 30 basis points inside guidance.

Airline group IAG launched a EUR1 billion two-tranche deal, increasing its sale to EUR1.2 billion given strong demand: it sold equal amounts of five and eight-year debt at 2.75% and 3.75%.

As a further positive indicator, eight high-yield bonds were launched on 15 March in the US market. Of these, T Mobile raised USD3.8 billion from a package to fund its 5G spectrum licenses.

International Financing Review reported on 15 March that US high yield issuance had reached USD118.4 billion so far in the first quarter, a record level for the period (the prior Q1 record was USD97 billion).

Implications and outlook

Greece's decision to launch a 30-year deal to further develop its yield curve and continue its path to "market normality" is a positive indicator, indicating its confidence in the European Central Bank's continuing support.

The ECB statement improved stability in European markets, also providing a favorable platform for France's second Green Bond. Demand for this was sizeable but fell well short of levels achieved in recent European sovereign syndications, notably the EUR105 billion enjoyed by Italy for its early-January 15-year sale, in part reflecting AFT efforts to avoid order inflation. The order book was larger than for France's debut in the Green Bond sector: in January 2017: its first such sale also was for EUR7 billion, but with EUR24.5 billion of demand - which at that time was deemed a clear success.

While the Community of Madrid has some of the strongest debt sustainability indicators among Spanish autonomous regions, its clearly successful sale of ten-year sustainable debt is also a positive indicator against the background of early regional elections just having been called. Similarly, the sale of corporate perpetual debt in both dollars and Euros is a further indicator of reviving risk appetite.

Counterbalancing this was the near absence of emerging market supply early in the week. This is largely due to borrowers having awaited the latest FOMC release to assess market receptivity, particularly for dollar-denominated issuance, with the post-announcement calendar suggesting concerns have eased.

As a further indicator of uncertainty, ICE data showed that by 12 March, the average yield on US investment-grade corporate bonds had reached 2.28%, 17 basis points above its level at end-February, and up by a full half percentage point within 2021. This indicator serves to reinforce the impression that without representing a full-scale market dislocation, bond markets have undergone important correction, with markets undergoing greater volatility and increased uncertainty over policy direction.

Posted 19 March 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence