This week's supply showed further positive risk appetite, indicated by highly successful sales by Brazil and Colombia, another record order book for syndicated Italian debt, and heavily oversubscribed perpetual issuance by Spanish oil company Repsol. Hungary's debut Green Bond and an inaugural Green sale by Deutsche Bank are further positive indicators of the underlying growth of ESG finance, with sharp expansion of social finance likely to address COVID-19 funding requirements.

Emerging markets

The Republic of North Macedonia priced a EUR700 million six-year deal on 27 May. The offering was priced to yield 3.95%, with a 3.675% coupon. According to the Ministry of Finance, the issue will be complemented by loans from the IMF, World Bank and European Union (for EUR176, 140 and 160 million respectively) to cover its 2020 funding needs.

On 1 June, Republic of Colombia sold USD1 billion of 2031 bonds at 3.165% yield, 250 basis points over US Treasuries, alongside USD1.5 billion of 2051 debt at 4.202%, 275 basis points over UST. Demand reached USD13.3 billion. César Arias, Director General of Public Credit and National Treasury, stated that the deal achieved three historical achievements: Colombia's lowest coupon to date for a long bond, the largest level of demand and the most diverse investor base.

Brazil sold on 3 June USD1.25 billion of five-year bonds at 3% and USD2.25 billion of 10-year debt on at 4%, well inside initial guidance of 3.5% and 4.6% area respectively. Demand reached USD18 billion. The Brazilian Treasury described the deal as "to promote liquidity of the sovereign curve…provide a benchmark for the corporate sector and to meet maturing foreign currency debt".

Cemex sold USD1 billion of seven-year debt, priced with a 7.375% coupon, versus initial price guidance of 8% area. Proceeds will fund debt repayments and other corporate purposes.

On 3 June, Hong Kong Electric sold a USD500 million ten-year deal. Despite wider concerns over Hong Kong, this was completed without pre-marketing with investors, reflecting the borrower's rarity: it previously issued only in 2016 and 2011.

On the same day, Macau-based gaming and resorts company Sands China sold USD1.5 billion of six and ten-year debt. The two tranches had coupons of 3.8% and 4.375% with issue prices of 99.90% and 99.58% respectively.

Other debt

Italy raised EUR14 billion from 10-year syndicated BTP sale on 3 June, ahead of an ECB meeting expected to announce expansion of its Pandemic Emergency Purchase Program. Demand reached EUR108 billion, setting a new record for a single-tranche deal. Pricing was set at 1.707%, set at nine basis points over its outstanding August 2030 BTP, versus initial guidance of a 15 b.p. spread.

While the issue relies on strong primary market support, Italy has benefitted significantly from ECB secondary market backing. Using UniCredit data, a Reuters report on 2 June noted that during April and May the European Central Bank bought EUR51.1 billion of Italian government debt, while the country had net new supply during the period of EUR49 billion.

Repsol gained an impressive EUR11.5 billion in demand for an increased two-tranche perpetual deal. The offering comprised two tranches of EUR750 million each callable after 6.5 and 8.5 years, priced at 3.75% and 4.25% respectively, versus initial price talk of 4.5% and 5.125%, and was upsized from EUR1 billion. Part of the proceeds will redeem an existing perpetual deal close to its first call. Repsol's clear success followed a similarly positive response last week to a EUR750 million 3.875% perpetual non-call 5.25-year issue for Swiss perfume manufacturer Firmenich, which attracted EUR4.3 billion in interest. The two deals were the first hybrid corporate issues in Europe since February.

ESG

<span/>Hungary has priced an inaugural EUR1.5 billion Green Bond due in 2035, at mid-swaps plus 190 basis points.

Finance Minister Mihály Varga claimed that the deal gave "a clear message to the markets" about Hungary's "commitment to environmental protection", set out in its May presentation on its Green Bond program. The deal gained EUR7.7 billion in demand.

Having not borrowed internationally in 2019, Hungary recently raised EUR2 billion of conventional debt. Its target borrowing for 2020 entails international issuance worth EUR4 billion, four times its original projection for 2020: its overall deficit is expected to reach 3.8% of GDP in 2020 according to debt agency ÁKK. Total borrowing is projected in the agency's May revised Debt Management Outlook at HUF10.1 trillion (EUR28.6 billion) within which foreign currency issuance of HUF1.6 trillion (EUR4.6 billion) would be sought including EUR4 billion of public debt sales. Overall, however, Hungary's issuance remains projected below the HUF10.89 trillion raised in 2019.

Deutsche Bank has issued its first Green Bond. It sold EUR500 million of six-year debt at 1.375% to finance the bank's own renewable energy projects, under the categories of energy efficiency, renewable energy and green buildings. The issue was 9.5 times subscribed and pricing trimmed from an indicated 200 basis points over mid-swaps to final pricing at 167 basis points. CEO Christian Sewing described the deal as "a further building block of our sustainability strategy". The bank recently announced a commitment to expand its green financing activities, targeting an expansion in such lending to EUR200 billion by 2025, roughly double its current level. Within the second quarter it also plans to announce a new oil and gas lending policy.

Rainforest Action Network, an interest group, claims that the bank already has made progress in changing its lending environmental footprint: the Financial Times reported that it lists the bank as the 19th largest provider of funding for carbon-intensive projects, having halved such exposures between 2016 and 2019 to USD12 billion.

The World Resources Institute claimed that by end-2019, 23 of the largest 50 private-sector banks globally already had specific quantitative sustainability objectives publicly established.

Our Take

Both Colombia's successful deal and the revival of the European corporate hybrid debt market are positive indicators of bond risk appetite. Colombia has faced some adverse market scrutiny amidst fears that its energy exposures increase the risk of it losing investment grade ratings over time, but sentiment has recently improved considerably. Its EMBI+ spread index, which traded at under two percentage points over US Treasury bonds prior to the COVID-19 pandemic, surged to peak at 494 basis points on 17 March, but has now recovered to 280 basis points (as of 2 June).

The Green Bond debuts for Hungary and Deutsche Bank are further indicators of the revival and longer-term expansion of the ESG sector, following closely the announcement of three ESG innovations on the same day last week - the first educationally-targeted social bond, the first Green bond from the chemical sector and an inaugural convertible Green bond.

Momentum will be encouraged by the growing number of investors establishing ESG-oriented investment vehicles and greater shareholder activism encouraging firms to show clear ESG commitments. A further major positive factor which will benefit "social" debt issuance is the growing outlay by governments and supranational bodies on issuance to mitigate social impacts from the COVID-19 pandemic and to meet expanded healthcare outlays and investment in potential vaccines and treatments.

Lastly, Italy's latest syndicated deal appears another overwhelming success. This reflects widespread backing from international investors when arranging new issuance, but its reliance on ECB demand is flagged by the sizeable volume of ECB purchases in the secondary market in recent months, making the ECB's decision on 4 June to expand the size and extend the duration of its PEPP program a key positive indicator for its future debt trajectory, and that of other EU members with strained debt metrics, such as Greece and Spain.

Posted 04 June 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence