Issuance has been broad, including two non-sovereign Turkish bond sales, sovereign taps by Brazil and The Bahamas, with the latter on far tighter terms than the original offering in October, and a highly successful perpetual sale by Hong Kong's Airport Authority.

Emerging markets/ESG

This week's key EM deals include two offerings from Turkey with ESG-related use of proceeds.

Vakifbank, Turkey's third largest bank by assets placed a USD-denominated five- year sustainable bond.

The bank is 36.5% owned by the Turkish Ministry of Treasury and Finance and 35.99% owned by Turkey Wealth Fund, the latter following capital injections by the sovereign wealth fund into three banks in late May 2020. Along with Halkbank and Ziraat Bank, the bank enjoyed TRL7 billion of support to expand its share capital to offset the impacts from the COVID-19 pandemic and related economic slowdown. In late January, it had raised USD750 million of five-year debt at 5.25%, its largest international bond financing to date.

On 1 December Vakifbank opened books on the sustainable bond with price guidance at 7% area. On 2 December, Seenews agency reported it had priced USD750 million at 6.5%.

Istanbul Metropolitan Municipality also sought a five-year benchmark dollar sale. In 2019, the entity held several discussions regarding bond finance for its plans to develop its metro railway system. Fitch and Moody's have rated the sale BB-/B2. The offering was launched on 2 December capped at a USD580 million size and with initial price talk at 7% area. Subsequent reports suggest this has been tightened to 6.75%, with demand having reached USD2 billion.

Banco Continental in Paraguay is planning a dollar denominated sustainability bond under a recently announced programme, published in November and compliant with ICMA standards.

Within developed market ESG supply, SNAM launched its second transition bond, with proceeds to fund energy transition projects. The Italian energy infrastructure firm announced an expected size of EUR500 million for eight years, with price guidance of mid-swaps plus 70 basis points. The issue is being undertaken alongside a tender for existing debt due between early 2022 and January 2025.

SNAM's deal was upsized to EUR600 million, with peak demand of EUR2.6 billion. It was priced at a 38- basis point spread, with 0% coupon and issue price of 99.728%. In its statement, the company claimed that this is the longest zero-coupon bond by an Italian borrower to date.

Credit Agricole completed its first issue under its recently released social bond programme. The EUR1 billion debut social deal attracted EUR2.25 billion in demand from 150 accounts and was priced at 0.238%, 60 basis points over mid-swaps. Its pricing was the bank's tightest to date and one of the tightest in the sector: last week Svenska Handelsbank priced a seven-year Euro-denominated Green bond at just a 40-basis point margin.

Away from ESG activity, on 2 December The Bahamas tapped its 8.95% amortizing 2032 issue with an additional USD225 million at an 8% yield, versus 8.25% initial guidance. This is an impressive tightening versus the initial USD600 million sale on 12 October, priced to yield 9.25% with USD1.1 billion of demand and over 140 accounts involved.

On the same day, Brazil raised USD2.5 billion from three taps, involving outstanding deals due in 2025, 2030 and 2050. In a National Treasury statement, it noted that these were priced at 2.2%, 3.45% and 4.5% - representing spreads of 177.9, 250.1 and 279.2 basis points over US treasuries. All three taps were at prices well above par. The tranche sizes were USD500 million, USD1.25 billion and USD750 million respectively.

Additionally, the Dominican Republic has announced its intention to tap its 4.875% 2032 bond, with the proceeds to be used to tender for four outstanding deals due between 2021 and 2025.

Hong Kong Airport Authority has arranged a highly successful debut perpetual issue. It raised USD1.5 billion on 2 December, divided equally between perpetual instruments first callable after 5.5 and 7.5 years. Peak demand for the two tranches reached USD6.5 billion and USD8 billion, with 280 investors involved. The tranches were priced at 2.1% and 2.4%, 65 and 70 basis points respectively inside initial price talk. Proceeds will be applied to the Authority's capital expenditure, including the "Three-runway System" - a 650-hectare reclamation project - and for general corporate purposes.

Other debt

Portugal's 10-year bond yield briefly entered negative territory on 26 November, the first time it has achieved this. Portugal's yield curve remains at negative yields for shorter maturities. The brief movement in its 10-year reference rate to negative yields is largely symbolic: it now stands at +0.04% while Spain's 10-year bond stands at 0.07%.

Banco Santander placed USD1.5 billion of Tier 2 debt in the US market at UST+190 basis points, pricing at 2.749%. According to IFR, the deal was five times subscribed.

Deutsche Bahn "extended its maturity profile" with a EUR1 billion 30-year deal, its first sale at the maturity. The deal was priced to yield 0.642%, being used by the borrower to "increase its financial flexibility".

Italy's Banca Monte dei Paschi di Siena sold a EUR750 million five-year senior preferred issue. Pricing was tightened from an indicated 2.25-2.3% to 1.963% after the issue attracted EUR1.7 billion in demand. The order book was led by asset managers (61%) and by UK and Italian investors (39% and 28% respectively), according to the bank's statement.

As a further indicator of the healthy bid for Italian assets, Poste Italiane gained over EUR5 billion for a two-tranche EUR1 billion offering. The BBB/Baa3 rated deal was priced at a new record low, according to the company's statement, with a four-year tranche priced at -0.025%, and ten-year debt at 0.531%. The combination permitted the issuer to "reduce costs, diversify funding sources and lengthen debt maturities".

Our take
This week's calendar once again shows an impressive flow of emerging market deals with their pricing levels and the range of borrowers indicating continuing improvement in sentiment towards emerging markets issuers.

The degree of tightening in The Bahamas' 8.95% 2032 issue - of 1.25 full percentage points in yield in one and half months - is particularly impressive given its weak fundamentals.

The country was downgraded by S&P Global Ratings by one notch in mid-November to BB-: the agency cited "large fiscal deficits and a high debt burden" as increasing funding pressures.

This was reinforced by the IMF's latest Article IV Mission report, published on 2 December, which noted that the country has been "hit hard" by economic slowdown and the loss of tourist income, generating a "significant increase" in public sector debt, to over 85% of GDP in 2020 according to IMF forecasts. The IMF accepted that fiscal consolidation is not feasible at present but warns that "tax policy and administration measures are essential", suggesting the need for higher future taxation on higher value residential property and greater use of income tax. Overall, the IMF assessed that financing needs "will decline only gradually over the medium term", generating "elevated risks of debt distress".

Turkey's worsening reserve position and often volatile monetary policy have been flagged by us repeatedly but proved no obstacle to the country's successful sovereign level bond sale ahead of Thanksgiving. The widening range of Turkish issuers this week has been a positive test of market appetite. Successful completion of the two slated positive deals should further reinforce the recent improvement - even if this remains subject to future potential reversal if Turkey reverts to policy (particularly regarding monetary policy rates) viewed adversely within financial markets.

Portugal's brief entry to the "negative yield club" of European issuers is symbolic, but nonetheless a clear indicator of the potency of the ECB's monetary policy - the bloc's third most heavily indebted issuer offers roughly zero yields on its 10-year debt, while Spain offers only a few basis points more.

Other key features - notably the broadening supply of ESG issuance and the continuing bid for long-duration debt - also indicate a continuation of pre-Thanksgiving trends. Hong Kong Airport Authority's perpetual sale also looks particularly impressive, with a sharp tightening in pricing made feasible by notably heavy oversubscription levels - 8.7 and 10.7 times the two tranches on offer.

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