Debt issuance

This week's vigorous primary calendar started even on Labor Day: two European junk-bond deals attracted strong demand on 2 September:

• Smurfit Kappa, an Irish-based packaging firm, increased a planned EUR500 million eight-year deal to EUR750 million after attracting EUR3.9 billion of demand. The deal was priced at 1.5%.ts. Proceeds will redeem debt maturing in 2020 and 2021: the company upsized its conditional planned repurchase of its 3.25% 2021 notes (from EUR250 million to EUR500 million) to reflect the deal increase.
• ThyssenKrupp, a diversified German industrial group, raised EUR1 billion of 3.5-year debt, with demand exceeding EUR2.75 billion. The issue was priced at 99.633% with a 1.875% coupon. The company statement noted "great interest from investors" noting it "took advantage of the favorable market environment" to strengthen its liquidity.

On 3 September, markets reopened fully, with 21 issuers entering the US high-grade market on the same day, a record:

• Nearly USD28 billion was raised by borrowers including Disney, with USD7 billion of debt in six tranches, John Deere, CSX and Caterpillar.
• Both Deere and CSX included 30-year tranches.
• Heavy supply continued on 4 September with a USD7 billion five-tranche issue by Apple and USD2 billion for Coca Cola.

Within Europe, negative-yield supply remains prominent:

• On 3 September Austria auctioned five and ten-year debt, selling a combined EUR1 billion, with each tranche some 1.8 times subscribed: the two portions cleared at -0.798% and -0.494% respectively.
• Edenred, a French employee benefits firm, has set a record for a negative-yield convertible bond. The firm sold a debut EUR500 million five-year convertible issue, with a 40% premium, 0% coupon, and an issue price of 108%, implying a yield to maturity of -1.53%.

Amidst positive indicators of government formation in Italy involving 5 Stelle and Partito Democratico, its 10-year bond fell on 4 September to a new low of 0.80%.

Elsewhere in Europe, France offered up to EUR10.5 billion of 10, 15, 20 and 30-year debt. It raised EUR10.139 billion including EUR3.005 billion of 2050 bonds at 0.52% yield and EUR1.676 billion of 20-year bonds at 0.19%. On the same day (5 September) Spain auctioned five, 10, and 50-year bonds. It raised EUR4.042 billion, just above the maximum EUR4 billion targeted, including EUR996 million of 50-year bonds at 1.447%.

The Swedish National Debt Office announced on 3 September 3, 2019 that it is considering the sale of 100-year debt. In a statement, it stated that "the prospect of locking in what appear to be exceptionally low interest rates for the long term is …worth looking into".

Financial sector supply also has shown the falling-yield environment in Europe. A Rabobank Tier 1 deal callable after 7.25 years was priced at 3.25% to first call, 40 basis points inside initial guidance. This broke the prior record low coupon for an AT1 deal set by Nordea at 3.5% in 2017. It was followed by Suez Environnement with one of the lowest coupon corporate hybrids to date. Raifeissen Bank attracted EUR2.7 billion of demand for a EUR500 10.5-year Tier 2 subordinated deal, callable after 5.5 years: pricing was tightened by 40 basis points.

One issue stood out for its lackluster reception. On 3 September, Bank of Ireland attempted the sale of a 10-year subordinated Tier 2 deal. The EUR300 million offering gained demand of only EUR340 million at price guidance of 2.2%, with investors reportedly discouraged by uncertainties over Brexit and its impact on the Irish economy. The bank attributed the withdrawal to the need to "ensure successful execution for both issuer and investors".

Danaher Corporation sold a five-part EUR6.25 billion deal designed to fund part of its USD21 billion purchase of General Electric's bio-pharma business. It focused on intermediate to longer tenors, described as enjoying greatest demand. It was followed by a EUR3 billion three-tranche deal for AT&T.

Emerging markets

Mexico's Grupo Bimbo, the world's largest bread producer, sold USD600 million of 30-year debt at 4%. The deal was more than five-times subscribed, with some 150 investors. The issue will redeem a 4.875% 2020 bond and extends the company's average debt duration from 10.1 to 13.6 years.

Last week Bank of the Philippine Islands (BPI) raised a CHF100 million two-year green bond deal. The issue was priced at 100.04%, with a zero coupon, to yield -0.02%, the first negative yield issue by a Philippine borrower. The issue was also the country's first Green bond. BPI followed this with a USD300 million dollar-denominated Green bond.

Russian steel firm Severstal is planning issuance shortly, having mandated banks on 3 September. Also pending is a debut deal for Chelpipe (formally Chelabinsk Pipe Plant), a tubular products manufacturer, which mandated banks on 4 September for a USD300 million five-year unsecured deal being marketed until 11 September.

Turkish spreads outperformed within emerging markets, tightening by 2.1% to 518 basis points on 3 September after it reported consumer inflation of 15.01%, the lowest level since May 2018. The tightening came despite market expectations of a further cut in Turkey's reference rate: in July this was cut 4.25% to 19.75% by the new governor of Turkey's central bank. The country's Monetary Policy Committee next meets on 12 September.

Our take

Bond markets have made an impressive "restart" with continued appetite in Europe for negative-yielding instruments, exemplified by the Edenred convertible offering and the Austrian auction. The new low for AT1 debt coupons is a further indicator of yield compression.

Debt markets will be underpinned by further indicators of US economic weakness. IHS Markit's latest PMI data for US manufacturing slowed to 50.3 in August, the weakest number since September 2009. Chris Williamson, IHS Markit's Chief Business Economist, described the figures as showing that "US manufacturers are enduring a torrid summer". He specified that "Output and order book indices are both among the lowest seen for a decade, indicating that manufacturing is likely to have again acted as a significant drag on the economy in the third quarter, dampening GDP growth."

The rally in Italian bonds reflects market relief over the country's ability to form a new government more likely to be attuned to EU objectives regarding fiscal policy. Given the urgent search for yield in European markets, Italian debt has rallied rapidly but still trades well above Spain and Portugal, whose 10-year debt yielded 0.12% and 0.13% respectively on 4 September.

Danaher's Euro-denominated package is noteworthy in that US corporates making dollar-denominated acquisitions traditionally have funded these in the dollar sector. Its migration into Euros reflects the receptive European markets and suggest it was able to swap the proceeds into dollars advantageously.

This week's one clearly-adverse indicator was Bank of Ireland's deal withdrawal. Given the prevailing uncertainties over Brexit, credits from the UK and Ireland could face some temporary resistance, while UK gilt yields would be likely to fall in the event of a hard Brexit given the high probability of near-term economic dislocation. Ireland's 10-year sovereign debt is trading at -0.05% yield, showing continued market confidence in Irish sovereign credit.

Posted 06 September 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence