Capital Markets: Emerging markets continue generating mixed signals

Emerging Markets Issue
Investment grade EM borrowers continue to see positive demand.

Notably, the Kingdom of Saudi Arabia sold a new six-year dollar sukuk issue and ten-year conventional dollar debt at margins of 135 and 180 basis points over comparable US Treasuries at preliminary price guidance on October 18. It allocated USD 5 billion with demand exceeding USD 26.5 billion, of which USD 7.5 billion was acquired against the sukuk tranche. pricing on both tranches was tightened by 30 basis points, bringing the sukuk to a 5.268% coupon and a 5.5% coupon. on a longer tranche. The issue will help fund a $3 billion 2023 bond tender, as well as $12.5 billion in obligations maturing in 2025 and 2026.

Also on Oct. 18, Emirates NBD for its $500 million five-year issue reached $1 billion in demand at 5.745 percent, 155 basis points over US Treasuries and 20 basis points tighter than initial guidance.

Investment-rated Lithuania also sold €1.2 billion of new debt, including €900 million of a new 5.5-year issue at 120 basis points over average swaps at a 4.125% coupon and a 99.26% discount and €300. million, a knock of 135 basis points from its previous 10-year deal. According to previous data, the demand was about 2 billion euros. After its completion, Latvia obliged the banks to sell further in euros.

Broader SSA Debt Restructuring Discussions

In addition to Ghana’s ongoing talks with the IMF, which we predicted would likely lead to a renegotiation of its debt under the G20 Common Framework, Nigeria and Kenya were in the spotlight.

The first was prompted by Nigeria’s Minister of Finance, Budget and National Planning, Zaineb Ahmad, who stated in an interview with Bloomberg TV that the country is considering debt restructuring, both internationally and domestically. His statement said the ministry had appointed a consultant to investigate “restructuring and negotiations to extend repayments to longer terms”. This Day newspaper added that he highlighted the need to use 65% of projected revenues in 2023 to cover debt service in 2023. Although Nigeria’s debt is growing rapidly, reflecting poor fiscal capture and high spending on subsidies, its debt stock as a proportion of GDP. is modest (just over 23% in mid-2022), but the World Bank predicts that its debt service costs will exceed government revenues next year.

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Nigeria had already shown some signs of debt distress, seeking a wider extension of DSSI official debt relief to sub-Saharan Africa, but had not used the term “restructuring” until now. The suggestion that it wants to extend maturities appears to indicate that it is not seeking capital reductions, but instead extending the maturity of its liabilities.

A subsequent statement by Nigeria’s Debt Management Office (DMO) denied that a restructuring was planned and instead claimed it was trying to manage its liabilities by “spreading debt maturities” and “refinancing short-term debt with long-term debt”. , suggesting it is also exploring bond buybacks and swaps as liability management tools. A subsequent statement said that “Nigeria remains committed to and will meet all its debt obligations” but that it would seek to apply debt management tools to its international obligations, including bilateral and concessional loans.

According to a Bloomberg report on October 20, Kenya plans to negotiate a loan extension from the Export-Import Bank of China to develop a rail link between Nairobi and the port of Mombasa. Transport Secretary-designate Kipchumba Murkomen has warned that the Belt and Road Initiative project will “never be completed” and that loan repayments from project revenues are “becoming impossible”. He mentioned the 50-year term as the goal of the renegotiation, as opposed to the current 15-20 year terms.

Under the recently elected President Ruto, users of the line have been given more flexibility to transport goods to Mombasa, ending the previous policy of transporting them to land hubs before delivery. Even then, the line is unprofitable with passenger and freight revenues of 15 billion Kenyan shillings against running costs of 18.5 billion. Exim has provided a KSH500 billion (US$4.13 billion) loan to the project. In early October, Kenya’s treasury was reportedly fined KSH 1.3 billion ($930,000) for defaulting on debt service obligations, following earlier non-payment problems with Chinese rail operator AfriStar. .

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Bank capital “expansion risk”

Banco Sabadell was unable to close an additional Tier 1 deal (its €400 million 6.125% issue) on its first call date, which will take place in November. The bank announced its decision ahead of the October 23 call notification deadline, “taking into account the replacement cost of AT1 instruments under current market conditions.”

On November 23, the instrument’s coupon will zero at the five-year swap rate (currently 3.08%) plus a yield margin of 6.051%, implying a new coupon of around 9.13%. The issue was already sold at a discount of 10 percentage points
His decision did not prevent Bank of Nova Scotia from closing an AT1 deal for $750 million of 60-year outstanding five-year debt at 8.625%, versus early guidance of 8.75%. If not announced, the bonds will reset to the 5-year U.S. Treasury yield plus 438.9 basis points.

Later in the week, Ireland’s Permanent TSB also sold €250 million of perpetual AT1 debt maturing in 5.5 years at an unusually high coupon of 13.25%, a record for the industry to sell similar instruments in late 2020 for the required 7.9% coupon. The challenge is to shore up its balance sheet ahead of buying €6.8 billion in loans from Ulster Bank, largely financed by the sale of shares to seller NatWest Group.

Our opinion

Both the Kingdom of Saudi Arabia and the Emirates NBD enjoyed healthy demand, further confirming strong investor sentiment for stronger GCC credit given the positive windfalls from higher energy prices on their finances. A healthy appetite for investment-grade EM risk also extended to the sale of the two parts of Lithuania.

Nigeria’s debt stress should not require a complete restructuring at present. Even after the projected growth this year, its debt-to-GDP ratio is unlikely to significantly exceed 30%. Its main problems stem from excessive spending on subsidies and ineffective fiscal capture. However, its growing burden of debt service costs against modest fiscal revenues requires policy attention. Kenya’s position is more strained (debt-to-GDP ratio at 67% in mid-2022) but much stronger than Ghana’s.

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Banco Sabadell’s decision not to call an AT1 instrument when possible is an isolated event for now and may be temporary. However, it has revived investor focus on “extension risk”. the likelihood that banks will not call AT1 and subordinated debt when market conditions deteriorate, leaving investors with longer (and potentially perpetual) maturities despite their initial expectations that they would. call whenever possible in accordance with normal market practice. However, further supply shows that it has not blocked the new issue, but may have contributed to the record coupon paid by Permanent TSB.

Banco Santander previously elected to skip the AT1 call option in 2019, before maturing the issue shortly thereafter, and Deutsche Bank and Lloyds Bank also missed first call dates in 2020, but still use first call. the opportunity.

Sabadell’s decision highlights the growing “extension risk” on AT1 instruments as interest rates rise. As banks face higher refinancing costs, there is a stronger temptation not to hold such instruments and allow them to move to less favorable repricing coupons. Sabadell emphasized that it may withdraw the issue at the next quarterly date, but the difficult refinancing terms increase the “extension risk. Investors face the risk of heavy losses if the practice becomes more widespread, preventing future issuance of AT1. capital instruments.

Posted on October 25, 2022 by Brian LawsonSenior Economic and Financial Advisor, Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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