Supply has abated this week with investors fearing temporary market dislocations if the UK votes to leave the EU.
IHS perspective | |
Significance | Market nervousness has increased amid fears that the UK will vote to leave the EU in its referendum on 23 June: focus on Brexit risk was encouraged by a series of opinion polls showing the "Leave" campaign ahead of those favouring the "Remain" option. |
Implications | In addition to risks affecting the UK, markets fear wider instability within the EU: this has encouraged a temporary flight to quality, with German 10-year yields turning negative for the first time this week. |
Outlook | Brexit fears appear likely to dominate the market in the coming week (or longer, depending on the result), despite the stronger than expected start to the ECB's corporate debt purchase programme (CSPP), which had appeared to be helping the high-yield market in particular (despite this not being directly included. |
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Leaders of the "Leave" Campaign campaigning ahead of the |
Despite the stronger-than-expected start to the European Central Bank's (ECB) Corporate Sector Purchase Programme (CSPP), the release of three polls on 13 June showing the Leave campaign ahead in the UK's EU referendum on 23 June has dampened market sentiment, and led to some "flight to quality", with German 10-year government yield turning negative for the first time. The UK referendum will overshadow the markets for the coming week, increasing uncertainty levels, and restricting issue activity. A "Leave" vote would be likely to generate financial turbulence, despite the readiness of European authorities to intervene in the markets.
ECB corporate purchases
The ECB has revealed that it purchased EUR348 million of corporate bonds on the first day of its CSPP, roughly double some market forecasts. The one-day total represented some 12% of average daily corporate bond market turnover, and would indicate a EUR7- billion monthly purchase volume if maintained. Market forecasts now estimate that corporate bond purchases could reach EUR5–10 billion, versus an outstanding stock of some EUR600 billion, according to the Wall Street Journal (WSJ).
From our perspective, the most notable impact has been in the high-yield market, where nine deals were completed in the week to 10 June according to the Financial Times (FT) newspaper, including funding for Titan Cement at the lowest cost to date for a Greek corporate issuer. Two more sub-investment grade deals, for Phillips Van Heusen Corporation, makers of clothing including such brands as Calvin Klein, Tommy Hilfiger, Arrow and Speedo, and Italian infrastructure construction firm Salini Impregilo were launched on 13 June.
Elsewhere in the corporate sector, US power utility Southern Power sold a EUR1.1-billion "green" (environmentally focused) issue on 13 June, and US/Canadian soft beverages firm Cott Corp. sought EUR450 million of funding for its buyout of Eden Springs in Switzerland.
Chinese financial sector diversification
On 13 June, ABC Leasing sold a debut USD500-million five-year deal, priced at 2.6%. Pricing was tightened twice, in total by a quarter of a percentage point in spread, with peak demand reaching USD2.4 billion. ABC is the leasing subsidiary of Agricultural Bank of China. Within the leasing sector, ABC claims a unique niche in "sannong" (agricultural machinery) leasing, including equipment for cotton picking and sugar harvesting, along with activities in aircraft, shipping and port leasing finance. At end-2015, it held assets of USD5.5 billion.
The issue illustrates a wider trend. The leasing units of Bank of China, ICBC and China Construction Bank have raised a total of USD3 billion in the last two months. Bank of Communication announced plans for similar financing on the same day as ABC's sale.
Demand was almost entirely from the region: 98% went into Asia. Pricing is closely linked to that of the parent bank, with ABC's deal offering a 0.3% yield premium over comparable debt of Agricultural Bank of China. However, this reflected the provision of a formal gurantee by the bank's Hong Kong branch, although the tighter pricing so achieved appears to have reduced demand versus the USD3 billion and USD3.75 billion peak demand previously achieved by ICBC and CCB's leasing subsidiaries.
Although the deal stream represents a successful development of new funding channels, the formal support provided to ABC implies that the new deal flow is still closely interlinked with the parent bank's funding, at least for the time being. Moreover, 73% of the ABC deal actually was subscribed by banks, further questioning the degree of diversification achieved.
Morocco IPO
On 13 June, Morocco announced that it plan to offer 40% of the share capital of state owned port Marsa Maroc for sale between 20 and 30 June. The transaction represents the first-ever privatisation on the Casablanca Stock exchange, and its first IPO this year.
The sale will raise some MAD1.9 billion (USD200 million) in five distinct segments, including discounted shares for employees. It will be led by local bank Attijariwafa, along with a syndicate of over 20 local banks. Marsa manages terminals at nine Moroccan ports and is seeking greater access to funding, as it plans to bid for two additional terminal at Casablanca Port and consider other investments in the region, with L'Economiste newspaper citing Nador and Kenitra as of possible interest. In addition to increasing Marsa's transparency in the market, the sale is hoped to revive stock market activity in Morocco. Local media have noted that the company had sought privatisation since 2013: it also raised local debt earlier this year.
Emerging markets
The planned IPO for Hotel Lotte, which had been expected to be South Korea's largest deal this year and raise some USD4.5 billion, has been postponed. The delay follows a series of raids by the South Korean authorities reportedly in connection with an alleged fund used for corrupt purposes. The raids were reported by Reuters to come on top of bribery investigations relating to one of the firm's directors. On 13 June, while no charges have been made, Hotel Lotte announced the deal would be delayed indefinitely due to "internal and external issues". Its Chairman Shin Dong-Bin claimed the deal could still be revived to achieve a listing in late 2016.
Abu Dhabi National Energy Company (known as Taqa) marketed its first deal since 2014, with a USD1-billion five- and 10-year offering. The issue will be used for general corporate purposes and to refinance USD1-billion maturing debt due in October, according to Taqa's press statement (which did not disclose the order books). It priced at coupons of 3.625% and 4.375% for the two tranches, attracting strong demand of some USD5 billion despite the difficult market tone. The positive response prompted Qatari telecommunications firm Ooredoo to launch a USD500 million 10-year deal on 15 June. This priced the same day at a 3.75% coupon and was over six times oversubscribed according to the company.
Argentine issuance activity is showing further signs of positive development. On 7 June, broadband and television supplier Cablevisión sold USD500 million of five-year debt at 6.5%, with demand of USD3.3 billion. This is the first corporate sale since Argentina's return to international markets, and was used to refinance existing debt and fund investment: it achieved the lowest international borrowing cost by an Argentine company for 15 years.
According to iProfesional website citing a filing with local regulators, it will be followed by Celulosa Argentina, with the paper and cellulose company seeking up to USD250-million of seven-year debt. The same source suggested that hydrocarbons exploration and production firm Compañía General de Combustibles is likely to issue soon, with Petrolera Pampa, Panamerican Energy and Arcor also interested in tapping the markets during 2016. Pampa is also an exploration and production company, owned by electricity utility Pampa Energia, while Panamerican is in the same sector and Arcor is Argentina's largest food producer, claiming to be the world's largest producer of hard sweets and the region's largest exporter of sweets with sales in 120 countries. Arcor operates a sizeable joint venture for biscuits and cereals with Grupo Danone.
Among provincial borrowers, the Province of Salta is expected soon, with up to USD350 million of amortising eight-year debt repayable in three equal instalments. Fitch Ratings has flagged Salta's low indebtedness (with debt service representing 20% of current budget) as relatively favourable, and also deemed it to have adequate fiscal discipline, as risk-positive factors. Within Argentina the Province has been involved in some domestic controversy, due to an announcement in mid-April that it was in arrears in making pre-payments to a fund designed to guarantee the fulfilment of its obligations. Salta has flagged that it has made all actual debt payments in timely fashion, and has until September to make up the USD27-million shortfall to its guarantee fund. On 16 June, it was due to meet a USD65-million interest payment on its 9.5% 2022 outstanding bonds on the due date, with no signs of delay, and has been meeting investors this week ahead of its planned bond sale.
Other
On 13 June, Caliber Home Loan sold a USD137 million sub-prime mortgage securitisation, which International Financing Review claimed was the first such offering since the financial crisis. The securities were supported by 368 loans originated and serviced by Caliber, rated by Fitch between A and BB. According to Fitch, 47% of the pool by value and 60% by number of loans has been involved in a prior credit event. Caliber noted that these include foreclosure and bankruptcies. The issuer claimed that the deal "comes at a time when supply has remained a hurdle" to reviving the sub-prime market, rather than investor caution or hostility given the prior history of the asset class.
Microsoft has announced that it plans to use debt for the bulk of the USD26.2-billion purchase of LinkedIn.
Outlook and implications
The ECB's announcement of its first-day purchases was likely to have been an intentional measure to flag its larger than expected start and add momentum to EU corporate bond markets. Although it has been hindered by Brexit fears, with corporate supply abating this week, the removal of some EUR5-7 billion in supply each month is likely to have a significant market impact, especially given the relatively modest levels of secondary turnover in the corporate bond markets. The first day purchases, as mentioned above, represented 12% of average daily turnover.
Although the ECB's direct purchases are limited to securities with at least one investment grade rating, recent issue flows suggest that the high yield market has been a major recent beneficiary. This is encouraging, as the ECB's ultimate goal is to broaden access to the corporate debt markets to benefit a wider range of EU firms, enabling the European corporate sector in general to reduce its reliance on banks for the dominant share of funding. Many new potential entrants could be unrated, or below investment grade level, so improved trading and issuance levels need to extend beyond the rated, investment grade market, if the ECB is to achieve true market deepening. Without this, there would be a danger that its corporate purchase programme could benefit a limited number of companies, many of which are highly-rated firms from higher-income EU members such as Germany and the Netherlands. To mitigate this, early ECB purchases included eligible companies from Spain and Italy, with these also being given high public profile.
Overall, the programme does appear to be tightening the European corporate market. According to Tradeweb data cited by Reuters, 16% of euro-denominated investment grade euro-denominated debt now bears a negative yield in the secondary market, up from around 5% in early May.
We remain relatively optimistic on the prospect for capital inflows into Argentina, despite mounting political pressure to show tangible economic progress (see Argentina: 31 May 2016: Argentine government needs rapid progress on employment and price inflation to appease unions and outmanoeuvre uncompromising opposition). The removal of capital controls and floating of the peso give international investors a far more attractive risk profile for potential investments in Argentina. On 14 June, Treasury and Finance Minister Alfonso Prat-Gay claimed that USD22 billion of new investment projects had been announced since the Macri administration took office, including an expanding level of FDI. The reported delay of payments by Salta into its debt-service guarantee fund is a relatively modest sum, and does not affect actual bond debt service: as such, the reported USD27 million in arrears should not cause major damage to the Province's issuance plans. The press focus on the subject could reflect its possible dislike of Salta's governor Juan Manual Urturbey, a Peronist not averse to working with the Macri administration.
Hotel Lotto's deal postponement raises wider concerns regarding South Korean corporate governance issues, notably regarding the lack of transparency and often-complex or unstable corporate structures within the country's chaebol conglomerate groupings. Such concerns are potentially unhelpful for other planned share sales in South Korea, with slated deals including a USD2.5-billion IPO for Samsung Biologics (the biopharmaceutical company within the Samsung group) and a USD1-billion share sale by Doosan Bobcat, a construction equipment maker.
The reopening of the US sub-prime market has been reported previously, with a smaller private placement in 2015. The current scale of issuance is extremely modest, and it would be highly unlikely that any investor in such instruments would be unfamiliar with their riskiness. For sophisticated buyers to take limited-scale exposures to well-studied if complex risks should not be a cause for wider concern and is not on a scale that could represent a cause for renewed market crisis.