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Ahead of this week's FOMC rate announcement of a half-point
increase in US policy rates, dollar reference yields continued
their upward trend, with the ten-year US Treasury yield briefly
trading above 3% for the first time in four years. In parallel, two
and 10-year German Bund yields reached 0.3% and 1%, while spreads
on peripheral Eurozone risks have widened. As an example, the
10-year spread between Italian government bonds and German Bunds
reached 189 basis points on 4 May, versus a one-year low of around
85 basis points.
Similarly negative trends are present in equity markets. After
Amazon's shares fell 14% in price on 29 April, with Apple also
recording a 3.7% drop, following worse than expected results, the
Nasdaq index recorded a 15% decline in total during April. This
left it 21.2% lower in 2022, versus a 13.3% decline for the
S&P500 index. The Renaissance IPO Index for the US lost 36% in
2022 to end-April, falling 43% over a 12-month period.
Despite the substantial worsening in reference rates and key
equity indices, sizeable transactions continue getting completed
successfully. In the bond markets, TenneT, which operates
electricity grids in the Netherlands and Germany, set a record on 3
May for ESG issuance in the Euro-denominated sector. It placed
EUR3.85 billion in a four-tranche deal spanning maturities of 4.5,
7.5, 11 and 20-year terms, with coupons of 1.625%, 2.125%, 2.375%
and 2.75%. The issuer's statement refers to "solid investor
demand", with orderbooks "touching the EUR8 billion mark" after
final pricing.
The 20-year tranche revived the "long-end" segment, where
activity has been constrained in recent weeks by the bond market
sell-off, but the tranche also illustrates worsening margins and
coupon levels. Bloomberg reported the 20-year tranche was priced at
110 basis points over mid-swaps, 20 basis points tighter than
initial guidance, but it noted that TenneT had paid a 67-basis
point spread for a comparable term roughly a year ago. As a further
measure of market deterioration, its late-May 2021 package of
EUR1.8 billion had included 6.5, 10 and 20-year terms with coupons
of 0.125%, 0.5% and 1.125% - although demand (of EUR4 billion) was
roughly half the peak level achieved in the current sale.
Equity market developments also show growing investor caution
and reduced receptiveness to new share sales, with two major deal
withdrawals in the last week for diverse reasons, although this has
been counterbalanced by a notable secondary success in Europe:
BASF announced on 29 April that it has halted its plans to list
Wintershall Dea, its oil and gas business. CEO Martin Brudermueller
notified BASF's AGM that it continues to "want to list the company"
but explained that as "it has interests in production facilities in
Russia…this makes an IPO difficult at this time".
NYSE-listed Chinese internet trucking firm Full Truck Alliance
- which runs a mobile app for truck transportation services - also
has withdrawn a sizeable deal, its planned Hong Kong listing worth
USD1 billion. Since it raised USD1.6 billion in a NYSE IPO last
June, its shares have fallen to almost one-quarter of their value
at the time of the sale (USD4.95 versus USD19), driven by an
investigation into its activities by the Cyberspace Administration
of China to "prevent national data security risks". The firm has
hoped for this - and any penalties - to be resolved by end-March.
The investigation has been ongoing since July 2021 and prevents the
firm accepting new customers.
Finnish insurer Sampo has completed its disposal of shares in
Nordic bank Nordea by doubling a planned secondary offering.
Initially this was announced as covering 100 million shares but was
doubled to raise EUR1840 in gross proceeds. The transaction was
increased in response to "strong market demand". Sampo initially
announced its intention last year to dispose of a 15.9% stake in
the bank to focus on its core insurance business. Prior blocks were
offloaded in early September and late October 2021.
Our take
This week's developments with underlying reference rates are
unsurprising, with high and persistent inflation pushing central
banks towards a tougher monetary policy stance, including larger
and faster policy rate increases and earlier, more rapid reduction
of central bank balance sheets. Markets improved after the FOMC
announcement after Federal Reserve Governor Powell indicated that
further acceleration in monetary tightening - to increases of 0.75
percent - were not planned at present.
As in recent weeks, the market correction has not prevented the
generation of sizeable investor demand for new capital market
transactions, but at higher cost. TenneT's ESG sale highlights
this, with demand double the level it achieved for a multi-tranche
Green bond sale in May 2021, but with a far larger coupons,
including substantial widening of the margin for the 20-year
trance.
Despite this, for higher-rated borrowers, the impact on debt
sustainability appears quite limited in the near term. There are
several examples where the maturity of outstanding high-coupon
liabilities and its replacement at current levels is permitting
continuing reduction in the average cost of the borrower's debt.
This is exemplified in a Cinco Días analysis on 26 April looking at
Spanish borrowing costs:
Using Spanish Treasury data for April, it calculated that the
cost of new borrowings - across all maturities from short term
bills to long-term debt - had risen to +0.39% during 2022 versus an
average of -0.04% during 2021, the first time Spain achieved a
negative borrowing cost during a calendar year. The upward trend
points to Spain paying the highest cost or new debt since 2018,
when its average cost was 0.64%.
Term rates have risen far more sharply, with Spain's 10-year
yield deteriorating from 0.565% at end-2021 to 1.85% at the time of
the article, having recently traded above 1.9% for the first time
since 2015.
Despite this, the average yield on Spain's full debt stock has
declined from the end of 2021, when it stood at 1.64%, to a record
low of 1.55%. This reflects the maturity of old high-coupon debt,
such as a 5.85% issue which matured in January on completion of its
10-year term, being replaced with a new syndicated deal priced with
a 0.7% coupon.
According to the Spanish Treasury's October Budget forecast,
this process will continue during 2022: it suggested that "debt
service costs relative to GDP have been falling despite the growth
in the debt stock". The Budget had forecast that this ratio could
fall as low as levels achieved in 2011 (when such costs first
exceeded 2% of GDP) based on such substitution effects: Cinco Dias
suggests that such substitution benefit will now be smaller, but
that the average cost should continue falling near-term.
As a further positive indicator, the average life of Spain's
public sector debt reached 8.1 years in Q1 2022, versus 8 years at
end-2021, having been at 6.5 years in 2015, according to the
Treasury's 2022 debt presentation.
Such trends are replicated in multiple European markets.
Overall, the average maturity of debt has lengthened in many
European markets, a key difference compared to the GFC and eurozone
crisis, with borrowers having reduced rollover and liquidity risks,
and locking in historically low borrowing costs. Intra-eurozone
sovereign spreads nevertheless are widening, related to the
expected acceleration of ECB monetary policy tightening, howbeit on
a more modest scale than in the USA. Adverse impacts from wider
margins and higher base reference costs will be gradual, at least
initially offset by the replacement of longer-dated historical
liabilities.
By contrast, risks will be considerably greater for weaker
borrowers, particularly if higher reference rates push the nominal
cost of borrowing towards unsustainable levels - such as
double-digit coupons for longer-dated dollar debt. Further
increases in reference rates - especially if accompanied by
widening spreads - would increase debt sustainability and default
risks in both the Emerging Market and High Yield segments.
Posted 06 May 2022 by Brian Lawson, Senior Economic and Financial Consultant, 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.
