Capital Markets Weekly: Green Bond and Emerging Market supply shrugs off trade uncertainty

Emerging Markets

• Kenya successfully raised USD2.1 billion, selling seven and 12-year amortizing dollar debt. The deal was oversubscribed 4.5 times with the two tranches priced at 7% and 8% respectively, each 50 basis points inside guidance. Proceeds will repay USD750 million of maturing debt due on 24 June 2019 and fund budgetary purposes.
• Indonesia has raised JPY177 billion (USD1.62 billion) from the Japanese domestic bond market (Samurai bonds). Its debt directorate noted that "…this is ... the largest transaction in samurai bonds [issued] by an Asian country". Maturities spanned three, five, seven, 10, 15 and 20-year tenors. Coupons ranged from 0.54% to 1.79%.
• Philippines gained CNY11 billion (USD1.6 billion) of demand for its CNY2.5 billion (USD364 million) three-year Panda sale.
• Chile gained some USD5 billion of demand for its USD1.5 billion equivalent sale of domestic peso debt which can be settled via Euroclear, tapping 2023, 2030 and 2050 issues.

Pending sovereign supply from Latin America is growing:

• The Dominican Republic has advised that it is "ready" to issue: Finance Minister Donald Guerrero stated, "we're waiting for the opportune time" and that this "could be in the next few weeks".
• Guatemala's Economy Minister Assiclo Valladares also has suggested that "there is a plan for a bond", following a favorable IMF review.

On 20 May, Latvia tapped its 1.875% February 2049 issue.

• It sold EUR300 million with 2.9 times cover, pricing the new tranche at 1.764%.
• Latvia now has fully covered its EUR1 billion requirement for 2019 from international debt markets.

According to Reuters, Oman has mandated banks for a planned bond sale, which could seek USD2 billion or more.

Green Bonds

There have been an impressive six Green Bond issues of note in little more than a week.

The Netherlands launched its debut Green deal on 21 May, seeking up to EUR6 billion from a 20-year deal. It raised the maximum amount, unusually doing so through auction, rather than a syndicated deal. Final demand reached EUR21.2 billion. The deal will be tapped regularly up to a EUR10 billion size.

Hong Kong marketed its first Green Bond on the same day, offering a USD500 million-USD 1 billion five-year deal, the first under Hong Kong's HKD100 billion (USD12.74 billion) Green Bond program. After attracting over USD4 billion demand, the transaction was sized at USD1 billion and priced at a spread of 32.5 basis points over US Treasuries, versus initial guidance of 50 b.p.

Russian Rail previously gained over EUR1.8 billion in demand for its first green bond. The EUR500 million eight-year deal was priced at 2.2% after initial guidance of 2.5%. The issue has been criticized for the standards of its Green Bond framework, with adverse commentary about the company's role in transporting coal - reportedly 50% of its freight traffic. Proceeds will be used for 'Lastocha' electric passenger trains to reduce carbon-fuel usage.

German development agency KFW also has sold its largest Green Bond to date, placing EUR3 billion of eight-year bonds, priced at mid-swaps minus 21 basis points, three basis points inside guidance.

State-owned Dutch electricity company TenneT gained close to EUR6 billion in demand for EUR1.25 billion of 11 and 20-year debt, priced with coupons of 0.875% and 1.5% respectively. Proceeds will be used to connect offshore wind facilities to the onshore electricity grid in the Netherlands and Germany. Lastly, Landesbank Baden-Wuerttenberg captured some USD2 billion of interest for a USD750 Green covered bond.

Our Take

Overall, the favorable response to supply since our last report indicates the absence of dislocation stemming from recent trade uncertainties.

Chile, Indonesia, Philippines and Latvia all represent better-rated borrowers within the emerging markets category and presented relatively few challenges on credit grounds. It is encouraging that Latvia lowered its costs versus the original sale in February.

Kenya probably was a better test of risk appetite, and clearly worked well. Despite the successful reception, we remain concerned by the adverse trend in Kenyan debt sustainability indicators, notably the increase in Kenya's debt to GDP ratio, now estimated to be close to 60%. According to the Nairobi-based Institute of Economic Affairs, debt service costs now consume roughly one-third of Kenyan government receipts, one of the highest ratios in Africa.

Despite the individual characteristics of the issuers, the aggregate picture nevertheless is clearly favorable, regarding both the aggregate volumes raised and diversity of markets used by EM sovereign borrowers. There also has been USD2 billion of well-received Latin American longer-dated corporate supply, with Mexico's Televisa upsizing a 30-year deal to USD750 million after gaining over USD2.25 billion of demand.

The Green Bond calendar has been particularly impressive, with six major deals in little over a week. The Green debut deals for the Netherlands and Hong Kong had both been posted well in advance but represent important attractive additions to the sector. Their success - and that of the wider Green calendar - gives momentum to further expansion and diversification within the segment.

Posted 28 May 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence