Capital Markets Weekly: Oman sukuk attracts strong demand in receptive market

Oman's USD11.5 billion order book was impressive, and its pricing of 4.875% well through guidance. Italy and Greece also sold 10-year debt alongside a diverse range of sustainability-linked deals including the largest package to date in this format and offerings by an Italian energy company and Brazilian meat producer.

Emerging markets

Oman returned to market with a USD1.75 billion nine-year sukuk issue, its first since 2018, attracting over USD11.5 billion in demand according to Reuters sources. The deal was priced at 4.875% versus 5.375-5.5% guidance. Eaarlier this year, Oman successfully raised USD3.25 billion in sukuk funding, including USD2.75 billion of 10 and 30-year liabilities alongside a tap of its 2025 outstanding.

Bahrain is also reported by Zawya to have started work with banks for an international sale in the second half of 2021, having raised USD2 billion last January. Both S&P and Moody's have a negative outlook for Bahrain, with the former warning that despite stronger oil prices fiscal deficits will "remain elevated, adding to already high debt and debt-servicing burdens".

Emirates Development Bank placed its second debt sale, a USD750 million five-year deal priced at 80 basis points over mid-swaps. The entity, which started operations in 2015, was the first to use an October 2018 law permitting sovereign debt issuance by UAE rather than individual emirates.

Saudi Aramco has started marketing for its upcoming bond sale, with three, five and 10-year tranches, with initial guidance of 105, 125 and 160 basis point spreads versus US Treasuries.

According to an Al Ahram report on 7 June, Egypt has approved legislation permitting sukuk issuance, according to Minister of Finance Mohamed Maait, who suggested that Islamic debt would be sold in both domestic and international currencies.

Data released on 4 June by China Central Depository & Clearing showed that foreign investment in Chinese debt reached record levels at the end of May. Offshore holdings of Chinese government bonds reached CNY2.12 trillion, 10.4% of the outstanding stock and 1.2% higher than the end-April level, the highest level on record. Total foreign holdings of bonds traded in the interbank market reached CNY3.68 trillion (USD575 billion), CNY61.47 billion (or 1.7%) higher than at end-April. Wang Chunying, a spokeswoman for the State Administration of Foreign Exchange, previously cited market sources suggesting that China's inclusion to the FTSE Russell World Government Bond index from October would generate inflows of USD130 billion into Chinese domestic bonds by international funds following or tracking the index.

Suriname has surprised market participants with the severity of its initial proposal for debt restructuring announced by the country last week, which requests a 70% haircut on its 2023 and 2026 outstanding issues and a coupon holiday. The proposal offers a new USD236 million bond due in 2029 to replace the USD786 million of outstanding marketable debt. A 30% haircut is proposed for official creditors.

By contrast, the bondholder committee for Belize has agreed to extend a grace period on coupon payments until September and signed a non-disclosure agreement on debt restructuring proposals, expressing the hope that this "will ultimately lead to a durable solution".

ESG

The European Union has approached banks for proposals regarding the first debt sale under its Next Generation EU (NGEU) program. The initial deal is expected to be sizeable, with the program looking to raise EUR800 billion between now and end-2026, with an average funding of EUR150 billion annually. EUR250 million of this will be in Green Bond format according to the EU's latest financing plan, and the program will make the EU the largest issuer of sustainable debt.

Italian energy firm ENI arranged a EUR1 billion seven-year sustainability-linked bond, which it describes as the first in its sector. The issue bears a 0.375% coupon and was priced at 99.855%. The coupon is subject to key performance indicators relating to the firm's net carbon footprint upstream (NCFU) and renewable energy installed capacity, set out in a new framework published in late May. Proceeds are for general corporate purposes. According to Global Capital website, investors "piled into" the deal despite the carbon intensity of ENI's activities.

Enel gained EUR11.3 billion of demand for a EUR3.25 billion three-tranche sustainability linked bond, "representing the largest sustainability-linked transaction ever priced" according to its statement. In parallel Enel launched a tender for four conventional outstanding bonds "accelerating the achievement of the Group's targets of sustainable finance sources". Enel was the first issuer using the sustainability-linked format, opening the segment with Euro and dollar-denominated sales in 2019.

HP Inc. released its sustainable bond framework on 8 June, and placed an inaugural USD1 billion bond thereunder, within a USD2 billion package. The framework establishes climate action goals including a net zero emissions objective by 2040, social objectives including gender equality in leadership by 2030, and digital equity.

Brazilian meat producer JBS sold USD1 billion of 10.5-year sustainability-linked bonds, pricing the deal at 3.75% versus initial guidance of low to mid-4% area. Its KPIs are based on the firm's goal of achieving net-zero greenhouse gas emissions by 2040.

Other debt

Bank supply, which has been strongly active in recent weeks, has continued at high levels. On 7 June, Goldman Sachs raised USD5 billion in four tranches, split between fixed and floating rate bonds of three and six (non-call five) year debt. The two fixed rate tranches, of USD1.555 billion and USD2.75 billion, were priced at 50 and 75 basis points over comparable US Treasuries (UST), versus initial price talk of 65 and 90/95 basis points area. Bank of America also issued, raising USD4.5 billion of three and eight-year debt, with the latter sold at 2.087%, 85 basis points over US Treasuries, and 20 basis points inside initial guidance. Lastly, Santander UK Group Holdings raised USD1 billion for six years (callable after five) at 1.673%, 88 basis points over UST and 22 basis points through guidance.

Having mandated banks for a syndicated 10-year sale on 7 June, Italy placed EUR10 billion of December 2031 bonds at 0.95% on 8 June. The issue is priced at 6 basis points above Italy's August 2031 bond, versus a nine-basis point indicated margin, with demand reported to have reached EUR65 billion. Italy had obtained EUR68 billion of interest when the August 2031 issue was sold on 16 February, also through syndication, with the deal having been priced at 0.604%.

Following Italy, Greece announced a tap of its 0.75% 2031 issue. Demand reached EUR26 billion on 9 June, versus the EUR32 billion obtained during its initial sale in January. It placed EUR2.5 billion at 0.92%, versus 1% guidance, with the latest sale bring 2021 issuance to EUR11 billion.

Implications and outlook

Both Oman and Bahrain are relatively strained credits, so successful completion of further financing represents a positive indicator for their ability to fund their 2021 budgets and to avoid debt stress this year. The demand obtained by Oman is sizeable and impressive, if slightly below the USD15 billion reportedly attracted in January. Oman's clearly favorable reception is an encouraging indicator for Bahrain's ability to access markets successfully.

The positive trend in foreign holdings in China is an ongoing process, helped by index changes. In late 2020, Blackrock described China as "an investment destination separate from emerging markets", with Amundi and Robeco among those publicly adjusting their stance to China. Given China's size and relatively strong growth, this positive trend appears highly likely to continue, as we have forecast previously.

Enel's sustainability-linked package enjoyed impressive support and this week's wider calendar shows the growing range of credits using the mechanism successfully. The presence of a Brazilian meat producer and an Italian energy company among issuers highlights that ESG issuance continues to include fund-raising by firms that climate advocates may view adversely, although for such firms to establish and work towards meeting sustainability-linked performance targets is nevertheless "climate risk positive".

While sizeable, this week's bank supply focuses more on shorter-dated maturities and thus seems designed to boost liquidity and TLAC ratios more than to lock in prevailing rates for more extended periods.

Posted 09 June 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence