Capital Markets Weekly: Peru and Indonesia lead limited issuance, US corporate issuance indicates adverse market trends

In a week adversely affected by renewed US equity market weakness, the two largest deals were from Peru and Indonesia. Peru has sold PEN10.4 billion (USD3.06 billion) of domestic, sol-denominated ten year debt, initially marketed at 6.125% but priced at 5.95%, clearable internationally through Euroclear. The issue is the largest local currency international sale conducted by an emerging market borrower, according to Peru's Ministry of Economy and Finance. The issue will be used to redeem outstanding debt maturing in 2019, 2020 and 2029, repay selected dollar credits and pre-finance part of Peru's 2019 requirements.

On 4 December Indonesia undertook a USD 3 billion sale, placing USD750 million of 4.45% five year debt, USD1.25 billion for 10 years at 4.75%, and USD1 billion of 30-year liabilities at 5.35%. The issue is to fund the 2019 budget.

We also highlight two "notes of caution". A Financial Times report claimed that corporate bond sales had fallen 14% in the six months to October versus the prior six-month period, according to Refinitiv data, making this the lowest corporate issuance level since the half-year to April 2016. Market sentiment also was damaged by the unexpected withdrawal of a planned dollar Tier 2 issue for ING Bank.

Peru's decision to raise domestic currency rather than dollar debt initially appears risk positive, in that it avoids currency risks for the borrower, deepens its domestic capital market and broadens its local currency funding sources. However, it carries the longer-term risk that during periods of risk reduction by international buyers, this could lead to heavy sales hurting its domestic yields. Overall, Peru remains one of the region's stronger credits and has made its choice voluntarily, rather than due to any lack of access to dollar funding in our view. Indonesia has faced some pressure on its currency in recent months: the rapid execution of its deal also appears a positive indicator at this time of year.

Already-published data from US bond-market trade body SIFMA give additional detail on the Financial Times report of market shrinkage. This confirms declining corporate issuance levels in the US market, with the year-to-date total at end October 15.5% below the corresponding level for 2017. High yield debt sales were down by 28.8%, while those for investment grade issuers were 13.9% lower. Non-callable fixed rate debt suffered a 34.6% fall, while floating rate debt declined by only 3.3% and convertible bond sales (howbeit a small part of the market - just 34.5 billion of the USD1219.4 billion total) actually grew 37.3%.

However, while this appears to indicate greater investor caution - notably towards high-yield debt and longer term fixed rate bonds - it may be somewhat misleading. SIFMA data spanning distinct asset classes shows that in aggregate, year- to-date US bond sales in 2018 stood in October at USD6.259 trillion, just 1.3% below their 2017 levels during the corresponding period. Our take is that riskier asset classes like emerging markets and high yield clearly are having a tougher year against the backcloth of rising rates and increased economic uncertainty. However, the aggregate corporate total is quite sensitive to large merger transactions and we would hesitate to suggest that companies are facing difficulty in accessing funds. Instead, we would assess that primary markets have become more selective, price sensitive and cautious.

There is also an indicator of a degree of potential crowding-out. Sales of US Treasury bonds rose in the period to October by 13%, expanding from USD1.954 trillion to USD2.209 trillion. Mortgage related sales were the only other asset class to grow, but by just 0.8% to USD1.601 trillion from USD1.589 trillion.

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