Capital Markets: Emerging markets continue generating mixed signals

Emerging markets issue
Investment grade EM borrowers continue to gain positive demand.

In particular, the Kingdom of Saudi Arabia sold a new issue of six-year dollar sukuk and ten-year conventional dollar debt, with initial price guidance on 18 October 135 and 180 basis point margins on comparable US Treasuries. Placed USD5 billion with demand exceeding USD26.5 billion, of which USD7.5 billion was obtained for the sukuk segment: pricing was tightened by 30 basis points on both tranches, leading to a coupon of 5.268% for the sukuk and a 5.5% coupon on the longer tranche. The issue is to help finance a tender offer for USD3 billion of 2023 bonds, plus USD12.5 billion of liabilities maturing in 2025 and 2026.

Also on October 18, Emirates NBD secured USD1 billion in demand for a USD500 million five-year issue priced at 5.745%, 155 basis points over US Treasuries and 20 basis points tighter from the initial guide.

Investment-grade Lithuania also sold EUR1.2 billion of new debt, including EUR900 million of a new 5.5-year issue priced at 120 basis points above swaps with a coupon of 4.125% and a price of a discount issue of 99.26%, and EUR300. million taps of its previous 10-year deal in a range of 135 basis points. Previous reports stated a demand of close to EUR2 billion. After its completion, Latvia mandated the banks for another euro-denominated sale.

Broader discussions on SSA debt restructuring

Apart from Ghana’s ongoing negotiations with the IMF, which we predict is likely to lead to a renegotiation of its debt under the G20 Common Framework, Nigeria and Kenya have been in focus.

It was first activated by Nigeria’s Minister of Finance, Budget and National Planning Zaineb Ahmad who stated on a Bloomberg TV interview that the country is considering debt rescheduling, both internationally and also domestically. Its statement mentioned that the Ministry appointed a consultant to investigate “the restructuring and the negotiation to spread the repayment over longer periods”. This Day newspaper added that it emphasized the need to use 65% of the projected revenue of 2023 to cover the debt service in 2023. Although Nigeria’s debt has been increasing rapidly, reflecting poor fiscal capture and high spending on subsidies, its debt stock as a proportion of GDP is modest (just over 23% in mid 2022), but its debt service costs are predicted by the World Bank to exceed state revenues by next year.

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Nigeria had already shown some signs of debt distress by seeking a wider extension of the official DSSI debt relief to the sub-Saharan Africa region, but had so far not used it -the term “restructuring”. The suggestion that it wishes to extend maturities seems to indicate that it is not looking for capital haircuts, but instead to extend the term of its liabilities.

A subsequent statement from Nigeria’s Debt Management Office (DMO) denied that restructuring was being planned and instead claimed that it was seeking to manage its liabilities through “spreading debt maturities ” and “refinancing of short-term debt using long-term debt” , suggesting that it was also exploring bond buybacks and swaps as liability management tools. The subsequent statement asserted that “Nigeria remains committed and will meet all its debt obligations”, but that it will seek to apply responsibility management tools to its international obligations, including bilateral and concessional loans .

According to a Bloomberg report on October 20, Kenya plans to negotiate to extend the loan term of the Export-Import Bank of China for the development of a rail link between Nairobi and the port of Mombasa. The nominated Secretary of Transport Kipchumba Murkomen warned that the “Belt and Road Initiative” project “will never break” and that it “will become impossible” to repay the loan from the income from the project. He mentioned a term of 50 years as a target for renegotiation, against the current terms of 15-20 years.

Under the recently elected President Ruto, users of the line have been given greater flexibility in how they transport goods to Mombasa, ending a previous policy that forced them to be transported to inland hubs before shipment. Even then, the line is not profitable with revenue from passengers and cargo of 15 billion Kenyan shillings, against operating costs of 18.5 billion. Exim has loaned KSH500 billion (USD4.13 billion) for the project. In early October, a penalty of KSH1.3 billion (USD930,000) was reportedly imposed on the Kenyan Treasury for non-payment of debt service obligations, following earlier issues regarding non-payment of AfriStar, the Chinese-owned train operator. .

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“Extension risk” of bank capital

Banco Sabadell failed to call an Additional Tier 1 deal (its EUR400 million 6.125% issuance) on its first call date, which falls in November. The bank announced its decision ahead of the October 23 call notification deadline “taking into account the replacement cost of AT1 instruments under current market conditions”.

On November 23, the instrument’s coupon will reset to the five-year swap rate (currently 3.08%) plus a yield margin of 6.051%, implying a new coupon of about 9.13%. The issue was already traded at a price discount of 10 percentage points
His decision did not prevent the Bank of Nova Scotia from issuing an AT1 deal, a USD750 million 60-year five-year non-call debt at 8.625%, versus 8.75% early guidance. If not called, the bonds reset to the 5-year US Treasury yield plus 438.9 basis points.

Later in the week, Ireland’s Permanent TSB also sold EUR 250 million of perpetual AT1 debt callable after 5.5 years at the unusually high coupon of 13.25%, a record for the sector, against the -the 7.9% coupon it needed to sell similar instruments at the end of 2020 The issue is to strengthen its balance sheet before the purchase of EUR6.8 billion of loans from Ulster Bank, which is primarily being financed by the sale of shares to the seller NatWest Group.

Our take

Both the Kingdom of Saudi Arabia and the Emirates NBD enjoyed strong demand, further confirming strong investor sentiment towards stronger GCC credits, given the positive spillover effects on the -their finances from higher energy prices. Good appetite for investment-grade EM risk also extended to Lithuania’s two-part sale.

Nigeria’s debt stress should not currently require full-scale restructuring. Even after the projected growth this year, its debt-to-GDP ratio is unlikely to significantly exceed 30%. Its main problems stem from excessive spending on subsidies and ineffective fiscal capture. However, the growing burden of its debt service costs against modest fiscal revenues requires political attention. Kenya’s position is more strained (with a debt-to-GDP ratio of 67% in mid-2022) but is much stronger than Ghana’s.

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Banco Sabadell’s decision not to call an AT1 instrument when possible is an isolated event so far and may be temporary. However, it has rekindled investors’ attention on “extension risk”: the possibility that banks will not call AT1 and subordinated debt in worsening market conditions, leaving investors to hold instruments of a longer (and potentially perpetual) tenor, despite their initial expectation that they would be. called when possible, in line with normal market practice. However, subsequent supply shows that it did not block new issuance, but may have contributed to the record coupon paid by Permanent TSB.

Banco Santander previously opted to miss out on an AT1 call opportunity in 2019, before redeeming the issue shortly afterwards, and both Deutsche Bank and Lloyds Bank have also missed first call dates in 2020, but the norm until -today was to use the first opportunity to call.

Sabadell’s decision highlights the growing “extension risk” on AT1 instruments as rates rise. As banks face higher refinancing costs, there is a stronger temptation to hold such instruments unclaimed and allow them to switch to less favorable post-call coupons. Sabadell stressed that it may call the issue at a subsequent quarterly call date, but the difficult conditions for refinancing increase “extension risk. Investors face the risk of large losses if the practice becomes more widespread, which hinders the future issuance of AT1. capital instruments.

Posted on October 25, 2022 by Brian LawsonSenior Economic and Financial Advisor, 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.


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