Emerging markets issuance
Investment grade EM borrowers continue to achieve positive
demand.
Most notably, the Kingdom of Saudi Arabia sold a new six-year
dollar sukuk issue and ten-year conventional dollar debt, with
initial price guidance on 18 October of 135 and 180 basis point
margins over comparable US Treasuries. It placed USD5 billion with
demand exceeding USD26.5 billion, of which USD7.5 billion was
obtained for the sukuk tranche: pricing was tightened by 30 basis
points on both portions, leading to a 5.268% coupon for the sukuk
and a 5.5% coupon on the longer tranche. The issue is to help fund
a tender offer for USD3 billion of 2023 bonds, along with USD12.5
billion of liabilities maturing in 2025 and 2026.
Also on 18 October, Emirates NBD gained 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 than initial
guidance.
Investment-grade-rated Lithuania also sold EUR1.2 billion of new
debt, comprising a EUR900 million new 5.5-year issue priced at 120
basis points over mid-swaps with a 4.125% coupon and discount issue
price of 99.26%, and a EUR300 million tap of its prior 10-year deal
at a 135 basis point spread. Prior reports claimed demand of close
to EUR2 billion. After its completion, Latvia mandated banks for a
further Euro-denominated sale.
Wider SSA debt restructuring discussions
In addition to Ghana’s ongoing negotiations with the IMF, which
we have forecast are likely to lead to renegotiation of its debt
under the G20 Common Framework Nigeria and Kenya have been in
focus.
The former was triggered by Nigeria’s Minister of Finance,
Budget and National Planning Zaineb Ahmad stating on a Bloomberg TV
interview that the country is considering debt rescheduling, both
internationally and domestically. Her statement mentioned that the
Ministry has appointed a consultant to investigate “restructuring
and negotiating to stretch out the repayments to longer periods”.
This Day newspaper added that she highlighted the need to use 65%
of projected 2023 revenue to cover debt service in 2023. Although
Nigeria’s debt has been rising rapidly, reflecting poor fiscal
capture and heavy spending on subsidies, its debt stock as a
proportion of GDP is modest (only just over 23% in mid-2022), but
its debt service costs are projected by the World Bank to exceed
state revenues by next year.
Nigeria had already shown some signs of debt distress by seeking
a broader extension of DSSI official debt payment relief to the
sub-Saharan African region, but until now had not used the term
“restructuring”. The suggestion that it wishes to extend maturities
appears to indicate that it is not seeking capital haircuts, but
instead to extend the term of its liabilities.
A subsequent statement by Nigeria’s Debt Management Office (DMO)
has denied that restructuring was being planned and instead claimed
it was looking to manage its liabilities through the “spreading out
of debt maturities” and “refinancing short-term debt using
long-term debt”, suggesting it was also exploring bond buybacks and
exchanges as liability management tools. The subsequent statement
claimed “Nigeria remains committed and will meet all its debt
obligations”, but that it will seek to apply liability management
tools to its international obligations, including bilateral and
concessional loans.
According to a Bloomberg report on 20 October, Kenya plans to
negotiate to extend the term of Export-Import Bank of China loans
for the development of a rail link between Nairobi and Mombasa
port. Transport Secretary-designate Kipchumba Murkomen warned that
the “Belt and Road Initiative” project “will never break even” and
that it “becomes impossible” to repay the loan from revenues from
the project. He mentioned a 50-year term as a goal for
renegotiation, versus the current 15-20 year terms.
Under recently-elected President Ruto, users of the line have
been given greater flexibility in how they transport goods to
Mombasa, ending a prior policy of forcing them to be transported to
inland hubs before shipment. Even then, the line is unprofitable
with passenger and freight revenues of 15 billion Kenyan shillings,
versus running costs of 18.5 billion. Exim lent KSH500 billion
(USD4.13 billion) to the project. Reportedly, in early October, a
KSH1.3 billion (USD930,000) penalty was imposed on the Kenyan
Treasury for non-payment of debt service obligations, following
prior issues over non-payment of AfriStar, the Chinese-owned
operator of the railway.
Bank capital “extension risk”
Banco Sabadell has failed to call an Additional Tier 1 deal (its
EUR400 million 6.125% issue) on its first call date, which falls in
November. The bank announced its decision ahead of the 23 October
call notification deadline “taking into account the cost of
substituting AT1 instruments under current market conditions”.
On 23 November, the instrument’s coupon will be reset at the
five-year swap rate (currently 3.08%) plus a 6.051% yield margin,
implying a new coupon of around 9.13%. The issue already had traded
to a 10 percentage point price discount
Its decision did not prevent the Bank of Nova Scotia from issuing
an AT1 deal, USD750 million of 60-year non-call five-year debt at
8.625%, versus 8.75% early guidance. If not called, the bonds would
reset to the 5-year US Treasury yield plus 438.9 basis points.
Later in the week, Ireland’s Permanent TSB also sold EUR250
million of perpetual AT1 debt callable after 5.5 years with the
unusually sizeable coupon of 13.25%, a record for the sector,
versus the 7.9% coupon it had needed to sell similar instruments in
late 2020. The issue is to strengthen its balance sheet ahead of
the purchase of EUR6.8 billion of loans from Ulster Bank, which is
primarily being funded by the sale of shares to vendor NatWest
Group.
Our take
Both the Kingdom of Saudi Arabia and Emirates NBD enjoyed
healthy demand, further confirming the strong investor sentiment
towards stronger GCC credits, given the positive windfall effects
on their finances from higher energy prices. The healthy 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 projected growth this year, its
debt-to-GDP ratio is unlikely significantly to exceed 30%. Its
major problems stem from excessive spending on subsidies and
ineffective fiscal capture. However, the growing burden of its debt
service costs versus modest fiscal income does require policy
attention. Kenya’s position is more heavily strained (with the
debt-to-GDP ratio at 67% in mid-2022) but is far stronger than that
of Ghana.
Banco Sabadell’s decision not to call an AT1 instrument when
possible is an isolated event so far and may well be temporary.
Nevertheless, it has revived investor focus on “extension risk”:
the possibility that banks will not call AT1 and subordinated debt
in worsening market conditions, leaving investors holding
instruments of longer (and potentially perpetual) tenor, despite
their initial expectation that these would be called when possible,
in line with the normal market practice. Nevertheless, subsequent
supply shows that it has not blocked new issuance, but it may have
contributed to the record coupon paid by Permanent TSB.
Banco Santander previously elected to miss an AT1 call
opportunity in 2019, before redeeming the issue shortly thereafter,
and both Deutsche Bank and Lloyds Bank also missed first call dates
in 2020, but the norm to date has been to use the first call
opportunity.
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 retain such instruments
uncalled and allow them to switch to less favorable post-call
coupons. Sabadell has stressed that it may call the issue at a
subsequent quarterly call date, but the difficult conditions for
refinancing do increase “extension risk. Investors face the risk of
heavy losses if the practice becomes more widespread, which would
hinder the future issuance of AT1 capital instruments.
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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