Capital Markets: Emerging markets continue generating mixed signals

Emerging markets continue
Investment grade EM borrowers continue to achieve positive demand.

Specifically, the Kingdom of Saudi Arabia sold a new six-year dollar sukuk issue and ten-year conventional dollar debt, with an initial price guidance of 135 on October 18 and a 180 basis point margin over comparable US Treasuries. It raised demand of USD5 billion over USD26.5 billion, of which USD7.5 billion was received for sukuk tranches: pricing was tightened by 30 basis points on both tranches, leading to a 5.268% coupon and a 5.5% coupon for sukuk. in long installments. The issue is to help fund a tender offer of USD3 billion of 2023 bonds, including USD12.5 billion of obligations maturing in 2025 and 2026.

Also, on 18 October, Emirates NBD received 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 above initial guidance.

Investment-grade-rated Lithuania also sold EUR1.2 billion of new debt, including a 4.125% coupon and a discounted issue price of 99.26%, and a EUR900 million new 5.5-year issue priced at 120 basis points in mid-swap with EUR300. million tap its previous 10-year contract at a 135 basis point spread. Previous reports claimed a demand of around EUR2 billion. After its termination, Latvia ordered banks to sell more euro-denominated securities.

Comprehensive SSA loan restructuring discussion

In addition to Ghana’s ongoing negotiations with the IMF, which we anticipate will lead to the renegotiation of its debt under the G20 Common Framework with Nigeria and Kenya.

The earlier trigger was triggered by Zaineb Ahmed, Nigeria’s Minister of Finance, Budget and National Planning, saying in a Bloomberg TV interview that the country was considering rescheduling debt, both international and domestic. His statement said the ministry had “appointed a consultant to investigate the restructuring and negotiations to extend the payments for a longer period of time”. This day the newspaper added that he highlighted the need to use 65% of the estimated 2023 revenues to cover debt service in 2023. However, Nigeria’s debt is growing rapidly, reflecting weak fiscal capture and heavy spending on subsidies, as its debt stock as a proportion of GDP. is modest (only 23% in mid-2022), but its debt service costs are projected to exceed state revenues by next year, according to the World Bank.

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Nigeria had shown some signs of a debt crisis by seeking the widest extension of DSSI official debt repayment relief in the sub-Saharan African region, but had not yet used the term “restructuring”. The suggestion that it wants to increase maturity seems to indicate that it is not looking to take a capital haircut but to extend the term of its obligations.

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

According to a Bloomberg report on October 20, Kenya plans to negotiate an extension of China’s Export-Import Bank loan for the development of a rail link between Nairobi and the port of Mombasa. Transport Secretary-elect Kipchumba Murkomen has warned that the “Belt and Road Initiative” project will “never break even” and that it will be “impossible” to repay the debt from the project’s revenues. He cited a 50-year tenure as a target for renegotiation, compared to the current 15-20 year tenure.

Under the newly elected President Ruto, users of the line have been given more flexibility in how they transport goods to Mombasa, ending the previous policy of forcing them to transport goods to inland hubs before shipment. Even so, the line is unprofitable with passenger and freight revenue of 15 billion Kenyan shillings, compared to running costs of 18.5 billion. EXIM has loaned KSH500 billion (USD4.13 billion) to the project. According to the report, in early October, the Kenyan Treasury was fined KSH1.3 billion (USD930,000) for non-payment of debt service obligations, following previous lawsuits over the non-payment of AfriStar, the railway’s Chinese-owned operator. .

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Bank Capital “Expansion Risk”

Banco Sabadell has failed to call an additional Tier 1 contract (its EUR400 million 6.125% issue) on the first call date in November. The bank announced its decision ahead of the call notification deadline of 23 October “taking into account the cost of replacing AT1 equipment in the current market conditions”.

On 23 November, the instrument’s coupon will reset to the five-year swap rate (currently 3.08%) and a yield margin of 6.051%, implying a new coupon of approximately 9.13%. The issue was already trading at a 10 percentage point price discount
Its decision did not prevent the Bank of Nova Scotia from issuing the AT1 deal, a USD750 million 60-year non-call five-year loan at 8.625%, against 8.75% initial guidance. If not called, the bonds would reset to the 5-year U.S. Treasury yield plus 438.9 basis points.

Later in the week, Ireland’s Permanent TSB also sold a callable EUR250 million permanent AT1 loan with an unusually large coupon of 13.25% after 5.5 years, a record for the sector, compared to the 7.9% coupon required to sell similar equipment in late 2020. The issue is to strengthen its balance sheet ahead of a EUR6.8 billion loan purchase from Ulster Bank, which is being financed mainly by selling shares to seller NatWest Group.

Our understanding

Both Saudi Arabia and the Emirates NBD enjoyed healthy demand, given the positive impact on their finances from higher energy prices, confirming strong investor sentiment towards strong GCC credits. A healthy appetite for investment-grade EM risk also extended to Lithuania’s two-part sell-off.

Nigeria’s debt crisis does not currently require full-scale restructuring. Even after the projected increase this year, its debt-to-GDP ratio is unlikely to exceed 30%. Its major problems stem from excessive spending on subsidies and ineffective financial capture. However, its growing burden of debt servicing costs compared to modest financial income requires policy attention. Kenya’s situation is more strained (debt-to-GDP ratio at 67% in mid-2022) but much stronger than Ghana’s.

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Banco Sabadell’s decision not to call the AT1 tool when possible is an isolated incident so far and may be temporary. However, this has revived investor focus on “extension risk”: the possibility that banks will not let AT1 and subordinated debt worsen market conditions, leaving investors with longer (and potentially permanent) duration instruments, despite their initial expectations. Called as far as possible, consistent with normal market practice. However, the subsequent supply did not preclude it from issuing new ones, but it may have contributed to the record coupon paid by the permanent TSB.

Banco Santander previously elected to miss the AT1 call opportunity in 2019, before redeeming the issue shortly afterwards, and both Deutsche Bank and Lloyds Bank also missed first call dates in 2020, but today’s standard is to use the first call opportunity.

Sabadell’s decision highlights the growing “expansion risk” in AT1 equipment as rates continue to rise. As banks face high refinancing costs, there is a strong temptation to hold such instruments uncalled and allow them to switch to less favorable post-call coupons. Sabadell emphasized that the issue could be called on the next quarterly call date, but the difficult conditions for refinancing “increase the expansion risk. Investors face the risk of heavy losses if the exercise becomes more widespread, which would hinder the future issuance of AT1. Capital instruments .

Posted by Brian Lawson on 25 Oct 2022Senior Economic and Financial Consultant, 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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