Capital Markets: Emerging markets continue generating mixed signals

Issuance in emerging markets
Investment grade EM borrowers continue to achieve positive demand.

More importantly, the Kingdom of Saudi Arabia sold a new six-year dollar sukuk issue and ten-year conventional dollar debt, with preliminary price guidance on 18 October at 135 and 180 which are basic point margins on the same US Treasuries. It placed USD5 billion with demand exceeding USD26.5 billion, of which USD7.5 billion was obtained for the sukuk tranche: the price was tightened by 30 basis points in both parts, bringing a 5.268% coupon for sukuk and a 5.5% coupon on the higher tranche. The issue is to help finance a tender offer for USD3 billion in 2023 bonds, along with USD12.5 billion in loans due in 2025 and 2026.

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

Lithuania also sold investment grade EUR1.2 billion of new debt, consisting of a EUR900 million new 5.5-year issue priced at 120 basis points in mid-term swaps with 4.125% coupon and issue price at a discount of 99.26%, and a EUR300 million tap in the first 10-year deal at a 135 basis point spread. Previous reports claimed the demand to be close to EUR2 billion. After this, Latvia ordered the banks for further sales denominated in Euro.

Broader SSA loan modification discussions

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

The former was triggered by Nigeria’s Minister of Finance, Budget and National Planning Zaineb Ahmad who said in an interview with Bloomberg TV that the country is considering debt rescheduling, both international and local. His statement mentioned that the Ministry has appointed a consultant to investigate “structuring and negotiations to increase payments over a longer period of time”. This Daily newspaper added that he emphasized the need to use 65% of the expected 2023 revenue to cover the debt service in 2023. Although Nigeria’s debt has increased sharply, showing poor fiscal capture and heavy spending on subsidies, its debt stock as a proportion of GDP is moderate (just over 23% in mid-2022), but debt service costs are projected by the World Bank to exceed state income in next year.

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Nigeria has already shown some signs of debt distress by seeking a wider extension of official DSSI debt payments in the sub-Saharan African region, but has so far not used the term ” – again”. The suggestion that it wants to extend maturities indicates that it is not looking for capital haircuts, but instead to extend the term of its debts.

A subsequent statement by Nigeria’s Debt Management Office (DMO) denied that restructuring was planned and instead claimed that it was seeking to manage its debts by “spreading debt maturities” and ” -refinancing of short-term debt with long-term debt” , suggesting that it is also exploring bond buybacks and swaps as tools to manage liability. The following statement claimed that “Nigeria remains committed to and will meet all debt obligations”, but that it will seek to use the instruments of liability management in its international obligations, including bilateral and concessional ones. loans.

According to a Bloomberg report on October 20, Kenya plans to negotiate to extend the term of loans with the Export-Import Bank of China 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 be broken” and that it “will be impossible” to repay the debt from the revenues from the project. He mentioned the 50-year term as a goal for renegotiation, against the current 15-20 year term.

Under the recently elected President Ruto, line users have been given more flexibility in how they transport goods to Mombasa, ending an earlier policy of forcing them to be transported to inland hubs on the left still send. However, the line is unprofitable with passenger and freight revenues of 15 billion Kenyan shillings, compared to operating costs of 18.5 billion. Exim has loaned KSH500 billion (USD4.13 billion) to the project. Reportedly, in early October, a KSH1.3 billion (USD930,000) penalty was imposed by the Kenyan Treasury for non-payment of debt service obligations, following AfriStar’s non-payment issues, the tag -owned by the Chinese railway operator. .

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Bank capital “extension risk”

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

On 23 November, the instrument’s coupon will be reset to the five-year swap rate (currently 3.08%) and a 6.051% yield margin, which means a new coupon of around 9.13%. The issue is already trading at a 10 percentage point discount to the price
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%, compared to 8.75% earlier 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 EUR250 million of perpetual AT1 debt callable after 5.5 years with an unusually large coupon of 13.25%, a record for the sector, compared to 7.9% coupon it needs to sell the same instruments in late 2020. The issue is to strengthen its balance sheet before buying EUR6.8 billion in loans from Ulster Bank, which -primarily funded by the sale of shares in vendor NatWest Group.

The one we took

The Kingdom of Saudi Arabia and Emirates NBD enjoyed healthy demand, further confirming strong investor sentiment towards stronger GCC credits, due to the positive windfall effect on their finances from higher energy price. Healthy appetite for investment-grade EM risk also extended to two-part sales in Lithuania.

Nigeria’s debt burden does not need to be completely changed now. Even after this year’s projected growth, its debt-to-GDP ratio is likely not to exceed 30%. Its major problems stem from excessive spending on subsidies and ineffective fiscal capture. However, the growing burden of debt service costs compared to moderate financial income requires policy attention. Kenya’s position is more heavily burdened (with a debt-to-GDP ratio of 67% by mid-2022) but much stronger than Ghana’s.

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Banco Sabadell’s decision not to call an AT1 instrument if possible is an isolated event so far and may be temporary. However, it has raised the investor’s focus on “extension risk”: the possibility that banks will not call AT1 and subordinated debt in worsening market conditions, leaving investors to hold the instruments longer. (and possibly perpetual) tenor, despite their initial expectation that it would be called if possible, in accordance with usual market practice. However, subsequent supply shows that it has not hindered new issuance, but it may have contributed to the record coupon paid by Permanent TSB.

Banco Santander previously chose not to miss an AT1 call opportunity in 2019, before redeeming the issue shortly afterwards, and Deutsche Bank and Lloyds Bank also missed early 2020 call dates, but the norm so far has been to use the first instance of calling.

Sabadell’s decision highlights the growing “extension risk” of AT1 instruments as prices rise. As banks face higher refinancing costs, there is a stronger temptation to keep those instruments uncalled and allow them to move 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 “extension risk. capital instruments.

Posted on October 25, 2022 by Brian LawsonSenior 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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