Emerging markets issue
Investment grade EM borrowers continue to achieve positive demand.
In particular, the Kingdom of Saudi Arabia sold a new six-year dollar sukuk issue and ten-year dollar conventional debt, with an initial price guide on October 18 of 135 and 180 basis points margin over comparable US Treasuries. It added USD5 billion to demand over USD26.5 billion, of which USD7.5 billion was received for the sukuk tranche: pricing was tightened by 30 basis points on both tranches, leaving a 5.268% coupon 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, along with USD12.5 billion of liabilities maturing in 2025 and 2026.
Also on October 18, Emirates NBD secured USD1 billion in demand on a five-year USD500 million issue priced at 5.745%, 155 basis points over US Treasuries and 20 basis points tighter than initial guidance.
Lithuania also sold investment grade EUR1.2 billion of new debt, consisting of EUR900 million of a new 5.5-year issue at a price of 120 basis points over mid-swaps with a 4.125% coupon and a 99.26% discount issue price, and a EUR300 million tap for its deal 10 years earlier at a range of 135 basis points. Previous reports claimed a claim of close to EUR2 billion. After it was completed, Latvia mandated the banks for another Euro-denominated sale.
Broader discussion of SSA debt restructuring
In addition to Ghana’s ongoing negotiations with the IMF, which we predict is likely to lead to a renegotiation of its debt under the G20 Joint Framework that Nigeria and Kenya have been negotiating.
Nigeria’s Minister of Finance, Budget and National Planning Zaineb Ahmad prompted the first by saying in a Bloomberg television interview that the country is considering debt restructuring, both internationally and domestically. His statement stated that the Ministry has appointed a consultant to investigate “restructuring and negotiations to extend the repayments to longer periods”. This Day newspaper added that she emphasized the need to use 65% of the projected 2023 revenue to cover debt service in 2023. Although Nigeria’s debt is rising rapidly, which shows bad fiscal capture and heavy spending on subsidies, its debt stock is a proportion of GDP. modest (but just over 23% in mid-2022), but the World Bank has projected that its debt service costs will exceed state revenues by next year.
Nigeria has already shown some signs of debt distress by seeking a wider extension of official DSSI debt relief to the sub-Saharan African region, but has so far not used the term “restructuring”. The suggestion that he wants to extend maturities seems to indicate that he is not seeking capital cuts, but rather an extension of the term of his liabilities.
A subsequent statement from Nigeria’s Debt Management Office (DMO) denied that a restructuring was being planned and instead claimed that it was looking to manage its liabilities by “spreading debt maturities” and “refinancing short-term debt at using long-term debt” , suggesting that he was also exploring bond buybacks and swaps as liability management tools. The subsequent statement claimed that “Nigeria remains committed to and will meet all its debt obligations”, but will seek to apply liability management tools to its international obligations, including bilateral loans and concessions.
According to a Bloomberg report on October 20, Kenya plans to enter into negotiations to extend the loan term of the Export-Import Bank of China to develop a rail link between Nairobi and the port of Mombasa. Transport Secretary-designate Kipchumba Murkomen has warned that the “Belt and Road Initiative” project will not “break even” and that it is “impossible” to repay the loan from the project’s income. He cited a term of 50 years as a target for renegotiation, compared to the current terms of 15-20 years.
Under the recently elected President Ruto, users of the line have been given more flexibility in how they transport goods to Mombasa, ending a previous policy of forcing them to transport them to inland hubs before the shipment. Even then, the line is unprofitable with passenger and cargo revenue of 15 billion Kenyan shillings, compared to current costs of 18.5 billion. Exim lent KSH500 billion (USD4.13 billion) to the project. It was reported that in early October, the Kenyan Treasury was fined KSH1.3 billion (USD930,000) for non-payment of debt service obligations, following prior releases regarding the non-payment of AfriStar, the operator of the Chinese-owned railway. .
Bank capital “extended risk”
Banco Sabadell failed to deal with its Tier 1 Extra call (a EUR400 million 6.125% issue) on its first call date, which falls in November. The bank announced its decision ahead of the October 23 announcement deadline “taking into account the cost of replacing AT1 instruments under current market conditions”.
On November 23, the instrument’s coupon will reset at the five-year swap rate (currently 3.08%) plus a yield margin of 6.051%, implying a new coupon of approximately 9.13%. The issue had already traded to a price discount of 10 percentage points
His decision did not prevent the Bank of Nova Scotia from issuing the AT1 deal, USD750 million of 60-year non-call five-year debt at 8.625%, compared to early guidance of 8.75%. If not called, the bonds would reset to the 5-year US Treasury yield plus 438.9 basis points.
Later in the week, Permanent TSB sold EUR250 million of permanent AT1 debt callable after 5.5 years at the unusual coupon of 13.25%, a record for the sector, compared to the 7.9% coupon it needed to sell similar instruments in late 2020. The issue is strengthening its balance sheet before buying EUR6.8 billion of loans from Ulster Bank, which is being financed mainly by selling shares to seller NatWest Group.
Both the Kingdom of Saudi Arabia and the United Emirates saw healthy demand, further confirming strong investor sentiment towards stronger GCC credits, given the positive headwinds from higher energy prices on their finances. The healthy appetite for investment-grade EM risk also extended to Lithuania’s two-part sell-off.
Nigeria’s current debt stress should not require full-scale restructuring. Even after the projected growth this year, its debt to GDP ratio is unlikely to exceed 30%. Its major problems stem from excessive spending on subsidies and ineffective fiscal capture. However, the growing burden of its debt servicing costs compared to modest fiscal revenues warrants policy attention. Kenya’s position is under more pressure (with the debt to GDP ratio at 67% in mid-2022) but it is much stronger than Ghana’s.
Banco Sabadell’s decision not to call the AT1 instrument when possible is an isolated event so far and may be a temporary event. However, it is reviving investors’ focus on “extension risk”: the possibility that banks will not call AT1 and subordinated debt in deteriorating market conditions, leaving longer instruments (and may be perpetual) held by investors, despite their initial expectations that these would be involved. called where possible, in accordance with normal market practice. However, subsequent procurement shows that it did not prevent new releases, but may have helped the record coupon paid by Permanent TSB.
Banco Santander previously elected to miss an AT1 call opportunity in 2019, before resolving the issue shortly afterwards, and Deutsche Bank and Lloyds Bank both missed first call dates in 2020, but the norm so far has been the first call opportunity use.
Sabadell’s decision highlights the growing “extended risk” on AT1 instruments as rates rise. With higher refinancing costs for banks, there is a stronger temptation to keep such instruments uncalled and allow them to move to less favorable post-call coupons. Sabadell has stressed that it may call the issue at a subsequent quarterly call date, but the difficult refinancing conditions increase “extension risk. Investors are at risk of heavy losses if the practice becomes more widespread, which would prevent the issuance of AT1 in the future.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.