Emerging markets demand for ECA and DFI direct loans – particularly locally denominated debt, which remains underserviced – is still on the increase after a record volume of lending in 2016. With that demand has come increased fundraising by ECAs and DFIs in the capital markets, growing sophistication in the timing of debt-raising, a diversification of investor base and a growing emphasis on pushing the tenors on their own borrowings.
JBIC, the most active ECA direct lender over the past two years, is setting the cost of fundraising benchmark. As one ex-ECA head tells TXF: “If you look at JBIC’s bond issues this year, its fundraising is currently one of the lowest in terms of cost when compared to the rest of the ECA market.” That advantage is as much born of JBIC’s canny use of the capital markets as Japan’s A1 sovereign rating. For example, in July, JBIC pulled off a $5 billion four-tranche dollar offering that was timed to perfection to take advantage of a vastly undersupplied dollar market.
Bank of America Merrill Lynch, Daiwa, JP Morgan and Nomura were bookrunners, raising a combined book of over $16 billion. The deal closed with a $1.5 billion three-year fixed rate leg, $1 billion with a floating tranche of the same maturity and $1.25 billion each at five years and 10 years.
The spread on the three-year debt was fixed at 39bp over three-month Libor and mid-swaps, respectively – 4bp tighter than initial price thoughts. The five-year tranche sold at a spread of 51bp over mid-swaps, also 6bp inside initial price thoughts. And the 10-year deal priced with a spread fixed at 67bp, 5bp inside initial price thoughts.
Pushing the borrowing boundaries
But while developed market ECAs with high sovereign ratings will always enjoy a cost of debt advantage, solidly rated emerging markets institutions like Bancomext (A3), Afreximbank (Baa1) and India Eximbank (Baa3) are becoming increasingly active and innovative, pushing the tenors on their own borrowings to enable them to better match the on-lending demands placed upon them.
India Eximbank has been one of the most dynamic ECAs in its pursuit of fundraising. The ECA plans “to raise around $3 billion from the international capital markets in 2017-18”, and most recently closed its debut Formosa bond at 100bp over three-month Libor – 15bp inside initial guidance.
The five-year, $400 million issuance was rated Baa3 by Moody’s and sold by Standard Chartered as sole bookrunner with JP Morgan and MUFG as structuring agent. The issue was mostly distributed to Asian investors (87%), while European and Middle-Eastern investors accounted for the remaining 13%. The notes are being issued under the ECA’s $10 billion medium-note programme.
India Eximbank cited “good demand across 50 accounts” for the paper and the policy bank claims it has “opened a market to enable other issuers to follow”. The deal is the first Formosa bond to be offered by an Indian issuer and marks the second ECA to tap the Formosa this year after Kexim priced a $400 million, five-year, floating-rate offering in June with a spread of around 70bp.
India Eximbank also debuted in the 144A market last year, issuing a $1 billion 10-year offering raised via joint bookrunners Bank of America Merrill Lynch, Barclays, Citi, JP Morgan and Standard Chartered. Although a regular issuer, all bonds sold by India Exim had been in Reg S format. The move to 144A commanded strong US investor interest – the US was allocated 61% of the notes, Asia 20% and Europe 19% - enabling the borrower to get away with very competitive pricing – the 3.375% 2026s were eventually sold at 99.933 to yield 3.383% - while also diversifying its funding base.
Bancomext gets clever
India Exim is not alone in its funding innovations. Last year, Mexico’s ECA Bancomext upsized its latest bond fundraising from $500 million to $700 million following a major oversubscription. The cross-border issue was a welcome boost to the ECA’s dollar coffers given the Mexican peso depreciated almost 10% against the dollar last year.
More significantly, the deal was a tier two offering – in effect subordinated debt – designed to appeal to investors looking for higher yields. But unlike most tier two trades – which usually come in for a very strict evaluation from rating agencies due to harsher loss-absorption features – Bancomext's new bond did not have write-down and write-off provisions, instead resting on the security of the ECA's state guarantee.
The combination of tier two status and state guarantee created heavy investor appetite – $3.8 billion of orders in total – and pushed pricing below initial guidance. The bonds sold with a 3.8% coupon to yield 4.032%, only slightly wide of the ECA's existing 4.375% 2025 notes, which were trading in the 3.6% area on the day of the tier two issue.
Better pricing, longer tenors
Afreximbank has also been upping its fundraising activity and been doing well on the pricing. It closed a $300 million five-year Chexim-guaranteed borrowing priced at 135bp over Libor in 2016, and in May that year also pulled off what was then its biggest dollar fundraising to date – a $750 million five-year issue – without paying a premium for the volume.
This year, the supranational has closed another record volume loan – a $1.2 billion-equivalent dual currency facility led by Standard Chartered (co-ordinator, bookrunner and facility agent) with support from 13 initial mandated lead arrangers and bookrunners: Bank ABC, Abu Dhabi Commercial Bank, MUFG, Barclays, SMBC, Commerzbank, Emirates NBD, Rand Merchant Bank, HSBC, ICBC, Mizuho, National Bank of Abu Dhabi and Standard Bank.
Closed in June, the dollar debt comprised two tranches with tenors of two and three years and margins of 125bp and 140bp over Libor respectively. The euro tranche had a three-year tenor and closed at 130bp over Euribor.
Afreximbank followed up on the loan the same month with a $750 million offering with a 4.125% coupon. Led by Barclays, Commerzbank, HSBC, MUFG, Standard Chartered Bank, the seven-year issue was the first time the borrower had gone beyond a five-year offering.
The private insurance market plays an integral part in the trade and export finance market and is increasingly being seen as a viable alternative to the public ECA market. TXF would like to acknowledge the growing importance of the private insurance market by providing this conference as a platform for the industry to convene, discuss and grow.