Saturday, 20 October 2018

Emerging EMEA Bond: Israel Electric’s US$1.1bn two-part bond

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Braving the storm

In a year that saw a record number of CEEMEA deals hit the screens, one stood out for its sheer bravery.

On June 18, Israel Electric (Baa3/BB+) stated its intention to price an intra-day dual-tranche offering consisting of five and 10-year tenors. In normal times there would be nothing unusual about the announcement, but these were far from normal times.

Following the release of the FOMC’s minutes on May 22, which mooted the possibility of a slowdown in the US Federal Reserve’s quantitative easing policy, emerging markets asset prices had borne the brunt of a huge sell-off in credit markets. Panic had gripped the asset class.

For three weeks no emerging markets issuer anywhere had sold a bond in the US dollar market except for China’s Huaneng, whose paper was largely placed with three Chinese-owned banks that were added as bookrunners late in the day.

Israel Electric needed no such support from its leads – Barclays and Citigroup – as it sold a US$600m 5.625% 2018 note and a US$500m 6.875% 2023 bond. Rothschild was independent adviser on the deal.

Critics will gripe at the price paid. While deals earlier in the year had printed with minimal or even negative new issue concessions, Israel Electric had to pay hefty premiums as both notes priced in line with initial guidance, with the issue spread on the 2018s at 438bp over mid-swaps and the 2023s at 453bp over.

That meant a new issue premium of about 60bp for the five-year tranche and 40bp for the 10-year. But big concessions were becoming prevalent across all bond markets.

For example, Chevron, rated Aa1/AA, paid a 20bp–25bp premium on a deal it priced the day before, a level which was roughly 25% off where its spreads were, albeit raising US$6bn in the process.

Israel Electric’s order book of US$2.36bn from over 200 accounts showed that investors were willing to buy emerging markets bonds at a time when some doomsayers were proclaiming the end of the asset class. And the deal looked increasingly prescient after guidance from the following day’s FOMC meeting added to market jitters, leading to a further Treasury sell-off.

Both notes, which priced at par, performed well despite the volatility. The five-year traded above re-offer, while the 10-year was down less than half-a-point in the 48 hours after pricing.

And to prove it was no fluke, Israel Electric returned to the market just two weeks later to tap each note for a further US$150m each, locking in cheaper yields in the process.

In total, the state-owned company raised US$1.4bn – its biggest debt issuance ever – through two transactions at a time when few others even dared contemplate a deal. It was a gamble, but one that paid off.

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