ECM bankers' hopes of another jumbo bonus at the end of the year have already dimmed just one month into 2022 as the prospect of tighter monetary policy and the slump in stock prices into correction territory have forced many issuers to revisit their plans to go public. In the US, January has seen just five IPOs price, the latest being the downsized US$200m Nasdaq IPO of chipmaker Credo Technology on Thursday. February could be even slower as the valuation reset means that the average loss from last year's 300-plus US IPOs is now above 30% (as of Thursday's close). Those losses have both battered investors' portfolios but also massively reduced the value of companies in the pipeline. Hyundai Engineering pulled its up to W1.2trn (US$1bn) IPO at the end of bookbuilding with the South Korean construction company saying investors were not valuing the company properly (See story below). Similarly, the parent of file-sending service WeTransfer cancelled the first major European IPO of the year after bookbuilding on the €250m Euronext Amsterdam float stalled, having launched with optimism that a combination of long-term profitability and high growth was exactly what investors wanted. Bruised by a surge in volatility (the VIX has nearly doubled this year to trade above 30 for much of the past week) and a 14.7% decline in the Nasdaq Composite Index so far in 2022, many investors, particularly hedge funds that often play the ECM calendar, have decided to steer clear of new issues. “The majority of issuers are waiting to see stability in the markets before launching transactions across products,” said David Ludwig, global head of ECM at Goldman Sachs. Hawkish turn Last week's FOMC meeting only reinforced the US Federal Reserve's hawkish turn late last year as it looks to control inflation by raising rates and shrinking its balance sheet after adding trillions to the money supply during the pandemic. Wall Street bankers nevertheless are doing their best to remain upbeat about activity levels over the course of the rest of the year as they look to execute their bloated pipelines. In the US, eyecare health company Bausch & Lomb, car-sharing app Turo, mattress retailer Mattress Firm, self-driving technology firm Mobileye, fintech Chime and the life division of insurer AIG lead a long list of 2022 IPO candidates. “As incremental clarity emerges on what moves the Fed actually makes and we make our way through earnings season, which happens to open the window for corporate repurchase activity, we expect to see improving risk appetite and broader access to the new issue market,” Ludwig said. Go slow Conveniently, February is often a slower month for new issues anyway. Not only does it coincide with the busiest weeks of the earnings season but any company going public after Valentine's Day cannot use third-quarter financial statements. This usually results in lighter ECM volume as annual numbers are produced. The US IPO market is in “a period of consolidation” and “searching for equilibrium” but could become very busy again as soon as March or April, said Eddie Molloy, Morgan Stanley’s co-head of ECM in the Americas. “The market is trying to figure out where to settle and what valuations should be and what’s the new equilibrium,” Molloy said. “It takes a little bit of time. When things are volatile, it’s sometimes hard to get investors sufficiently confident about pricing a new story efficiently – and it’s hard to take several weeks of execution risk. So it’s sometimes better to take a breather. “[But] I don’t think there’s any structural change in the way people think about new stories or there is some permanent impairment. I don’t think that’s the case at all.” Increasing worries The European preference to complete IPOs using full-year numbers (rather than those from the third quarter) usually mean
Trading volumes across major credit default swap indices and debt exchange-traded funds have broken records in January, a sign of a significant reshuffling of investor exposure to corporate credit even as bond markets have shown remarkable resilience in the face of this year's downturn in equities. About US$800bn in volume has changed hands across the four main US and European CDS indices this year up to January 26, according to ISDA data, a third higher than the previous January record set in 2020. Volumes in the iShares iBoxx $ high-yield corporate bond ETF – the largest US junk bond ETF – have also surpassed January records with over 770m shares trading in the month through Thursday, according to Refinitiv data, while the iShares investment-grade equivalent "LQD" notched a high of about 323m shares for the month. The jump in activity underlines how popular these macro credit products have become among investors looking for a fast and efficient way to rejig positions. It also belies a calm on the surface of corporate bond markets, where credit spreads have only widened modestly so far. Many traders and investors are questioning how long corporate credit can continue to shrug off the volatility enveloping other markets as the US Federal Reserve moves to wind down its stimulus programmes and raise interest rates to tame inflation. "This year has started off with what feels like a regime change due to higher interest rates percolating through the system. That is affecting equity markets because revenue multiples from a valuation standpoint are coming down,” said Benjamin Brodsky, chief investment officer at BlueCove, a London-based investment manager. “We haven't seen that yet percolate through to credit, but we believe it's only a matter of time," he added. The bumper volumes in macro credit products such as CDS indices and ETFs suggest many investors have been busy readjusting positions, even if they’re far from running for the exits just yet. Trading volumes in US corporate bonds reached US$614bn this year through Thursday, according to bond platform MarketAxess, still some way off January 2021’s total of US$772bn. That contrasts with the height of the coronavirus pandemic in March 2020, when record volumes of nearly US$1trn passed through the US corporate bond markets as investors scrambled to overhaul their portfolios. Hedge first, sell later It has become increasingly common among investors and traders to use broad-based index products to switch their credit market exposure in recent years. January trading volumes in LQD, BlackRock's investment-grade ETF, have grown every year since 2014 and have more than doubled since 2018, Refinitiv data show. The demand for macro products – which allow fast execution in large size – often picks up when markets get rocky, allowing investors to reduce or increase their risk quickly, rather than reflexively buying or selling individual bonds that tend to be less liquid. In one notable example of this type of behaviour, the volume of CDS index protection on European investment-grade credit that investors bought in the previous week amounted to their largest de-risking since February 2020, according to a note last Wednesday from Barclays' credit strategists. “I’d argue the steadiness in credit markets makes them vulnerable from here,” said Yoni Gorelov, co-head of US credit trading at Barclays. “There could be more downside to come, though it might not happen immediately.” He added: “I wouldn’t be surprised if some investors look at credit as a cheap hedge." Some traders argue the middling response in corporate bonds is natural given the current economic outlook. Recessions are the greatest concern for credit markets, raising the prospect of investors failing to recoup all the money they have lent to companies if defaults pick up, and there is nothing to suggest that the US economy is headed in that
Cybersecurity software provider McAfee's US$5.66bn-equivalent term loan B backing its buyout by an Advent International-led investor consortium in a US$14bn deal is expected to enjoy a strong reception as demand for leveraged loans soars. As floating-rate assets, loans are attractive to investors in a rising interest rate environment. For the week ending January 19, investors poured a staggering US$2.25bn into loan funds, topping the previous record of US$1.87bn in weekly additions notched in August 2013, according to Refinitiv Lipper data. "My understanding is that the order book for McAfee is going to be massive. There's a lot of demand for loans right now. The market will easily absorb it," said a source familiar with the deal. Private equity sponsors are taking advantage of record high loan demand to finance leveraged buyouts, locking in cheaper financing ahead of the rate hike, with at least eight LBO loans, including McAfee, expected to price within the next two weeks. McAfee is also considering issuing US$1bn in senior secured bonds, which would come to market at the beginning of February, but this is still in flux and, depending on investors’ demand for the loan, may even be scrapped. "If [leads] get overwhelming demand in the loan market, [they'll] nix it and print the full amount in TLB. Let's see what happens," another source said. An investor agreed: "They're likely to get better execution in the loan market because there's so much demand. The bond market is the poorer performing asset class right now, whereas loans are up on the year. The hot hand is the loan market." Leads are, however, still expected to issue US$2.3bn-equivalent in unsecured high-yield bonds, with no obvious alternative for that component in the loan market. The bonds are likely to be substantially US dollar-denominated given the profile of McAfee's business, but sources said leads had received a lot of reverse enquiry from both loan and bond investors on the euro side. "[Leads] are taking feedback on board, so we'll see," said a European-based source of the potential euro bond component. "Europe is just under 25% of McAfee's business mix geographically and the current currency split is broadly in line with that. But if we get overwhelming demand in euros at the right price, the company is willing to shift between the two." Buyout mania Demand for the deal has been strong despite a turbulent backdrop in the stock markets which has also fed through to some degree to fixed-income credit. The loan book is already nominally covered, and sources are expecting an even larger book as the deal progresses. "The loan market isn't totally immune to the broader backdrop but it is less volatile than others," said the Europe-based source. "But if we continue to see a very weak macro backdrop, the loan market will chisel down in sympathy with equities and high-yield. There is definitely caution in the wind but there are currently 10 deals in the European market, and all are seeing very robust interest and demand." McAfee’s term loan B, together with the US$5.75bn term loan for healthcare technology company Athenahealth are sizeable buyout loans that have already hit the market this year. In 2021, PE sponsors issued a record 76 US LBO loans that each totalled US$1bn or more, as fears over the Covid pandemic receded and dealmaking resumed, Refinitiv data show. Both borrowers and lenders have gravitated towards software businesses, a sector that has proved to be resilient during Covid. "Software is liked quite a bit in the market. Part of the reason is that the nature of its revenue is subscription-based. So with the chance that we go into a cyclical downturn over the next year or two, McAfee is probably going to be one of the last areas that will get hit," said a portfolio manager. In addition, while leverage is fairly high, investors like the high cashflows and margins of the business – and the chance to get involved in a large liquid deal. De
Cybersecurity software provider McAfee's US$5.66bn-equivalent term loan B backing its buyout by an Advent International-led investor consortium in a US$14bn deal is expected to enjoy a strong reception as demand for leveraged loans soars. As floating-rate assets, loans are attractive to investors in a rising interest rate environment. For the week ending January 19, investors poured a staggering US$2.25bn into loan funds, topping the previous record of US$1.87bn in weekly additions notched in August 2013, according to Refinitiv Lipper data. "My understanding is that the order book for McAfee is going to be massive. There's a lot of demand for loans right now. The market will easily absorb it," said a source familiar with the deal. Private equity sponsors are taking advantage of record high loan demand to finance leveraged buyouts, locking in cheaper financing ahead of the rate hike, with at least eight LBO loans, including McAfee, expected to price within the next two weeks. McAfee is also considering issuing US$1bn in senior secured bonds, which would come to market at the beginning of February, but this is still in flux and, depending on investors’ demand for the loan, may even be scrapped. "If [leads] get overwhelming demand in the loan market, [they'll] nix it and print the full amount in TLB. Let's see what happens," another source said. An investor agreed: "They're likely to get better execution in the loan market because there's so much demand. The bond market is the poorer performing asset class right now, whereas loans are up on the year. The hot hand is the loan market." Leads are, however, still expected to issue US$2.3bn-equivalent in unsecured high-yield bonds, with no obvious alternative for that component in the loan market. The bonds are likely to be substantially US dollar-denominated given the profile of McAfee's business, but sources said leads had received a lot of reverse enquiry from both loan and bond investors on the euro side. "[Leads] are taking feedback on board, so we'll see," said a European-based source of the potential euro bond component. "Europe is just under 25% of McAfee's business mix geographically and the current currency split is broadly in line with that. But if we get overwhelming demand in euros at the right price, the company is willing to shift between the two." Buyout mania Demand for the deal has been strong despite a turbulent backdrop in the stock markets which has also fed through to some degree to fixed-income credit. The loan book is already nominally covered, and sources are expecting an even larger book as the deal progresses. "The loan market isn't totally immune to the broader backdrop but it is less volatile than others," said the Europe-based source. "But if we continue to see a very weak macro backdrop, the loan market will chisel down in sympathy with equities and high-yield. There is definitely caution in the wind but there are currently 10 deals in the European market, and all are seeing very robust interest and demand." McAfee’s term loan B, together with the US$5.75bn term loan for healthcare technology company Athenahealth are sizeable buyout loans that have already hit the market this year. In 2021, PE sponsors issued a record 76 US LBO loans that each totalled US$1bn or more, as fears over the Covid pandemic receded and dealmaking resumed, Refinitiv data show. Both borrowers and lenders have gravitated towards software businesses, a sector that has proved to be resilient during Covid. "Software is liked quite a bit in the market. Part of the reason is that the nature of its revenue is subscription-based. So with the chance that we go into a cyclical downturn over the next year or two, McAfee is probably going to be one of the last areas that will get hit," said a portfolio manager. In addition, while leverage is fairly high, investors like the high cashflows and margins of the business – and the chance to get involved in a large liquid deal. De
Barclays lost about US$125m on a complex currency derivatives trade in December linked to Advent International and Singapore wealth fund GIC’s abortive takeover attempt of drug maker Swedish Orphan Biovitrum, according to sources familiar with the matter, delivering a blow to recently appointed chief executive CS Venkatakrishnan and his reputation as a sound risk manager. Deutsche Bank and Morgan Stanley also lost about US$20m apiece after UK pharmaceutical firm AstraZeneca effectively blocked the SKr69.4bn (US$7.5bn) buyout offer from private equity giant Advent and GIC for the Swedish biotech company also known as Sobi, the sources said. All three banks had provided a type of derivative called a contingent option that allowed Advent to lock in the exchange rate on a large chunk of the Sobi acquisition ahead of time, with the additional flexibility of allowing the firm to discard the hedge for no fee if the deal failed to close. Barclays held the largest exposure from the hedge, which was worth roughly US$3bn in total, one source said. The Swedish krona declined about 6% against the dollar in the three months between the announcement of the proposed Sobi acquisition in early September and its collapse, leaving the banks exposed to a sizeable FX move. Barclays, Morgan Stanley and Advent all declined to comment. Deutsche Bank and GIC did not respond to requests for comment. The scale of Barclays’ losses represents a black eye for Venkatakrishnan, a former risk manager who famously led a team that flagged the notorious “London Whale" credit derivative trades that inflicted around US$6bn of losses on his former firm JP Morgan. “Venkat”, as he is also known, headed Barclays’ global markets division prior to taking over the top job from Jes Staley in November and would almost certainly have had to sign off on the Sobi deal contingent trade, given the size of the position. Barclays had looked to ramp up its presence in deal contingent options significantly last year and became known for pushing more aggressive deal terms. The UK bank is now considering scaling down its presence in contingent options following the Sobi losses and has been looking to reduce its risk in other positions it holds, sources said. Rapid expansion The market for contingent options expanded rapidly last year amid record dealmaking activity with the announcement of US$2.1trn of cross-border mergers and acquisitions (a nearly 70% jump from 2020). That provided an important source of revenue for many bank trading desks in what was an otherwise sleepy FX market. Many banks favoured offering contingent hedges for PE-led takeovers, which historically have had a better track record of completing compared with corporate M&A, and industry veterans reported increasing signs of frothiness in this corner of the market last year. All this came against the backdrop of a 25% increase in average deal sizes to US$119m in the PE space, forcing banks to take down more risk – or share deal contingents out among rivals. Last year also saw a steep increase in PE deal failure rates for cross-border M&A to 18% – more than four times above the previous year and the highest level since 2016. That didn't stop deal contingent premiums – which are typically quoted as a percentage of the cost of a regular FX option – decreasing to between 20% and 25% of the equivalent option on many deals (or even below that range in some cases) as banks competed fiercely to win these trades despite an abundance of opportunities. In the most widely used type of structure, the deal contingent premium gets added on top of the forward FX rate to account for the extra leeway the client has to walk away from the hedge if the deal collapses. So the lower the premium, the cheaper the hedge. (The premium is only a fraction of the cost of a regular FX option because the acquirer can only drop out of the contract if the underlying deal falls thro
Pressure group Market Forces has criticised the role of HSBC and Standard Chartered in an upcoming US$10bn revolving credit facility for Saudi Arabian oil giant Saudi Aramco, which it describes as the "world’s biggest polluter", highlighting the increasing pressure on banks’ fossil fuel exposure. It described the two banks’ involvement as "hypocrisy" and out of line with their commitments to meet net-zero emissions targets by 2050, particularly as Aramco is planning to expand its oil and gas operations by the equivalent of 27bn tonnes of CO2 by 2030. Market Forces said that this was incompatible with the International Energy Agency’s "Net Zero by 2050" report, which said no new coal mines, coal plants or oil and gas fields can be built if the world is to meet the goals of the Paris Agreement to limit global warming to 1.5 degrees. “The fact that HSBC and Standard Chartered are in line to finance Saudi Aramco shows us just how hollow their ‘net zero’ commitments are,” said Mia Watanabe, UK campaigner at Market Forces. Aramco is tracking towards more than four degrees, according to MSCI’s Implied Temperature Rise tool, which describes the company as "lagging". The oil giant has committed to achieving net zero on direct Scope 1 and 2 emissions by 2050, but indirect Scope 3 emissions are the oil and gas industry’s biggest problem. Aramco’s expansion plans are equal to 4.7% of the world’s carbon budget to stay under 1.5 degrees of global warming, Market Forces said. Aramco did not respond to requests for comment. Rolling over? The new US$10bn loan refinances an existing facility that was agreed in 2015 and matures in March. There are 27 banks on the deal, led by global coordinators HSBC, JP Morgan and Riyad Bank. Standard Chartered is expected to be a joint bookrunner. The new loan is not a sustainability-linked facility and for many banks, it is business as usual for a longstanding and lucrative client that more than comfortably fits their traditional credit risk and return criteria. “Aramco has this revolver which has never been drawn in 20 or so years. It will not be used to fund a new oil site or for drilling. It would be crazy for us to just shut down the relationship and not provide the financing,” a loan banker said. But even conventional deals are running into ESG questions as banks increasingly consider whether clients’ carbon reduction plans are in line with their own net-zero pledges as interim 2030 targets loom, and some bankers are calling for ESG provisions to be added into the facility. “It is very likely that some basic ESG-related representations would need to be made on the refinancing. The original loan did not have any,” a second loan banker said. Banks are expected to announce a raft of new targets this year similar to Citigroup’s commitment in January for emissions in its energy loan portfolio to drop 29% by 2030 from 2020 levels, and SEB’s pledge in November to reduce fossil fuel in its energy portfolio by 45% to 60% by 2030 from 2019 levels. HSBC said it was planning to publish targets in its annual report on February 22 to align its financing for the oil and gas and power and utilities sectors with the Paris Agreement. StanChart declined to comment. Squeaking through High-emitting borrowers may be able to complete conventional medium-term loans without ESG criteria for now, but this is expected to become increasingly difficult in the next two to three years and may not be possible in the next refinancing round. Aramco’s loan is expected to have a maturity of at least five years, but the maturities of five-year deals with up to two extension options are becoming uncomfortably close to banks’ 2030 interim targets. “Maybe this is the last hurrah for certain sectors and clients to do deals without some really onerous ESG targets on them as the next refinancing will go beyond these
Barclays lost about US$125m on a complex currency derivatives trade in December linked to Advent International and Singapore wealth fund GIC’s abortive takeover attempt of drug maker Swedish Orphan Biovitrum, according to sources familiar with the matter, delivering a blow to recently appointed chief executive CS Venkatakrishnan and his reputation as a sound risk manager. Deutsche Bank and Morgan Stanley also lost about US$20m apiece after UK pharmaceutical firm AstraZeneca effectively blocked the SKr69.4bn (US$7.5bn) buyout offer from private equity giant Advent and GIC for the Swedish biotech company also known as Sobi, the sources said. All three banks had provided a type of derivative called a contingent option that allowed Advent to lock in the exchange rate on a large chunk of the Sobi acquisition ahead of time, with the additional flexibility of allowing the firm to discard the hedge for no fee if the deal failed to close. Barclays held the largest exposure from the hedge, which was worth roughly US$3bn in total, one source said. The Swedish krona declined about 6% against the dollar in the three months between the announcement of the proposed Sobi acquisition in early September and its collapse, leaving the banks exposed to a sizeable FX move. Barclays, Morgan Stanley and Advent all declined to comment. Deutsche Bank and GIC did not respond to requests for comment. The scale of Barclays’ losses represents a black eye for Venkatakrishnan, a former risk manager who famously led a team that flagged the notorious “London Whale" credit derivative trades that inflicted around US$6bn of losses on his former firm JP Morgan. “Venkat”, as he is also known, headed Barclays’ global markets division prior to taking over the top job from Jes Staley in November and would almost certainly have had to sign off on the Sobi deal contingent trade, given the size of the position. Barclays had looked to ramp up its presence in deal contingent options significantly last year and became known for pushing more aggressive deal terms. The UK bank is now considering scaling down its presence in contingent options following the Sobi losses and has been looking to reduce its risk in other positions it holds, sources said. Rapid expansion The market for contingent options expanded rapidly last year amid record dealmaking activity with the announcement of US$2.1trn of cross-border mergers and acquisitions (a nearly 70% jump from 2020). That provided an important source of revenue for many bank trading desks in what was an otherwise sleepy FX market. Many banks favoured offering contingent hedges for PE-led takeovers, which historically have had a better track record of completing compared with corporate M&A, and industry veterans reported increasing signs of frothiness in this corner of the market last year. All this came against the backdrop of a 25% increase in average deal sizes to US$119m in the PE space, forcing banks to take down more risk – or share deal contingents out among rivals. Last year also saw a steep increase in PE deal failure rates for cross-border M&A to 18% – more than four times above the previous year and the highest level since 2016. That didn't stop deal contingent premiums – which are typically quoted as a percentage of the cost of a regular FX option – decreasing to between 20% and 25% of the equivalent option on many deals (or even below that range in some cases) as banks competed fiercely to win these trades despite an abundance of opportunities. In the most widely used type of structure, the deal contingent premium gets added on top of the forward FX rate to account for the extra leeway the client has to walk away from the hedge if the deal collapses. So the lower the premium, the cheaper the hedge. (The premium is only a fraction of the cost of a regular FX option because the acquirer can only drop out of the contract if the underlying deal falls thro
South Korean construction company Hyundai Engineering has pulled a Korea Exchange IPO of up to W1.2trn (US$1bn), saying investors were not valuing the company properly. Bookbuilding ran from January 17 to 26. During that period, South Korea’s benchmark Kospi 200 Index dropped 6.9% in line with global stock markets. In addition to the poor market conditions, a tough new law on worker safety came into effect on Thursday in South Korea, prompting several construction firms to halt work on projects until after the Lunar New Year to avoid facing prosecution, local media reported. Sentiment towards the construction sector had already been affected by a construction accident in mid-January in the south-western city of Gwangju, which left one worker dead and five missing, according to the reports. Asian markets fell again on Thursday after the US Federal Reserve said it was likely to start raising rates in March and throughout this year to help tamp down high inflation. Fears also lingered over a possible Russian invasion of Ukraine. Pricing for the IPO was slated for Friday. Retail subscription was supposed to run from February 3 to 4, ahead of a listing on February 15. Hyundai Engineering was offering 16m shares (4m primary/12m secondary), or 20% of the enlarged share capital, in an indicative price range of W57,900–W75,700 each. The company planned to sell 55%–75% of the shares to institutional investors, 25%–30% to retail and 20% to an employee stock ownership plan. Selling shareholders included Hyundai Motor Group executive chairman Eui-sun Chung and honorary chairman Mong-Koo Chung. Established in 2001, the company is the plant construction and infrastructure affiliate of Hyundai Motor Group. Hyundai Engineering and Construction, the construction arm of the group, is the largest shareholder of Hyundai Engineering with a 38.6% stake. The group’s logistics arm, Hyundai Glovis, holds 11.7%. Goldman Sachs, KB Securities and Mirae Asset Daewoo led the float.
Pressure group Market Forces has criticised the role of HSBC and Standard Chartered in an upcoming US$10bn revolving credit facility for Saudi Arabian oil giant Saudi Aramco, which it describes as the "world’s biggest polluter", highlighting the increasing pressure on banks’ fossil fuel exposure. It described the two banks’ involvement as "hypocrisy" and out of line with their commitments to meet net-zero emissions targets by 2050, particularly as Aramco is planning to expand its oil and gas operations by the equivalent of 27bn tonnes of CO2 by 2030. Market Forces said that this was incompatible with the International Energy Agency’s "Net Zero by 2050" report, which said no new coal mines, coal plants or oil and gas fields can be built if the world is to meet the goals of the Paris Agreement to limit global warming to 1.5 degrees. “The fact that HSBC and Standard Chartered are in line to finance Saudi Aramco shows us just how hollow their ‘net zero’ commitments are,” said Mia Watanabe, UK campaigner at Market Forces. Aramco is tracking towards more than four degrees, according to MSCI’s Implied Temperature Rise tool, which describes the company as "lagging". The oil giant has committed to achieving net zero on direct Scope 1 and 2 emissions by 2050, but indirect Scope 3 emissions are the oil and gas industry’s biggest problem. Aramco’s expansion plans are equal to 4.7% of the world’s carbon budget to stay under 1.5 degrees of global warming, Market Forces said. Aramco did not respond to requests for comment. Rolling over? The new US$10bn loan refinances an existing facility that was agreed in 2015 and matures in March. There are 27 banks on the deal, led by global coordinators HSBC, JP Morgan and Riyad Bank. Standard Chartered is expected to be a joint bookrunner. The new loan is not a sustainability-linked facility and for many banks, it is business as usual for a longstanding and lucrative client that more than comfortably fits their traditional credit risk and return criteria. “Aramco has this revolver which has never been drawn in 20 or so years. It will not be used to fund a new oil site or for drilling. It would be crazy for us to just shut down the relationship and not provide the financing,” a loan banker said. But even conventional deals are running into ESG questions as banks increasingly consider whether clients’ carbon reduction plans are in line with their own net-zero pledges as interim 2030 targets loom, and some bankers are calling for ESG provisions to be added into the facility. “It is very likely that some basic ESG-related representations would need to be made on the refinancing. The original loan did not have any,” a second loan banker said. Banks are expected to announce a raft of new targets this year similar to Citigroup’s commitment in January for emissions in its energy loan portfolio to drop 29% by 2030 from 2020 levels, and SEB’s pledge in November to reduce fossil fuel in its energy portfolio by 45% to 60% by 2030 from 2019 levels. HSBC said it was planning to publish targets in its annual report on February 22 to align its financing for the oil and gas and power and utilities sectors with the Paris Agreement. StanChart declined to comment. Squeaking through High-emitting borrowers may be able to complete conventional medium-term loans without ESG criteria for now, but this is expected to become increasingly difficult in the next two to three years and may not be possible in the next refinancing round. Aramco’s loan is expected to have a maturity of at least five years, but the maturities of five-year deals with up to two extension options are becoming uncomfortably close to banks’ 2030 interim targets. “Maybe this is the last hurrah for certain sectors and clients to do deals without some really onerous ESG targets on them as the next refinancing will go beyond these
Consumer goods company Procter & Gamble took advantage of investor hunger for defensive credits amid turbulence in risk assets that has stifled issuance in the investment-grade primary market this week. Procter & Gamble, rated Aa3/AA-, raised on Thursday a two-part senior unsecured note made up of a US$1bn five-year and a US$850m 10-year, following the pattern of its previous debt raise when it raised US$2bn across five and 10-year senior notes last April. Price thoughts started at Treasuries plus 45bp area and 65bp area, respectively, before the bonds were priced at 27bp and 50bp over. Procter & Gamble's existing 1% 2026 senior notes, issued in April 2021, last changed hands at 15bp over Treasuries on Thursday, according to MarketAxess. The new offering could help refinance incoming maturities, with Procter & Gamble's US$1bn 2.3% 2022 senior notes due in February. Yet with a cash pile of US$11.5bn and little leverage, the company will not feel an urgent need to pay down debt. Procter & Gamble's strong financials were expected to be a big lure to investors against a cautious backdrop, sparked by the Federal Reserve's unwillingness to rule out an aggressive tightening path at the central bank's policy meeting this week, said investors. “When you see the market worried about volatility, it’s always nice to have a double A issuer market. It’s less of a credit worry,” said a banker away from the deal. The hawkish stance outlined by the Fed comes against heated inflationary pressures that drove December consumer price growth to an annualized rate of 7%. Supply-chain pressures and freight costs have cut into margins for consumer good companies like Procter & Gamble but it has continued to maintain its strong performance during the pandemic. "We do not expect much in the way of [new issue concessions] given PG’s conservative balance sheet and strong operating metrics, even in the face of recent inflationary headwinds that are pressuring margins across the space," said CreditSights analysts. For its fiscal second quarter Procter & Gamble reported net income of US$4.22bn, up from US$3.85bn a year earlier. Bookrunners were Deutsche Bank, Citigroup and HSBC.
Bellwether