Bond Bonanza Raises Threshold for New Emerging-Market Debt Sales

LAGOS (Capital Markets in Africa) – Emerging-market issuance is losing its fizz and bond investors are divided in their appetite for risk after a record year for hard-currency debt.

With about $290 billion in placements by borrowers from developing nations so far this year, volumes have been slipping since the second week of April when a slew of multi-tranche deals from Saudi Arabia, Qatar and Egypt accounted for half of the $50 billion of bonds that priced. Sales have dropped to $14.5 billion in May so far compared with April’s $90 billion record, according to data compiled by Bloomberg.

Fidelity International, Amundi Asset Management and Vontobel Asset Management all agree that a surge in issuance by lower-rated governments such as Angola, Ghana and Argentina contributed to the recent emerging-market selloff as a climbing dollar battered appetite for riskier assets. There’s less consensus on whether the market will remain open to new debt from high-yield names.

“Bluntly speaking, I would say the market is closed,” said Sergey Goncharov, a Zurich-based portfolio manager at Vontobel Asset Management, who helps oversee 3.1 billion Swiss francs ($3.1 billion). “A strong issuer can come and offer some hefty premium, but in reality most issuers will just take a wait-and-see approach and will wait for late June or even September.”

The rise in U.S. yields coupled with a strong dollar sparked flows out of emerging-market bond funds, leaving investors with less cash to buy more debt in the primary market. International investors withdrew over $6.1 billion between April 16 and May 4 from emerging market debt funds — bigger outflows than when the market was spooked by the so-called taper tantrum in 2013, according to the Institute of International Finance.

“If you’re a high-yield borrower and if you haven’t issued already this year, it could be argued that perhaps you missed the window,” said Paul Greer, a London-based money manager at Fidelity International, which oversees $326 billion in assets.

The glut of long-term issuance by lower-rated sovereigns is a recent phenomenon and emerging-market funds are struggling to digest the additional risk from these bonds, potentially hindering placements through the rest of the year, Greer said.

“The threshold for us to buy is higher than it would have been six months ago,” Greer said. “The markets are under pressure and total returns have been hit, risk premium is going up.”

Junk Borrowers
Hard-currency borrowing costs for developing-nation issuers have climbed this year to above 5.5 percent, the highest level in more than two years, Bloomberg Barclays indexes show. Angola and Ghana came to market during the rout and offered the highest yield this year for a sovereign.

Other investors interpret the fact that the two nations — both ranked six levels below investment grade — were able to obtain long-term financing as an optimistic sign of the market’s expanded depth and capacity to absorb more emerging offerings. Though it had to offer a premium, South Africa managed to sell $2 billion of Eurobonds this week, even as emerging-market assets resumed their slide.

“There is no sign of fatigue,” said Anders Faergemann, a London-based senior fund manager at Pine Bridge Investments which oversees $90.5 billion. “As long as the market views that the issuer will repay them over time, I don’t see why they could not come to the market.”

Despite the slowdown in sales, JPMorgan Chase & Co. predicts the highest volume of sovereign issuance after 2017, according to Stefan Weiler, the head of debt capital markets for central and eastern Europe, the Middle East and Africa. JPMorgan is the third-biggest underwriter of emerging-market debt this year.

Investors will judge placements on a stand-alone basis in the coming months and won’t reject deals based on the global backdrop alone, according to Amundi, Europe’s biggest money manager.

“It really is a question of valuations and fundamentals,” said Sergei Strigo, co-head of emerging-market debt and currencies at Amundi, which oversees about 40 billion euros ($48 billion) in emerging markets. “If we believe that there is value in one bond or the other, we have the ability to invest.”

Source: Bloomberg Business News