Emerging market loans bankers are not looking back at last year fondly. Their market bore the brunt of lenders flight to quality, which inevitably favoured the strongest credits in western Europe over weaker borrowers elsewhere.
The numbers for 2009 are poor. By the beginning of December, volumes for the Middle East and Africa stood at just $51bn, down 55% from the same period in 2008, according to Dealogic.
Club transactions dominated, with borrowers unable to sell their deals beyond their core relationship groups. More damagingly, emerging markets were struck by a spate of restructurings, most notably in the CIS, Saudi Arabia, Kuwait and, late on in the year, Dubai.
Despite all this, many are confident the worst is behind them. "Overall activity should be higher this year than in 2009," says Hasan Mustafa, head of syndicate for CEEMEA at Royal Bank of Scotland in London. "I believe we saw the bottom last year."
The evidence of a recovery is plentiful. Almost all the big deals from the second half of 2009 gave reason to cheer.
Sonangol, the Angolan oil company, increased a $1bn facility to $1.5bn in September, making it Africas biggest of the year; the same month MDM Bank became the first Russian financial institution to tap the market; and Tatneft, the oil and gas group, raised $1.9bn of commitments between August and November in the first widely syndicated deal from Russia. Even Hungary, shut out for most of the year because of deepening economic problems, got itself on the map with Mol, the oil and gas company, and OTP Bank both issuing.
There was progress elsewhere, too. Aluminium group Rusal completed a $17bn restructuring, the biggest in Russias corporate history, in early December. Bankers said this was a prerequisite for ensuring other metals and mining groups from the country had access to the market this year. And Kuwaits Global Investment completed a $3bn restructuring in the same month, which bankers hope will be a model for the regions other defaulted borrowers.
The exception to the good news was Dubai Worlds call for a standstill on some of its debt at the end of November. In early December, there was little clarity about what the holding companys restructuring would entail or how it would affect Dubais debt markets. But it is almost certain to halt the recent pricing falls in Dubai, at least for the next few months.
Take your implicit guarantee
The crisis could also have a profound effect on lending to government-related entities across the region. Such companies have long emphasised the implicit guarantees they have from their respective governments, thus pushing their funding costs below what they would be on a standalone basis. That could cease, however, and those entities with weak underlying businesses will be hit hardest. "People will now consider whether they want an actual state guarantee when lending to quasi-sovereigns in return for sovereign-based pricing," says David Pepper, head of CEEMEA syndicate at WestLB, in London. "At least in the short term, such borrowers are likely to have to adapt to an environment of greater transparency and more rigorous credit analysis."
By the end of the year, however, bankers were confident that the immediate crisis would not spread far beyond Dubai. "I dont think it will become a contagion, even within the United Arab Emirates," says Mustafa. "The ability of borrowers [from Abu Dhabi] such as Etisalat, DEWA and Mubadala to raise debt should not be affected, albeit at pricing which may be wider than we were pre-Dubais crises."
He adds that some countries could even gain from Dubais woes: "Beneficiaries are likely to be Abu Dhabi, Qatar, Turkey and even Russia as liquidity that was going to name lending deals in the region will look for a safe home in credits which are strong on fundamentals."
Many bankers have high hopes for central and eastern Europe in 2010. This is especially true of countries like Poland, Czech Republic, Slovenia and Slovakia, given their strong economic performances. Other factors, such as the latter two being eurozone members, also help ensure they are highly favoured by lenders.
Their borrowers clearly benefit from this. Slovenias Nova Ljubljanska Banka helped re-open the regions financial institutions market in June when it signed a Eu405m deal, for example. Cez, the Czech utility, was set to get pricing very similar to German blue chip E.On, before it decided against a loan in favour of a cheaper bond in October.
"Theres still a tendency for a flight to quality," says Tim Ritchie, global head of loan syndicate at Barclays Capital, in London. "The stronger economies and the solid, more international businesses within them are the ones getting the most interest from lenders."
While that trend is set to continue for the most part, few countries can be ruled out altogether. Hungary was consistently talked down by most bankers before Mol and OTP issued. And Ferrexpo of Ukraine a country whose five year CDS was as high as 1,350bp in December signed the only metals and mining deal from the CIS last year.
Russia, meanwhile, is a country that excites loans bankers like no other. Although issuance crashed from a record $90bn in 2007 to just $6bn by mid-September last year, its oil, gas and mineral riches ensure it will always attract lenders. "Russia is simply too big for most international banks to ignore," says Roland Boehm, head of loan debt capital markets at Commerzbank, in Frankfurt. "The potential for business there remains very large."
Many bankers also say that Russias debt markets have come through the crisis better than others in the region, with no banks defaulting, unlike in Kazakhstan and Ukraine. "People tend to focus only on the bad news from Russia," says Boehm. "But there has been a lot of good news lately. Russia should be seen positively compared to many of its neighbours."
Others echo this. "Investors are a lot more comfortable with Russia than they were a year ago," says Neil Barclay, head of European corporate loan syndicate at Barclays Capital, in London.
Russias market will thus be one to watch. "The top tier Russian corporate borrowers will undoubtedly be in the market," says Pepper. "Its just a question of whether they get pre-export financings or, as widely anticipated, theyll be able to issue unsecured deals. My guess is that the likes of Lukoil, Gazprom Neft and TNK-BP will be able to take the latter route."
Russia should also manage to move beyond oil and gas. Thanks to Rusals restructuring, miners and metals groups will probably make a comeback. And financial institutions, especially the biggest or the state-owned ones, should face little difficulty.
Turkey is almost certain to shine again this year. Its financial institutions, largely unscathed from the subprime fallout and able to offer their banks plenty of ancillary business, borrowed throughout 2009, gaining ample commitments for their one year rollovers. Their benchmark pricing, which narrowed from an all-in yield of 250bp in April to 200bp by the end of the year, is set to tighten further, say bankers. Many expect it to fall to 125bp-150bp by the end of 2010.
Turkeys corporate borrowers, traditionally far less active than its banks, are likely to be busier, taking advantage of a level of local liquidity that few other emerging markets can boast.
Africa remains on the loan markets periphery, with issuance far below that in the Middle East and eastern Europe. Big, dollar denominated deals are usually confined to a handful of state-owned companies able to structure pre-export financings, such as Sonangol and Ghana Cocobod.
But while that is set to continue, there is a growing trend of local currency deals, especially from telecoms companies. Hiren Singharay, head of syndications for Europe, Africa and South Asia at Standard Chartered in London, says that such loans used to be restricted to South Africa, but increasing affluence across the continent and strict rules preventing capital flight are making them popular elsewhere.
"Local investors cannot take their money abroad to buy fancy structured products like CLOs, CDOs, subprime or Dubai debts," he says. "It has to be kept in their home currency.
"Loans pay more than savings accounts and are safer than equities. Thats whats driving cash into local currency loans. Its a new frontier."
Typical of this was MTN Uganda, which raised a $100m corporate loan, in October, the countrys biggest ever, with 80% of the commitments being in shillings.
One eye on the bond markets
Emerging market loans specialists will be watching bond markets closely this year. While there are examples, such as Cez, of borrowers shunning one in favour of the other, most insist that bond and loan markets work together, not in competition. "The bond market has eased the pressure on the loan market," says Boehm. "Its absolutely to our advantage that is stays open."
Most importantly, bonds could lift the burden of banks having to provide long-term maturities, especially those of more than five years. "Tenors are still restricted for borrowers seeking bank debt," says Barclay. "So bonds are the most viable option if theyre looking for long maturities."
Banks are clearly still cautious about emerging markets. Lending is likely to be restricted to borrowers with the strongest credit profiles, while short tenors and high pricing will remain.But after the nadir of 2009, a comeback is the least bankers expect. "The loan market will be back with a bang this year," says one banker. "It will surprise a few people."