Even as $1.4bn flowed out of emerging market mutual funds last week, Russia priced a Rb40bn euroclearable bond. The feat demonstrated that in spite of a haemorrhaging of cash from EM, demand remains strong for some credits — and for local currency issues.
Even taking into account swap costs, it is clear that Russia's rouble bond came more than 15bp inside where the sovereign could have priced a new dollar bond. Investors were willing to take a more expensive deal from the country in order to get the rouble exposure, such was the demand for local currency risk.
To some extent, this was expected. A Rb30bn euroclearable note from Russian Agricultural Bank in March last year was also priced inside its dollar curve. But that was last year, when the flow of money into emerging markets looked unstoppable, driving yields on emerging market credits further and further down.
Not so now. With emerging market funds now leaking the hot money that came in last year, the crisis in the Middle East is having an effect on risk appetite. But Russia’s deal is the kind of issue that still appeals to those core emerging market investors that got comfortable long ago with the concept of political turmoil across the broader asset class. More than that, it plays precisely to their pleas for more local currency issues.
Bankers and borrowers will have to beware of reading too much into Russia's deal, however. That issue got away — helped, no doubt, by an eye-catching yield of 7.85%. But it was smaller than some in the market had expected. A flood of EM bond issues would still prove difficult for syndicate officials to price as even dedicated EM investors are likely to be buying more discriminately than at the end of last year.
After a brief visit to the more exotic parts of the debt market, some buyers have fled. But issuers can be fairly certain that core emerging market investors will still be receptive to the right terms. The key is to keep ambitions sensible. Basing deals on last year's inflated investor base would be asking for trouble.