Emerging market bankers state the importance of a sovereign curve like a mantra — a liquid curve, they claim time and time again, helps corporates and banks from the country more easily access the market. It is said so often that this principle has almost become a platitude.
Certainly Kazakhstan’s borrowers have trundled along fine without it for years – its last Eurobond was printed in 2004 and matured in 2007. The country’s 100% state-owned corporates such as oil and gas company Kazmunaigas and rail company Kazakhstan Temir Zholy instead acted as a proxy for that curve.
Some expected selling in those names on the arrival of the sovereign — which there was when the sovereign roadshow was announced — but since guidance for the sovereign was released and tightened on Thursday, the corporates also tightened by 15bp. High demand of over $11bn at the initial guidance stage for the sovereign re-priced the outstanding state corporate curves.
Perhaps hoping for this final result, lead managers doggedly insisted that investors consider the credit in relation to other emerging market sovereigns such as Azerbaijan and Brazil, rather than pricing off the liquid curves of the state-owned corporates. That gave them much more flexibility to ratchet in pricing once initial guidance was out rather than having investors fixated on what something like the Pemex to Mexico spread looked like.
The value of experienced lead managers which could hold firm in this approach was notable — their stubbornness has resulting in future savings for the whole country, not just the sovereign.
Kazakhstan has provided a strong example to back up the theoretical mumblings of bankers about the need for a strong sovereign curve. Such a strong case in fact that treasurers at KMG and KTZ may well be wondering why it has taken the sovereign so long — though whether the country could have managed the same result in another year when Russia dominated the CEEMEA market is up for debate.
New EM countries dragging their feet about providing a liquid benchmark for their banks and corporates should take note.