Emerging Markets: Bond markets look to new frontiers despite rate rise fears
While US Fed rate rises and the ECB’s tapering of its QE programme could knock some of the froth off the top of exuberant EM debt markets next year, there will still be plenty of opportunities for debut and frontier issuers to raise cash in innovative ways. Virginia Furness reports.
Extraordinarily deep and liquid capital markets helped CEEMEA issuers to raise nearly $200bn of bonds in 2017 — a record year for volumes, but also a brilliant year for debut issuers. While higher funding rates in 2018 may lock some of the more obscure names out of the market, there are still new frontiers to explore.
Heavy investor inflows into the emerging market asset class helped support bond issues right across the full credit spectrum last year, allowing the likes of Tajikistan, Belarus and Iraq to raise new bonds at lower yields than ever before. Meanwhile, demand for duration prompted a flurry of longer dated bonds, most recently from Nigeria.
“2017 was fairly unique in this context,” says Samad Sirohey, Citi’s head of CEEMEA DCM in London. “We had a strong bid for both duration and risk as part of the hunt for yield. Fund flows, low volatility and a recovery in the commodity cycle enabled our clients to bring those products to market.”
But Sirohey warns that volatility will return to the market in 2018. “Issuers will have to be more nimble, and there will be more focus on strategy with respect to timing,” he says.
However, DCM bankers are confident there are new areas to explore in 2018, both in terms of products and issuers.
Uzbekistan is preparing the ground for its first sovereign rating, with a view to issuing a Eurobond in 2018. Emboldened by its neighbour Tajikistan, which issued a $500m 7.125% 2027 in September, drawing books of $4bn, Uzbekistan is said to be in talks with Standard & Poor’s.
Investor appetite for the credit is already strong, particularly among US accounts, which are preparing to set up fresh credit lines, according to a London-based DCM banker.
Other potential sovereign issuers mentioned in the same breath as Uzbekistan are Papua New Guinea, Burkina Faso and Nicaragua. But rising US rates may mean that the international bond markets could become too expensive for some issuers.
“If investors are charging anything more than 10%, you need to question the economic viability of the deal,” says Paul Greer, a trader of emerging market bonds at Fidelity in London. “You need to look at the country’s real and nominal growth, the use of proceeds of the deal, and whether it makes sense for them to go to Eurobonds if they can get concessional financing from the likes of the World Bank.”
While big sovereign debuts may be rarer in 2018, there is still new ground to be broken in terms of products on offer.
Nick Darrant, head of CEEMEA syndicate at JP Morgan, says that international local currency bonds are generating greater interest than before. Last year saw international trades in Russian roubles, Turkish lire and Georgian laris.
“A number of CIS states have been making enquiries about local currency products, as well as some African nations,” he says. “The lari trade was a taste of things to come for the adventurous yield hunter. It doesn’t require a full bull market but certainly a strong window for a couple of months.”
In the Middle East, which made up almost 50% of total CEEMEA issuance in 2017, project or secured bonds are likely to become more widely used, according to James Sadler, EMEA DCM at Bank of America Merrill Lynch in Dubai.
Abu Dhabi Crude Oil Pipeline, a wholly owned subsidiary and strategic asset of Abu Dhabi National Oil Co (Adnoc), set the tone with its $3bn secured bond in October last year.
“Gulf issuers are becoming increasingly sophisticated, as are their financing requirements; this is driving the focus on these more complex and bespoke products,” says Sadler.
“[Project bonds] would offer access to new pockets of demand, such as traditional infrastructure investors in Europe, the US and Australia — and frankly a double-A rated sovereign-owned entity with an offtake at government level is just the kind of risk they are looking for.”
Long duration bonds will also remain attractive, particularly if the US Treasury curve remains flat. Nigeria’s mid-November placement of a $1.5bn 30 year dollar bond showed that duration is very much on the table for lower rated issuers.
“The deal is a strong testimony that there is more to be done in Africa for the sovereigns,” says Cécile Camilli, head of CEEMEA DCM at Société Générale Corporate & Investment Banking in London. “We will be able to present the 30 year trade as clearly do-able.”