International lenders fear a further decline in the EM loan market, which has seen year-to-date volumes decline 62% from 2017, will trigger a rally in bond issuance.
A combination of a dovish US Federal Reserve and the inclusion of various EM borrowers into key indices has made bonds a cheaper way to raise funding.
“The determining factor for borrowers is essentially pricing," said Mohammed Khnifer, senior DCM associate at the Islamic Corporation for the Development of the Private Sector (ICD). "As we speak right now, the fixed income approach is the right one."
But opportunistic financing in the bond market will not cultivate the long-standing relationships with lending banks that have carried borrowers through crisis after crisis. Emerging markets borrowers, which are naturally more susceptible to political and economic volatility, have historically found loans to be a more reliable source of funding.
Investors react to headlines, but bank relationships tend to be stickier.
Turkey is the perfect example. Despite the currency crisis that rocked the Turkish economy and sovereign bonds last August, international lenders remained committed to funding the country's banks with which they have long-established relationships.
While investors sold Turkish sovereign bonds as fast as they could in the run-up to the local elections in March, lenders held steady, even providing Turkish borrowers with tighter margins on their semi-annual refinancings. Secondary loan market spreads widened only a little.
Turkey is not the only story of resilience. In 2015, one year after US and EU sanctions had been applied to Russia, lenders showed their commitment to borrowers, providing $6.8bn-equivalent of funding in loans to Russian credits. Bond investors provided Russian borrowers with $6.1bn.
In 2016, once capital markets found their feet with sanctions, lenders provided Russian borrowers with $32.3bn-equivalent of funding, while bond investors provided a mere $16.5bn.
The primary advantage of a bond issue for some EM borrowers is a longer tenor, but amend-and-extend deals are becoming increasingly common in the loan market, effectively allowing borrowers to squeeze in tighter pricing on longer financing without enduring yet another origination process.
For some borrowers, tapping the bond market is simply about diversifying creditors. But those drawn to the bond market would do well to remember how often loan funding is open to them when the bond market is not.
Unlike the credit investors who sell at the first sign of a dubious headline, bank lenders have proved time and again they can be relied upon as a consistent funding source. Borrowers' banking relationships should be treasured and nurtured.