Rising rates are terrifying emerging market investors, who see the potential for huge losses when buying even the safest paper. But although we can expect a tougher backdrop for printing new CEEMEA bonds in the coming year, especially if the Omicron variant takes off, from the results of our EM bond market survey it is clear that capital markets bankers are expecting bond volumes to be stable in 2022 and maturities to remain similar.
As well as refinancing deals, sharp growth is expected in some areas. The net supply of CEEMEA bonds is expected to increase, as is usual, despite a broad expectation that there will be long periods of stalled new issuance.
“We’ve passed the point where new sovereigns coming to the market will be a big theme in EM anymore — though you do get the occasional one like the UAE [United Arab Emirates] trade we brought this year,” says Nick Darrant, co-head of EMEA DCM syndicate at Citi in London. “The corporate market is where the new business is going to come from as companies grow in size and so does the perimeter of what investors will buy.”
Hussain Zaidi, head of bond syndicate, west, at Standard Chartered in London, expects volumes to pick up in Africa over the next year, while GCC supply is expected to be more or less the same.
“From Turkey we also believe there will be a continued uptick across all sectors, in line with the growth in volumes we saw this year where the market saw issuances rise 67%,” he says. “Much of the growth across MENA, Africa and Turkey is expected to be driven on the back of weakness in volumes in the last half of this year. Increased market volatility has shifted a considerable amount of paper to next year… We have strong visibility [of] the pipeline coming to market early next year and we expect the first quarter to be significant.”
Our survey respondents are evenly split between those who think it will be business as usual for sovereigns frontloading supply and those who think that there will be an extra push to do so.
Bankers also say they expect fees for bonds to remain the same. But several have indicated to GlobalCapital that the structure of bond mandates is evolving.
“On syndicates we’re seeing more differentiation between global co-ordinators and bookrunners,” says Zaidi. “Bookrunner groups remain large though. With sovereigns tending to do multiple trades now rather than big jumbos, we’re seeing fewer bookrunners on these because there are more trades to go around.”
Risky business
As rates rise and EM yields are lifted, there is increasing caution from investors around whether a string of defaults are going to follow from issuers that cannot afford to refinance their debts.
But our sellside survey respondents are more optimistic. Almost all say they are not concerned about a rise in default rates, believing that even if this does happen they do not expect it to affect investor sentiment towards EM broadly, and as such it is unlikely to affect dealflow.
“Rising rates are always a key worry for the EM asset class and we can probably also expect certain idiosyncratic events in some key markets, but as recent history showed that doesn’t necessarily mean contagion,” says Stefan Weiler, head of CEEMEA DCM at JP Morgan in London.
Iman Abdel Khalek, co-head of Citi’s CEEMEA DCM team agrees, saying that it is a historical phenomenon that investors look at EM as one homogenous asset class.
“We may continue to see discreet events of distress or even default,” says Abdel Khalek. “But thankfully the market has been able to differentiate in a way that limits risk of contagion to the broader asset class. The rates environment I think is the only aspect that carries common risk to EM as a whole.”
Somewhat understandably, respondents say they hope that any events of default will still be few and far between.
“There haven’t been many defaults in the region and we should see credit stories improve as markets open up,” says Zaidi. “So for me the risk of rising defaults is not a huge concern in terms of the continuation of the primary market.”
Certainly, in our survey, conducted before the Omicron variant arrived, the responses suggest that credit ratings are expected to move very little.
Darrant says he sees the theme in 2022 as a move to a moderate yield environment, not a high yield environment.
“We are going to see the cyclicality of rates overlaid on to the market and there may be periods of adjustment,” he says. “But we’ve already seen this play out in the last few weeks and investors have been quite sanguine about the moves.”
Eyes on the NIPs
As the US Federal Reserve tapers its bond market help over the next year, bankers, investors and issuers expect US Treasury yields to rise, and EM yields with them. But how EM spreads will react is more in doubt.
Two thirds of our respondents say, rather optimistically, they expect that spreads could come down, but by less than 20%, though a third think that they will go up.
However, in preparation for the inevitable rise in yields, investors at the end of 2021 were baying for higher new issue premiums to counteract some of the effects of the Treasury volatility. In the autumn they did rise, but new CEEMEA deals still struggled in the secondary market after pricing. Investors were becoming more and more selective as year-end approached and were asking for even higher concessions.
“New issue premiums have been elevated since the Evergrande situation in September and we’ve had this focus around inflation,” says Darrant. “But already they’re coming down, though I expect them to remain moderately elevated into year end. When we come back in January we’ll just have to take it from there.”
There is hope for issuers that with a clean sheet and fresh inflows, investors will be more willing to take risks in 2022.
“New issue concessions have been slightly higher but what they will look like at the start of next year will depend on the inflows and how the trades are performing in the secondary market,” says Zaidi. “That’s going to be closely scrutinised and if we see an outperformance, new issue premiums will come down — they won’t necessarily be continually elevated.”
ESG at the fore
As ESG is predicted to become bigger business, banks are in a race to showcase their abilities in this arena, busy building teams specifically geared towards it.
“We have a green team within our capital markets business and recently made a hire for it in London, but we also have ESG champions in each and every geography,” says Zaidi. “It helps that we drove the early ESG deals which opened this market because you are then involved in the investor feedback and know what has worked. It positions you to better advise our clients and thereby bring more structures and better structures to market. If you weren’t directly involved it’s hard to advise issuers on what is the optimal approach to the ESG market. As a result, this year we were able to drive ESG issuance volumes across MENA, Africa and Turkey by 38% and expect 2022 to be an even more robust outcome.”
Weiler says that JP Morgan “of course” has a global ESG strategy and is continually making investments in that. “At JP Morgan, I also have someone directly in my team dedicated to ESG,” he says. “Given the dealflow of this type now, with around 25% of deals having an ESG-wrap, it’s become a necessity to serving our clients in a first-class way.”
Despite that enthusiasm though, in our survey, the large majority say that even as ESG becomes more of a concern for funds, they are unsure as to whether we will see substantially more funds refusing to buy bonds from fossil fuel producers and other polluting sectors next year.
The return of the roadshow
Before Covid-19 shut down international travel in 2020, global roadshows were a very common part of the process of printing a CEEMEA bond. Some issuers had become frequent enough borrowers that they felt investors knew their story well enough to print without physical meetings, but these were the exception, not the rule.
Some issuers and bankers however are itching to rack up the airmiles again and are eying 2022 as the year for takeoff.
“Investors are comfortable with virtual roadshows but we’re hearing that in first half of 2022, several issuers would prefer to meet face to face,” says Zaidi. “Issuers perceive that the dialogue is more robust versus virtual and their credit stories can be better explained, especially for debuts. But it’s going to depend on how enthusiastic investors are to attend those meetings.”
Weiler says that “face-to-face meetings with investors will be beneficial for some, but certainly not all issuers”, but other bankers caution that virtual meetings do offer some advantages over physical and that issuers would be wrong to assume in-person is always better.
“Investors have embraced virtual marketing wholeheartedly and the reality is that in a very busy week, such as we saw in mid-November, they would struggle to process volume of supply if they had to physically travel to meetings rather than click a button from a desk,” says Abdel-Khalek. “I think the key going forward is going to be to give investors the choice where possible.”
Others agree. “A lot of issuers love that they can save time by doing virtual roadshows and so get deals done faster,” says Tommaso Ponsele, Citi’s London-based co-head of CEEMEA DCM. “Others want to be out on the road and see value in that. I think in 2022 we’re going to see an increasing combination of the two approaches, but the prevalence will remain with virtual meetings.”
Omicron might just increase that prevalence. GC