CEEMEA bond volumes were boosted in 2020 and 2021 as governments rushed to raise debt to finance the fight against the pandemic. At the same time, Western central banks pushed rates down via quantitative easing, meaning many investors sought out higher yielding assets – often to be found in emerging markets such as CEEMEA.
In 2020, $275bn of these bonds were printed, over $50bn more than the year before. In 2021, more than $240bn had been printed by the end of November.
In the last few years JP Morgan – top of the 2021 Dealogic CEEMEA league table – and Citi have consistently been the top two banks by volume of bonds printed. In 2021 their market shares have been well into double digits at 12.2% and 11.8% at the end of November, according to Dealogic.
Standard Chartered has come third in the last three years. While its market share is much smaller at 7.1%, this is still no mean feat given that it hasn’t focused as much on the CEE region, preferring the Middle East and Africa.
Tommaso Ponsele, co-head of CEEMEA DCM at Citi in London, says that whether market share can increase from these high points for the top houses will in large part be about how spread out the deals are and how big issuers believe syndicate groups need to be on bonds.
“There’s recently been growing recognition from clients that having four or five banks or more on a trade can be problematic, so we’re seeing more and more clients sticking to two or three or tiering their groups,” he says. “This can ultimately deliver some further market share consolidation towards the houses most dedicated to the space.”
Hussain Zaidi, Standard Chartered’s head of bond syndicate, west, in London says his bank can grab a larger share. “In the Middle East, Africa and Turkey we believe we can increase our market share and that overall volumes are set to grow through an increase in debut issuers,” he says. “In Africa, the bond business is predominantly sovereign issuance. The corporate and financial sectors are less tapped. Being physically on the ground in these countries we’re in a position to expand these segments further.”
The battle for EM bonds
Several bankers have noticed an uptick in competition after 2020’s EM bonds bonanza. Following years and years of disinvestment, cutting people and teams being merged, there has been a noticeable investment in talent of late.
There have been high-profile moves as banks have recruited experienced capital markets bankers. Among them, Nick Darrant moved from JP Morgan to Citi in 2020, then Alex Karolev from BNP Paribas to JP Morgan and Matt Doherty from Deutsche Bank to BNPP. Sergey Sudakov left BNPP for Morgan Stanley, to build a CEEMEA DCM team. BNPP responded by recruiting more staff for its CEEMEA syndicate and DCM operations.
Standard Chartered, for its part, made a big statement in 2021 by hiring Vitaliy Krekhovetskyy in October to its CEEMEA DCM team. After two years as Neftan’s head of debt financing, he was hired to break Standard Chartered into the CEE DCM business.
“From a league table standing position CEE has always been the missing piece for us,” says Zaidi. “We have a successful Middle East, Africa and Turkey business and an obvious objective is expansion so we’re now looking at opportunities in the CEE region.”
In a change for EM though, the increased competition across CEEMEA has not resulted in falling fees.
Ponsele says that, if anything, clients have been more focused on quality of service and delivery of the products.
“This is a sign of the development of the market as issuers become increasingly discerning,” he says. “There are much more important things on most issuers’ minds when picking between banks — and clearly when that includes the provision of bridge financing or back-up financing solutions it’s a different conversation.”
But one DCM banker says he has noticed an increase in “fee side letters” – something he says started in the CIS but has evolved over six years or so — as a way for issuers to reward “more qualified” banks without visibility to others in a syndicate.
Post-Covid, will EM catch cold?
Bankers, issuers and investors are all waiting to see how volumes will stand at the end of 2022, once central banks withdraw or shut down stimulus programmes and deal with inflation —and see the impact of the Omicron variant.
As US Treasury rates climb higher, EM yields are expected to follow, which may make the market less attractive to borrowers, or indeed investors who feel they are trying to catch a falling knife. But many believe volumes will hold up regardless.
“In the last decade even as yields have gone up and down, we haven’t seen a change to the trajectory of EM issuance volumes,” says Nick Darrant, co-head of EMEA DCM syndicate at Citi in London. “It’s a natural evolution as, by definition, emerging market economies are growing. It’s not always linear but the direction of travel is not in doubt.”
Iman Abdel Khalek, Ponsele’s co-head of CEEMEA DCM at Citi, agrees. “Volumes are going to be even bigger in 2022,” she says. “We are in a post-Covid world where companies want to demonstrate to shareholders their ability to grow: this implies both capex and inorganic growth projects, which need to get financed.”
Stefan Weiler, head of CEEMEA DCM at JP Morgan in London, says issuance volumes will not be materially different in 2022 versus 2021, despite the more challenging markets that could emerge from rate rises in the US.
“EM will continue to receive a greater allocation in global fixed income portfolios and the close to $500bn of redemptions from EM will help underpin issuance volumes,” he says.
Innovating and expanding
The issuance is not expected to come just from refinancing though. Despite EM bond markets developing over the last 10 years, there are still several sectors, countries and regions from which debut deals and new products are expected.
“The corporate market has been a huge area of growth in the EM primary market this year, and it feels like the corporate wave is here to stay,” says Ponsele. “Banks have been retreating from loan funding and EM clients are looking to diversify funding sources. This has been positive for us as it’s an area we have been focused on for some time: we feel there are maybe only two to four banks that have a similar level of corporate high yield experience.”
Abdel Khalek agrees. “The way regulation has gone it’s become very expensive for banks to hold five year term loans so it’s in turn become much more expensive than bonds as a source of debt,” he says.
Higher oil prices may also have an effect. “It’s helpful for GCC issuers,” says Zaidi. “It increases liquidity for them and improves their credit fundamentals. For several issuers it could provide an opportunity to enter the capital markets for the first time.”
There is also, in CEEMEA as elsewhere, an increasing focus on environmental, social and governance issues. That has already been in evidence in the new kinds of bonds these issuers have been printing.
“In the GCC, transition financing is, of course, a big topic and we’ve seen a few issuers — like Apicorp [in 2021] and Etihad [2020] — providing a blueprint for other issuers,” says Zaidi. “There’s more and more uptake from issuers and more frameworks being established. As a bank we’ve been advising that in the future ESG concerns will be paramount. It’s taken some time though for issuers to put proper, robust frameworks together though that investors appreciate.”
Weiler says the ESG space will only grow in popularity.
“Issuers are aware that they will face increasing scrutiny from investors on ESG even when printing non-ESG wrapped deals,” he says. “Borrowers are aware that a positive ESG story will benefit the marketing of a transaction and it is undisputable now that green or sustainability-linked bonds will add incremental demand and provide pricing benefits.”
But EM faces its own challenges in becoming more ESG-investor friendly.
“It’s important not to view EM through a first world ESG lens,” says Darrant. “You have to consider it on its own merits. Less wealthy nations have different priorities to juggle. Though there is some lag in take-up on these kinds of products the issuers are taking those concerns seriously and they know it’s only going to get increasing focus from investors. It’s also important for everyone involved to consider the potential moral hazards in encouraging ESG approaches for some of these issuers, and incentivise these borrowers appropriately.”
He adds: “You don’t want an issuer forced to choose between going green and paying to improve educational standards or in some other way lifting their country out of poverty.” GC