Don’t judge an EM bond by its cover (ratio)
We can’t know yet whether borrowers are right to issue in tricky markets
For the more youthful EM bond participants out there, 2022 has been a bit of a culture shock. For years, the job has sometimes felt like it comprised putting a deal on a screen, watching it fly, then jetting down to Bogotá for a closing dinner at a Colombian pop star’s bar. Years of easy monetary policy have conditioned bond issuers to idyllic conditions.
Now they are dealing with books that barely cover target deal sizes, the highest new issue concessions in a decade, and plenty of deals trading down on the break. Then there’s the hard part: managing clients’ expectations.
A year ago, anyone offering a double-digit new issue concession was “paying up”. Today, that phrase has lost all meaning: if you get the deal done, you’re happy to take the money and run.
Still, some admit to feeling the sting when they turn to markets with a top-ranking issuer and investors barely bother to pick up their pens. If Mexico — the king of EM issuers — offering 25bp on a smaller than expected euro deal on Monday was a surprise, when it traded down 15bp on Tuesday it really did catch the eye. Then Mexican government-owned utility CFE offered as much as 50bp the next day. Those eyes were now watering.
Yet this is not about banks getting it wrong with their advice to clients. DCM and syndicate bankers must not fret. There is not an emerging markets sell-side institution out there that has not had to face difficult conversations with a borrower after a deal did not go as planned this year. You are not alone.
Instead, take in the soothing tones of British philosopher Alan Watts telling the story of the Chinese farmer and his runaway horse. As Watts concludes, “you never know what will be the consequences of a misfortune”, nor of good fortune.
So should CFE have been willing to pay so much or should it have waited? Should CSN — one of the most popular and fastest-recovering credit stories in Latin America — have been in the markets last Thursday and had to whittle down the size of its liability management exercise?
GlobalCapital, of course, does not have the answer. But we do know that this is no time for hand-wringing about new issue concessions. And downsizing deals may feel awkward, but that anything is better than nothing. The countless EM corporates who DCM bankers say have abandoned issuance plans for now may have saved face, but have they saved money?
Only at the end of what is sure to be a very tough year will we know whether these issuers were right to pay up.
There is still a possibility of a miraculous recovery in sentiment, or a rates rally out of nowhere, and those who waited will feel a certain smugness. But it is only that — a possibility. Moreover, for funding officials, 11 months is a long time to not be sleeping soundly because you don’t know if you’re able to complete your financing plan.
Emerging markets have always faced challenges raising financing; they are, sadly, pretty much the lowest rung on the fixed-income ladder. Comparisons to last year are hardly useful. It’s time to go back to basics, turn over every stone to find willing buyers, and make sure the money is there when it’s needed. Quibbling over numbers that essentially only matter to the small world of primary debt capital markets participants is a secondary concern.