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Unconventional EM issuance has its limits

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Emerging market bond issuers have been finding ever more creative ways to secure funding, issuing taps and private placements in recent weeks. It has been a remarkable feat in some instances but borrowers must be careful not to overuse these tricks

In recent weeks, several CEEMEA borrowers have pulled off some unconventional trades.

Hungary printed a $400m privately placed tap of a global bond, generated through a reverse enquiry, following a similar trade for Romania earlier in the summer.

Slovenia’s NLB pivoted from a public note with several banks on it to a deal backstopped and led by just one of those banks, issued at a higher yield.

And Turkey on Friday sold $2bn, using a $1bn anchor order, by tapping the $1.5bn 9.875% January 2028s it issued in early November.

The notes have been cleverly done with the issuers ultimately securing funding that they otherwise may have struggled to tie down. But issuers may find they can only go to this well so many times.

Turkey, for example, may have irked the investors in its original November note by bringing a tap of such grand size so shortly after the original print, and with a double digit new issue premium attached that would have undoubtedly taken some of the juice out of the bonds in trading.

When Hungary quietly printed its note it faced accusations from some investors that it was trying to escape scrutiny on its ESG practices by not offering it up to a wider group of buyers — though the AKK fervently denied this was the case.

And NLB created furore by annoying the group of banks on its deal that it subsequently fired by bringing a note wider than had originally been suggested.

After the last year’s volatile pricing and difficult access for EM issuers, it is easy to make the case for these kinds of deals. Money in the bank is better than nothing.

Investors might be a little cross that they weren’t shown a particular offering as they would like, or that a recent deal is now much bigger than the one they thought they were buying into but this is the rough and tumble of markets that participants sign up to.

But some issuers it seems have been wooed by convenience of these types of deals and the pricing security that they bring, avoiding any potential messy execution problems in the wider market.

Sources close to Hungary, for example, said it is keen to tap bonds through private placements rather than issue new privately placed instruments where possible.

But borrowers need to remember that investors value transparency. They will accept the odd trade as a necessary evil in a tough year but keep at it and they are likely to increasingly punish issuers in pricing when they do return to the public market — and perhaps even in private pricings.

Investors have said they would question, when next offered a public bond, why it is an issuer felt the need to go down the route of a private placement. They will be wary of borrowers which regularly increase the sizes of bonds by large amounts, putting pressure on their holdings.

There is a sour history of emerging market borrowers in the private placement market that has not been forgotten — Mozambique, Angola and Tanzania among them.

Investors are in a forgiving mood after a rotten year for EM as an asset class and the disgruntled are in the minority. But more dissenting voices will join theirs the more borrowers circumvent conventional public market issuance. That will serve neither issuers nor investors.