The only way is up for CEEMEA bond markets
After a calamitous year in EM bonds, market participants are wary of predicting how the next 12 months could play out. Few foresaw the war in Ukraine — and even fewer the Covid pandemic, which influenced volumes for the two previous years. But there is some hope of normalisation in 2023, as GlobalCapital’s poll of bankers and investors shows. By Francesca Young.
There is a sense that the only way is up after an exceptionally poor year in CEEMEA bond volumes. Only $116.5bn was printed in 2022 through to mid-November, compared with $257.6bn for the full year in 2021.
“CEEMEA bond volumes in 2023 will be materially better, but it’s important to remember that 2020 and 2021 were abnormal years,” says Alex Karolev, head of CEEMEA syndicate at JP Morgan in London.
“The hope is, though, that we will return to normal volumes of about $150bn-$170bn — maybe not for 2023, but in years thereafter.”
GlobalCapital’s survey of senior DCM bankers shows that for 2023, nearly half of the market, like Karolev, expects an overall boost in CEEMEA volumes of between 20% and 50%.
Within the expected growth in bond volumes, the boost each sub-region is expected to receive is unequal, though, and this analysis suggests the total increase may be to the lower end of the range. Volumes of Middle East new issuance are expected by the majority of respondents to grow by 20%-50%, while CEE and Africa are each expected to be up by 20% at the most. In 2022 CEE volume was $55.7bn, Middle East was $39.6bn and Africa was $21.2bn.
“Eastern Europe and the Middle East were the main areas of bond business in 2022 but the Middle East was still low, relative to historical volumes,” Karolev says. “There was still much more there than from CIS or Africa, which were close to zero. In 2023 we will see the same — there will be a dominance of investment grade issuers.”
Stefan Weiler, head of CEEMEA DCM at JP Morgan, agrees. He says the investment grade portion of the business will be the initial driver of issuance but higher yielding names will follow as markets firm up and risk appetite returns.
Meanwhile, Iman Abdel-Khalek, co-head of CEEMEA DCM at Citi, based in Dubai, says borrowers, having adjusted their mindsets, will make for a more productive year in 2023 in the primary market.
“In the Middle East the realisation has happened that rates are up and are staying up for a while,” she says. “PIF [Public Investment Fund, the Saudi sovereign wealth fund] coming to print is an example of this recognition. Banks are now funding at higher levels than they used to. But even at these higher rates and with pressure off commodity producers, serial prolific funders will want to continue to maintain a presence. We will still see sovereigns bringing good sizes to the market — perhaps not the $10bn we were used to but something more moderate. We saw KSA do $5bn in October. There is also a significant corporate and projects pipeline that could be a good driver of volumes.”
EM investors have taken heavy losses in the past two years, with the main benchmark indices down by double digits. Most respondents think that 2023 will break the streak, but it is close run: half predict benchmark indices will go higher in 2023, 37.5% say they will go lower and the remainder expect them to end the year at about the same level as they began it.
“There is a lot of cash on the sidelines waiting for the right time for redeployment — and cash levels are likely to grow further as net financings are expected to stay negative,” Weiler says. “That means that when risk appetite strengthens, the eventual market rally could be very strong and fast.”
Nick Darrant, co-head of EMEA fixed income syndicate at Citi in London, agrees.
“Required new issue premiums next year will be highly correlated with who has access to the market,” he says. “We, and everyone else, are looking for the turning point in the market. Right now funds are holding 10% cash balances and yields are high. But there will come an extraordinary entry point for investors where these high yields are still on offer but it’s the time to deploy that cash, as they can see considerable upside.”
At that point, he adds, new issue premiums will come down quickly.
“The market has been battered but they know that being ready to move when that turn arrives is critical,” he says. “Then investors will chase deals, which is a dynamic we have not seen in a while. We are seeing evidence of this in terms of issuer and investor engagement every time there is talk of a Fed pivot, though these have, so far, been false dawns.”
Sovereign borrowers in previous years have tended to frontload their year’s activity in the capital markets. Our survey shows that the market is divided on their expectations for this — exactly half believe this will happen again in 2023, while the other half think issuers will see the second six months of the year as offering more opportunities.
Throughout 2022 a large number of CEEMEA bonds fell into distressed trading territory as borrowers dealt with rising rates, higher inflation and political unrest. Some fear that as maturities approach and full blown restructurings get under way, EM investors will become increasingly jittery. Others say that as these losses are already priced in through secondary trading, the blow has already been dealt. Of those surveyed, 18.8% say a wave of defaults is the biggest risk to CEEMEA in the coming year. Fears of escalation of the war in Ukraine and rising European and US rates are of even bigger concern, though.
Those issuers that retain access to the market but have maturities fast approaching are already looking at how to manage those debts.
“We are expecting to see a big pick-up in LM activity as issuers try to address upcoming maturities early on,” says Abdel Khalek. “There are sizeable maturities in the CEEMEA space coming — about $400bn before the end of 2025 — and this is an important tool in managing that.”
“Obviously the LM exercises can only help for CEEMEA credits that are seen as going concerns,” adds Tommaso Ponsele, co-head of European corporate DCM and CEEMEA DCM at Citi.
“There are some names where the situation may become unsustainable, the debt stack is just too high and a more comprehensive restructuring may be necessary. But hopefully, after that is done these businesses will become viable again.”
But views vary. Weiler says he does not expect to see a big pick-up in proactive refinancing activity.
“We hope to see more borrowers calling the bottom of the market through buy-back exercises,” he says. “But given the high current yield environment, I cannot see borrowers funding these buy-backs with new issuances.”
Tenors of EM new issues this year were shorter, as the rates outlook was uncertain and developed market yields rose. Previously, much of the appetite for longer deals came from accounts keen to find a higher yielding option than the Western world could provide, but as rates rose long CEEMEA bonds became less attractive on a relative value basis.
“There is still not much of a duration bid, though, with Taiwanese and US insurance companies having been slow to return,” Darrant says. “The five to 10 year issuance spot is still the most active.
“Maturity extensions, deleveraging and ESG will all be big themes for 2022 — as well as, of course, infrastructure and project financing. If the hope that the corporate market re-opens plays out, that could also be major theme. There could be a wave of financing for M&A, as some companies have come under pressure.”
Throughout 2022, fears grew for the resilience of the asset class as well as the banks and funds serving it. These were only exacerbated by Credit Suisse quitting the business as part of its strategic review in November. In our survey, 68.8% of respondents believe the number of DCM staff serving CEE clients will stay the same, but a considerable amount — 31.3% — think those staffing levels will drop. No one thinks houses will be beefing up in this area. There is hope of broad stability, in that 81.3% think there will be little to no change to the banks serving the market, but 12.5% think one or more of the top 10 dealers will depart.
The two banks at the top of the league tables have reaffirmed their commitment to this market to GlobalCapital. Ponsele at Citi says his firm has no plans to change its countries of coverage, with the exception of the pullback from Russia in 2022.
Meanwhile, Weiler at JP Morgan says: “The drop in business is more likely to have an impact on houses that look at EM more opportunistically.” GC