Volumes drop and premiums vary in tough year for EM
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Emerging Markets

Volumes drop and premiums vary in tough year for EM

Context and market conditions are always important when considering the merits of any new issue, but this was particularly the case in 2022, given how volatile markets were. Every CEEMEA issuer had to pay a high all-in price to get their deal away, and new issue premiums varied between issuers. EM issuers faced the toughest conditions in many years during 2022. The Russian invasion pushed investors to flee from riskier assets. The war had practical effects too: disruption to energy and food supplies sent inflation soaring and the resulting interest rate rises meant borrowing costs jumped sharply for CEEMEA issuers. New issue volumes dropped from 2021, particularly among CEEMEA corporates. By George Collard and Oliver West.

Hagia Sophia, Istanbul,Turkey

CEEMEA Sovereign Bond of the Year

Republic of Turkey

$3bn 7.25% 2027 sukuk

Citi, Dubai Islamic Bank, HSBC, KFH Capital

Turkey’s sovereign bonds took a battering late in 2021 and in early 2022. The government’s insistence of cutting interest rates to fight inflation sent the lira plummeting and a balance of payments crisis surely looms.

Turkey had $11bn of funding to do in the year on international markets, later reduced to $10bn. The big question was, could the sovereign hit that target amid such internal economic woes? The answer, in February, was to start off the year’s funding by visiting the Islamic market.

The $3bn sukuk was Turkey’s biggest ever new issue, whether Islamic or conventional. The book was over $10bn, showing that tapping Middle East Islamic investors was a shrewd move. And conventional investors still played a part, with more than a quarter of the book in Europe or the US.

The most impressive aspect was the timing. February 16 was eight days before Russia invaded Ukraine, which froze new issuance for nearly a month and prompted a sell-off in EM bonds. Turkey, of course, did not predict and jump ahead of the invasion, but in the weeks leading up to it tensions were high and this had scared most CEEMEA issuers from the primary market.

Had its first issue of the year gone badly, Turkey would have been in a very tricky position when looking to get the rest of that $10bn done. Instead, it sold another sukuk and two conventional bonds in 2022, taking $9bn of that $10bn target.

Latin America ESG Bond of the Year

Republic of Chile

$2bn 4.34% 2042 sustainability-linked bond

BNP Paribas, Crédit Agricole, Société Générale

For many sustainable finance bankers, 2022 was a tough year. ESG fell down the priority list of some investors, who found themselves with their backs against the wall amid the trickiest market conditions since the global financial crisis. Deals like Chile’s sustainability-linked bond (SLB), issued on March 2, were a soothing reminder of both the enduring appeal of ESG-themed debt, and the fact that — for many major money managers — a crisis underscores, rather than undermines, the urgency of tackling the climate disaster.

Chile was one day into its investor roadshow when Russia invaded Ukraine in February, sending global financial markets into turmoil. Undeterred, Latin America’s best sovereign priced its $2bn SLB just days later. In the first SLB from a sovereign issuer, Chile attracted higher demand (over $8bn of orders), achieved greater tightening (35bp between initial pricing thoughts and launch), and a slimmer new issue concession — around 15bp — than almost all the LatAm deals priced before the invasion.

It was vindication of the value of a committed sustainability strategy. Having already sold $31bn of green, social and sustainable bonds before it turned to the SLB format, Chile had primed its audience for an innovative deal. Investors were impressed by how the greenhouse gas emissions and total carbon budget KPI was aligned to the country’s Paris Agreement contributions. The reception exceeded banker expectations. Moreover, though the timing, so soon after the Ukraine invasion, looked bold at the time, it proved to be smart. Funding conditions only deteriorated in the following months.

CEEMEA Corporate or Financial Institution Bond of the Year

Bank Leumi

$500m 5.125% 2027

Citi, Jefferies, JP Morgan, UBS

As with all the best new bonds in 2022, timing was key. Bank Leumi came to market on July 20, when many issuers believed investors had left for their summer holidays.

The Israeli bank listened to its advisors, who thought the market was still open. It was the first benchmark-sized CEEMEA new issue in more than a week, and there were no more until the first day of September. A $1.4bn book suggested investors were not all on holiday, and the pricing versus investment grade banks outside of EM was a strong result.

EM bonds rallied over July and August, but this trend reversed in September. Had Bank Leumi waited until after the summer to issue, it would have faced trickier conditions.

The bank sold a debut senior bond and managed to print it very close to investment grade peers in developed markets. At 210bp above US Treasuries, it printed just 35bp above Wall Street giant JP Morgan, although being $7bn across six and 11 year tranches the US bank’s trade was not an exact like-for-like comparison.

And rarely for many CEEMEA new issues in 2022, it traded higher on the first day on secondary.

CEEMEA Non-Sovereign Bond of the Year

Public Investment Fund 

$1.25bn 5% 2027, $1.25bn 5.25% 2032, $500m 5.375% 2122

Arab National Bank, Bank of America, Bank of China, BNP Paribas, Citi, Crédit Agricole, Deutsche Bank, First Abu Dhabi Bank, Goldman Sachs, Gulf International Bank, HSBC, Industrial and Commercial Bank of China, Intesa Sanpaolo, JP Morgan, Mizuho, Morgan Stanley, MUFG, Natixis, Riyad Bank, Saudi Fransi Capital, Saudi National Bank, SMBC, Société Générale, Standard Chartered

Saudi Arabia’s Public Investment Fund, made quite the statement with its debut public bond. PIF did not try to hide the fact that this was a planting-its-flag-in-the-capital-markets exercise. It had no immediate need for funding.

Despite deal documentation only being Reg S and not 144A, PIF still drew an impressive book of more than $24bn. At the time no CEEMEA issuer had come anywhere near a book like that in 2022, although the Saudi sovereign did top it a few weeks later.

The biggest statement was the 100 year tranche. These are rare in emerging markets and something only a few issuers can do, and for PIF to do so on its debut was special.

On top of all this, PIF made its debut amid the doom and gloom that surrounded the EM bond market throughout the year. It would have been a spectacular first outing — even in a market in the best of health.

Some investors scoffed at the green aspect of the deal, but one banker on the trade said the 100 year tranche made it a “bond beyond oil”.

PIF will return to the capital markets in the next few years, and it will hope its showstopping debut will have made a lasting impression, helping with pricing and size in future.

Latin America Deal Of The Year

United Mexican States

$2.87bn 3.5% 2034, $2.93bn 4.4% 2052

Bank of America, Barclays, BBVA, Santander

For years, LatAm DCM bankers would tell clients to issue in the first available window. For years, many borrowers would wait and wait as markets rallied, looking to save a few extra basis points. For years, this strategy worked.

Mexico doesn’t tend to get so cute. The sovereign is usually a reliable presence in the primary market in the first week of January. When 2022 rolled around, there on the screens were those soothing words: United Mexican States dollar benchmark.

Most years, a Mexico dual-tranche dollar benchmark and switch-tender would be business-as-usual. But 2022 was a year in which business-as-usual was the exception. Mexico had chosen January 4, the first day of the year that both London and New York were open, for its dollar foray. It proved to be the best day of the year for issuance, with conditions deteriorating by the day immediately after.

Several other major LatAm sovereigns were put off by funding costs that in January were already higher than what the market had become accustomed to. They waited in vain for better conditions that never arrived, some forced to look to other sources of funding, others forced to pay up even more later.

Mexico wins GlobalCapital’s award partly in recognition of the fact that its longstanding consistent issuance strategy this year paid dividends like never before. While the market fretted about whether certain other sovereigns would be able to access the market, Mexico swept up 57% of its annual funding needs on day one.

It seems doubtful whether Mexico has ever regretted its decision to be first, or one of the first, LatAm borrowers in the market almost every year. The simplicity of its approach is a lesson to all issuers.

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