Contrarian EM issuers have a ripe opportunity to fund
Investors are in a confident mood and cash is being piled into the asset class once more
Emerging market issuers are waiting until September to access the primary bond market — nothing unusual about that; conventional wisdom dictates it is one of the busiest times for bond issuance. But a smart borrower could make a head start in the next couple of weeks with a new issue that would meet little competing supply and an investor base keen to buy.
An issuance window — albeit an unusual one — is about to open up for emerging market borrowers once the US Federal Reserve Open Market Committee meeting and US non-farm payroll data is released over the next two weeks.
Issuers should take it, rather than wait for September. Demand for new bonds is increasing and is better than it has been for some months. Two EM investors on Tuesday told GlobalCapital they want to buy new bonds, one of them for the first time in months but have little they can put their money into.
Investors have high cash levels and rising after the return of hard currency inflows.
Meanwhile, sovereign issuance in particular has been light, with very little from the CEEMEA region over the past two months. Outside of central and eastern Europe, sovereign issuance has been low all year.
Any school child that has done even a term's worth of economics can tell you what that spells in terms of supply-demand dynamics and who will end up with the pricing power.
But many issuers seem to want to wait until September, when they believe they will have the comfort of higher liquidity in the market. But going with the herd means you end up just another sheep in the flock and a borrower will find it hard to distinguish themselves. Another EM fund manager on Tuesday said he expects issuance to be heavy, particularly from EM sovereigns come the autumn.
Conventional thinking also holds that too many investors are off work during August, thinning out liquidity and making good deal execution much riskier. But there is plenty of evidence to suggest that is an outdated idea.
Issuers outside of EM on Monday showed the merits of issuing in late July. UK corporate National Grid paid a small concession for a sterling deal, and a senior non-preferred trade from German lender DekaBank proved popular.
EM investors are becoming hungrier for new bonds. Next week, if the Fed springs no nasty surprises, an EM issuer who tested the primary market might find themselves the centre of attention and reap the subsequent pricing and book size reward.
Many investors are at work, and the increased willingness and ability to work remotely since the pandemic means those cash-rich buyers will be willing and able to place orders.
It hardly even requires a bold step into the unknown. There are precedents for this strategy being a success. An Israeli bank, Bank Leumi, vindicated this strategy last year. It sold a new bond on July 20, eight days after the last CEEMEA new issue and nearly a month until the next one. It paid only a narrow spread to investment grade developed market banks and the bonds did well in secondary trading, unusual at the time for EM new issues.
Bank Leumi won GlobalCapital's 2022 CEEMEA corporate or financial institution bond of the year, with its clever timing a major reason for that.
For more up to date examples, just look at the European FIG and investment grade corporate bond markets. UK corporate National Grid paid a small concession for a sterling deal on Monday, and a senior non-preferred trade from German lender DekaBank proved popular just a day later. Both issuers pretty much had their market to themselves.
There are plenty of EM issuers that have not enjoyed unfettered primary market access in recent years. Those with funding to do and the audacity to dare to think independently have a golden chance to have an investor base starved of primary issuance to itself, with all the pricing benefits that will bring.