This autumn primary market this year is the perfect moment for emerging market high yield issuers to fill their boots from an investor base keen for new issuance, particularly from better paying but fundamentally strong borrowers.
EM bond bankers expect plenty of deals to come from September. But the primary market may not be so attractive to higher quality issuers sensitive to the effect volatility in US Treasury yields will have on their borrowing costs.
This creates room for high yielders. They have market access, regardless of whether investment grade issuance is heavy or not, and yield-focused issuers are not as sensitive to US rate volatility as spread-focused, investment grade borrowers.
And while the yields they pay will be high, their spreads are tight, just as they are for investment grade issuers. Borrowing is unlikely to get cheaper for them in the near future, especially if the war in the Middle East drags on and the spectre of higher inflation and rate rises arrives, so now is the time.
Iinvestors will be keen. They have plenty of cash and need to invest it. Their interest is twofold. Firstly and obviously, they will earn higher returns.
Secondly, while high yield EM issuers offer triple digit spreads to US Treasuries and in some cases yields close to or above 10%, their fundamentals are strong.
High yield issuers may be of lower credit quality than IG borrowers but that does necessarily make them high risk investments. And EM is in a very good asset class in which to weather the economic blow from the war in the Middle East.
Very few EM sovereigns are in debt distress and only one, Senegal, is viewed as a genuine near-term restructuring or default candidate.
So there is not as much risk as the yield might suggest, particularly in the sovereign bond market.
A perfect scenario awaits high yield EM issuers: tight spreads and a hungry, cash-heavy investor base keen for high yields in a primary market that may be missing some of the regular investment grade borrowers. It is a rare mixture of events that no borrower should want to miss.