CEEMEA sovereigns lead bond market rebound
Sovereigns are making the most of a bounce in demand for CEEMEA bonds after the coronavirus pandemic and oil shock sent markets into a tailspin earlier this year. They have extra spending to fund, but with QE on the rise investors have cash to place. But other pandemic policies have left parts of CEEMEA capital markets moribund.
The impact of Covid-19 and plunging oil prices has sent public finances in the CEEMEA region into chaos. Fiscal deficits are on the rise, as governments scramble to respond with lifelines for flailing companies, funding for agencies and help for citizens in the form of stimulus packages.
Saudi Arabia’s central bank has pledged an injection of $13.3bn for its banking system to improve liquidity; while in central Europe, Hungary released the region’s largest response package as a proportion of GDP, totalling 13.6%, according to ING.
Despite $83bn pouring out of emerging market funds by the end of March, according to the Institute of International Finance, investor appetite returned after quantitative easing and rate cutting (both internationally and locally) encouraged liquidity and forced investors in need of yield back into EM assets.While some governments, especially in Africa, have turned to bodies such as the IMF for emergency funds, the generally better rated CEEMEA sovereigns have used debt capital markets.
“Right now, emerging markets look attractive for investors, all of whom are on the hunt for yield from high quality issuers,” says Marzena Fick, head of CEE DCM at Citi in London.
Since January, 239 bonds have been issued across CEEMEA, with a value of $163.71bn. While fewer bonds have been issued compared with this point last year, the overall value of this year’s deals exceeds that of 2019, when 556 bonds had been signed with a total value of $158.13bn.
Gulf leads way
Gulf sovereigns in particular have led the way back into public markets, despite the region suffering from the effects of the coronavirus and being particularly vulnerable to the oil slump.
Although a drop in global demand (combined with supply disagreements between de facto Opec leader Saudi Arabia and non-Opec oil producer Russia) caused Brent Crude oil in April to drop below $20 a barrel for the first time in decades, investor appetite for the region’s top sovereign credits has been robust.
“The crisis has not significantly impacted investor sentiment or pricing in the GCC [Gulf Cooperation Council],” says Garbis Iradian, chief economist for the MENA region at the Institute of International Finance. “Despite the outlook downgrades for some sovereigns amid the lower oil prices, the recent issuances from the region have performed well in the market.”
The Emirate of Abu Dhabi, rated Aa2/AA, first stunned markets with a $45bn order book for a $7bn triple-tranche deal in April but then tapped the trade for a further $3bn, from $19bn of orders, in May at levels that were through its own curve. Bankers at the time said this was “unprecedented”.
Saudi Arabia, Qatar and even the B+/BB- rated Bahrain have all issued since April, while Israel has also managed to tap markets, raising both euros and dollars.
Demand for GCC credits has been high because, despite their exposure to the oil industry, they are rich countries with other sources of cash.
“Gulf sovereigns, specifically Qatar, Saudi Arabia and the UAE, benefit from large financial buffers in the form of sovereign wealth funds and strong access to international markets. This allows them to easily fill their deficits,” says Iradian.
But pots of oil money sloshing about state coffers has not been a prerequisite for market funding. In central and eastern Europe, sovereigns including Slovenia, Romania and the Republic of North Macedonia have entered the market.
The region’s EU and eurozone members are proving to be popular credits, bankers say, with investors viewing them as backstopped by the European Central Bank through bond buying measures such as the Pandemic Emergency Purchase Programme (Pepp) and the European Commission’s rescue plan, called Next Generation EU.
The official sector buying will help CEE sovereigns fund their own crisis responses with extra debt issuance. “Investors are expecting more CEE volume this year than we have ever seen in any one year,” says Fick. “Historically, we have never seen all of these countries in the market in one calendar year.”
Funding for everyone
Conventional trades from investment grade borrowers are not the only deals bringing the market to life.
Even high yield issuers have been able to print. Egypt, rated B2/B/B+, won a hefty $21bn of orders for a $5bn triple-tranche trade in May.
Amr Helal, CEO of North Africa at Renaissance Capital in Cairo, says: “It was a good call for Egypt to go to the market when it did. Waiting for things to settle down could have been an option, but in this uncertain global environment I would advise taking the money — even if it means sacrificing a potentially tighter yield down the line.”
Ukraine, rated Caa1/B, is also expected to come to the market with a deal once it signs off on its IMF package.
There has even been room for green bonds, seen by some as a hallmark of a mature credit. Hungary issued its debut in the product — a 15 year €1.5bn trade — in June, just a month after issuing a conventional €2bn deal.
Corporates shun lenders
But although the global central bank and governmental monetary and fiscal responses to the pandemic have boosted sovereign market activity, they are dampening other markets. “Sovereign issuance will dominate CEEMEA this year,” says Fick. “In CEE, corporates will likely take advantage of the stimulus packages in their individual countries, and the delay of MREL [minimum requirements for own funds and eligible liabilities] for banks will allow them to reassess their issuing plans.”
Corporate and FIG borrowers have recoiled from the typically resilient syndicated loan market. The number of CEEMEA loans signed so far this year has dropped 48.8% from the same time last year, with only 84 loans worth $67.6bn in total, according to Dealogic.
At this point in 2019, which by historical standards was itself a disappointment, 164 deals had been signed.
The last time loan issuance was this low was in 1991, with only 68 deals signed.
The drop, experts say, is a result of corporate borrowers turning to attractive domestic stimulus packages, while the region’s banks have taken advantage of the easing of capital requirements.
“The pandemic, coupled with the oil slump, has had a significant impact on emerging market loans,” says Damien Orban, vice-president, EMEA loan capital markets at Bank of America in London. “There is not the same demand for incremental liquidity as there is in developed countries, which are used to having access to capital markets and alternating between bonds and loans.
“Emerging markets differ in the sense that they are not as reliant on inter-national capital markets — primarily because borrowers, who are used to operating throughout crises, have tended to position themselves more defensively and tend to have liquidity on hand.”
Unsurprisingly, margins have widened since the crisis erupted in mid-February, which banks say is to compensate for the increased capital risks they face.
Some lenders concede that many investment grade emerging market borrowers would be forced to add an extra 20%-25% to the margins they would pay under normal circumstances.
For example, Uralkali, the Russian potash producer, last month raised a $665m loan with a margin of 220bp over Libor. Lenders on the deal told GlobalCapital that when the deal was initially discussed in January, the margin was expected to be around the 180bp mark.
But there have been small sparks of success in the loan market. In May Turkey’s Garanti Bank became the first bank anywhere to raise an internationally syndicated loan linked to environmental, social and governance (ESG) targets.
“In a crisis, we find that lenders usually favour lending to corporates, but the ESG angle on our loan proved to be of value and helped to get the deal done,” says Batuhan Tufan, director, head of financial institutions at Garanti Bank in Istanbul.
“Despite the outbreak of Covid-19 and a drop in the Turkish currency, we proceeded with the deal, and with the ESG angle we were able to get very positive responses from lenders.”
Lenders remain confident that activity will improve, as investors hunt for yield and govern-ments ease lockdowns.
“We are in a more constructive market right now,” says Orban, “so we anticipate a pick-up in activity in the second half of the year. There is pent-up demand from the borrowers that took a ‘wait and see’ approach after the crisis began.”
MDBs: cometh the hour, cometh the mulitateral
Multilateral development banks (MDBs) have proved themselves to be bastions of support for crippled developing markets during the coronavirus pandemic. While the immediate cash that MDBs provide often acts a lifeline for many emerging markets, official sector support also boosts a sovereign’s chances of market access, experts say. But as the debate about EM debt relief rages on, some question whether more help is needed.
Across the World Bank Group, up to $160bn has been made available in the form of grants and financial support for the world’s poorest countries. The International Monetary Fund has pledged $100bn of financing, throwing a life jacket to many EM economies in dire need of cash.
Regional MDBs, including the European Bank for Reconstruction and Development and the Arab Petroleum Investments Corporation, have also loosened their purse strings in a bid to support clients.
“In times of crisis, [vulnerable countries’] access to finance from other sources is severely constrained,” says Jingdong Hua, vice-president and treasurer of the World Bank. “Many African countries in the last decade and a half have been able to go to euro or dollar markets and raise money. The cost may be high, but they at least felt confident they were building their reputations in the market. But when the crisis happened, their access stopped. So it is in times of crisis that the value of multilateral banks really shines through.
“Our package is pretty unprecedented — it’s for 15 months. We have four institutions for this — the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). We have a pretty broad toolkit, including support for middle income countries, which face different challenges from the poorest countries.”
The IBRD and the IDA are assisting more than 100 countries with their Covid-19 responses. Nearly half of those countries are in sub-Saharan Africa, and many include sovereigns that have previously issued in international debt markets, including Ghana, Belarus and Turkey.
But securing financing from the official sector has other benefits for borrowers too. For many, funding from the IMF or other MDBs helps their prospects in the debt markets as it offers investors confidence that the borrower is not alone.
“Investors are confident in the emerging market countries that can show they have access to liquidity through MDBs like the IMF or from the EU,” says Marzena Fick, head of CEE DCM at Citi. “Ukraine is in great demand. Considering how well low double-B and single-B rated names such as Egypt have performed, Ukraine would definitely have strong access to the [bond] market once it has signed its IMF programme.”
But some market spectators question whether the official sector’s efforts are enough. “For some lower income countries in CEEMEA, the IMF’s Rapid Credit Facility programme is just too small,” says Elina Ribakova, deputy economist at the Institute of International Finance. “Those countries, such as South Africa, will need to look at other sources of MDB funding.”
Critically, debates around debt relief have come to the fore as Covid-19 has made the debt burdens of many emerging market sovereigns unsustainable. Several questions remain about how MDBs will respond if the crisis continues to ravage EM sovereign finances and whether the private sector will submit to calls for debt relief.
The World Bank Group has temporarily suspended bilateral debt servicing and the G20 has agreed to temporary debt standstills for the world’s poorest countries.
Private sector involvement in offering debt relief has been more contentious, however, with the consensus being that investors will only consider debt holidays on a case-by-case basis. But some critics say that private creditors are failing to take sufficient action to relieve their debtors.