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The law of the EM bond jungle

By Steven Gilmore
27 Aug 2013

EM debt bankers should not berate issuers for piling into the market in their post-summer rush. Co-ordination is impossible and issuers have every incentive to seek the best terms at the expense of others.

The end of the seasonal summer slowdown heralds a slew of bond deals as supply restarts in the first week of September. CEEMEA debt bankers are making their traditional appeals for patience as the first proper market window in almost a month approaches.

Historically, the EM market has a very poor track record in this respect. But it is still is an understandable request. An unruly scrum of issuance in any market risks spoiling the party for everyone, apart from perhaps buyers who can use the lack of co-ordination to their advantage and demand higher yields.

This year the outlook is even more challenging for CEEMEA names. The 10 year US Treasury rate is trading in a range of around 2.7- 2.9%, but could easily jump to well over 3% given strong economic data out of the US and the right noises from the Federal Reserve.

Even in the best of times it can be difficult for borrowers to resist trying to be among the first back after a break. But when a golden run of rock bottom yields is fading fast patience is even less of a virtue than usual. There is a backlog of strong sovereigns, established Russian corporations and unknown third tier banks all hoping to take advantage of the final days of historically low rates. 

Their respective funding teams are not responsible to some abstract idea of etiquette or even to the wider EM bond market. They are responsible to shareholders, citizens and direct superiors to whom they promised to get the best terms possible. If this means jeopardising some other issuer’s chance of doing the same so be it. 

There can be no co-ordination in a market spanning continents. What do Nigerian banks with tier two bonds in mind care if Russian borrowers have the same idea? If the Russian sovereign is eyeing a $7bn transaction it will not convene with Serbia and Latvia to stagger supply. Even when it comes to corporations and sovereigns of the same country the smaller credits often have more to gain by getting in first before the sovereign sets a floor for spreads and drains the bond market of finite demand for one country’s risk.

It does not take advanced game theory to show that issuers have far more incentive to be at the forefront of any supply rush and much to lose by waiting. The lack of some overarching organisation that could structure supply to issuers’ collective advantage is regrettable but understandable. Syndicate bankers should be sorry but not surprised if the CEEMEA market is suffering from severe indigestion in a few weeks' time.

By Steven Gilmore
27 Aug 2013