Emerging market corporates have never had it so good in the capital markets. With their sovereigns bond curves more stable and developed than ever before, the process of raising debt has never been easier for them.
Investors, meanwhile, have never been more interested, attracted by the yields on offer, the companies growth potential and their isolation from the eurozone crisis.
And, as a mark of their increasing sophistication as borrowers, it is the bond markets that they are increasingly turning to for their funding needs. According to Barclays, in 2007, bond financing as a percentage of total EM financing was 29%. Today, it represents 50%.
US dollar emerging market corporate bonds have been one of the fastest growing asset classes in global fixed income in recent times, with hard currency volumes now nearly at $1tr outstanding.
"The volume of EM sovereign debt has been roughly the same over the last years but EM corporate debt has grown, yet you rarely see portfolios cut in a way that specifically caters to that, even though you do with high yield, which is a sector of the same size," says Ray Zucaro, a portfolio manager at SW Asset Management in California.
The extra supply has been easily absorbed by the market, fuelled by a desire from non-traditional EM investors to escape the crises in their home markets. Many EM sovereigns now look comparatively healthy against their European peers, providing a decent alternative platform on which to take corporate risk."Europes problems are not going away anytime soon," says Hasan Mustafa, head of debt capital markets, CEEMEA, at Royal Bank of Scotland in London. "There will be structural reforms rambling on for some time. Investors dont see the emerging market corporates as a safe haven per se, but they see them as a good diversification play. EM has its own problems, but the blow up in Greece or Spain does not directly and immediately impact the fundamentals of credit in UAE or Saudi, so I imagine cash will continue to be allocated to these names just to spread the risks."
In particular, the strongest corporates have noticed the difference in global demand for their paper across a variety of currencies. Telecommunications company América Móvil, for example, has over the last two years been issuing in euros, sterling, Swiss francs, yen and renminbi, as well as its usual dollar and Mexican peso notes.
"The type of investors in our bonds has very much changed over the last couple of years," says Carlos García Moreno, chief financial officer at América Móvil in Mexico City. "Simply the fact that we have been able to go to these markets is indicative of the change in the perception of Latin America risk."
But despite the leaps that have been taken by the EM corporate sector, the asset class is still developing and has problems to address such as transparency and, at times, sovereign interference such as the Dubai World debt moratorium in 2009.
"We are seeing renewed focus from US and European high yield investors on sub-investment grade EM corporates," says Nick Darrant, head of CEEMEA syndicate at BNP Paribas in London. "But while the hurdle of the jurisdictional risk is easing, corporate governance remains a concern for a lot of non-EM dedicated accounts. But most borrowers now recognise this and are rapidly adopting an investor-friendly mentality."
That pressure from investors is forcing change, and the biggest corporates are leading the charge.
"Mubadala and later IPIC set the standard for the Middle East and everyone else is attempting to follow," says Mustafa. "In Russia and the CIS theres more concern about supervisory boards and there is progression there too. There is worry overall, but at the moment its clear that for the biggest companies like Gazprom, Vimpelcom and Lukoil this is not an area of concern and its certainly not putting their core investors base off buying their paper."
YPF blots record
Argentinas expropriation of Repsols stake in YPF in April starkly highlighted to some of the dangers that can lie in wait for investors in EM corporates. But although the situation served as a reminder of the risks, it did little to damage the trading of other EM corporate names.
"These days the average investor is much more sophisticated in comparing discrete country risks," says Darrant. "Over the years the concept of contagion has remarkably all but disappeared from EM. Ironically it is principally a western European phenomenon these days. This allows the majority of EM corporates to be evaluated on their own merits."
Hardened EM corporate investors such as Zucaro are equally unconcerned, saying that while there are risks, it is possible to read the market.
"There are risks in the emerging markets that affect the corporates but a lot of it is down to cultural nuances that you have to be aware of," he says. "In the YPF and Repsol case for instance, YPF was being run as a dividend machine and was not producing enough energy for the country, so while I dont condone what happened, you can see how it happened. Those kind of situations create noise, but astute investors understand those risks and monitor those situations."
Others are even less concerned about such situations. "Expropriation doesnt happen in the West, but even Western governments are protective of their core assets and privatisation," says Mustafa. "In the Middle East most energy assets are either 100% or majority state owned. In Russia, there is state control of oil and gas resources but they seem to support private ownership as well."
With the strongest names in the emerging markets turning good profits and with growth in their sights, the sovereign ceiling can often hold them back, both in terms of their credit ratings and their bond yields.
Mexicos América Móvil is one of only a few EM corporates that has managed to outperform its own country.
"In Latin America, América Móvil has certainly shown that it is possible for EM corporates to pierce the country platforms," says Zucaro. "It can be done if the business grows internationally, but if youre domestically focused like O-I, youre capped at the sovereign risk level."
América Móvil is rated A2 by Moodys, A- by Standard & Poors and A by Fitch while Mexico is rated lower at Baa1 by Moodys, BBB by Standard & Poors and BBB by Fitch.
"What investors like about us is the ability to take exposure to Latin America in a strong credit vehicle, without having to worry about specific credit risk were diversified across 18 countries," says Garcia Moreno.
Cashing in on currencies
Diversification is important with regards to funding sources too as its takes the pressure off corporates dollars curves as well as opening a new source of funds.
"EM corporates now have plenty of choice on the menu, beyond the old dollar or euro conundrum," says Darrant. "Now there are some 10, 15 or even 20 currencies available to blue chip names depending on the level of name recognition and the credit quality. The Swiss franc market has matured over the years to a point where double-B emerging market credits now have selective access. The renminbi market is at an earlier stage in the life cycle."
But how the currency exposure of the funds raised in those markets are dealt with is an area of concern for investors. In more unusual destinations, the currency is often swapped back to the issuers main funding currency, but even raising an excess of dollars can create a currency mis-match if the company is domestically focused. Zucaro says that for such companies, the best strategy is for them to raise money in their local currency as currency risk is then eliminated. However, the problem with this is that it is often not possible to raise the size or tenor needed in that local currency. For the larger, more international corporates like iron ore or oil and gas companies, the dollar exposure is more fitting.
"We see the burden being on us as investors to make sure that the company is taking the right currency risks," says Zucaro. "Diversification is good but it has to match the companys needs."The EM corporate sector has forged ahead over the last few years at a time when many others have gone backwards. The question over the coming years will be how well it can harness its new-found most-favoured status to grow sensibly and transparently.
América Móvil breaks EM binds with bonds
But perhaps more tellingly, it has, after a series of aggressive acquisitions across Latin America, the Caribbean and the US, become the fourth largest telecommunications company in the world with over 246m registered wireless customers and operating in 18 different countries. Recently it has turned its attention to Europe, surprising markets in mid-June by reaching agreement to buy a 21% stake in Telekom Austria. The move came as América Móvil was also attempting to build a stake in KPN, the Dutch telecoms group.
Matching its international corporate ambitions is its capital markets strategy. The A2/A-/A rated company has spent the last few years developing a reputation of being one of the boldest and most innovative borrowers operating in the global debt markets, not afraid to venture out of its local market comfort zones. To many, the standard was set in June 2010 when it awed Europe with a 2.5bn triple-tranche euro and sterling note that was larger than all investment grade new issues of the previous two months. AMX drew 4.5bn of demand in euros and £1.3bn of orders in sterling, taking advantage of its high grade investor appeal and the scarcity of Latin American paper in the European market at that time.
"Before the last two years we only really accessed the dollar and Mexican peso markets," says Carlos García Moreno, chief financial officer at América Móvil. "Now we have issues in sterling, Swiss francs, euros, yen and even this year did a renminbi note. None of these were opportunistic moves they were all done deliberately with the intention to develop a funding base in these currencies. It makes sense from our point of view to diversify our funding base and also bring diversity to investors in their markets."
In some instances América Móvils currency exposure is swapped back to dollars or pesos, the companys funding currency. It does, however, in some circumstances keep the foreign currency risk, but that risk is managed carefully. While emerging market investors often fret about corporates currency exposures after gorging themselves in the international markets, no such concerns exist with América Móvil.
"We are seeking to make an investment in Europe, so keeping some euro exposure makes sense," says García Moreno. "Similarly, in renminbi, we deal with Chinese vendors, so that market makes sense for us as we use the currency. We have an active currency management programme."
But even though América Móvil has spread its wings far and wide in the capital markets, it also realises that there are opportunities in its home market."Were launching a programme of issuance of Europesos that will be in place over a number of years and in which we will commit to issue regularly," says García Moreno. "Well be concentrating on providing liquidity to that market and are in the process of picking local and international banks to act as market makers. Weve done these types of deal before, but only isolated issues."
Mubadala shows the way with project bond
|Project finance bonds are not a new concept. Nineteenth Century bankers employed them, with mixed success, to arrange financing for South American and Canadian railways, writes Michael Turner.|
The technique underwent a renaissance in the early 1990s as a source of capital for long-term infrastructure projects both in North America and developing countries. But they fell out of favour in the late 1990s and early 2000s when commercial banks flooded the marketplace with cheap, flexible and long term loans.
But the global credit crisis and incoming regulations such as Basel III have hit banks where it hurts. They are no longer able to provide the scale of funding required to finance new projects, or to refinance existing projects. The result is an enormous infrastructure funding gap that project financiers are desperately hoping bonds will be able to partly fill.
Abu Dhabis Mubadala Development Company is one project sponsor that is giving these financiers hope for the future.
The company sold a $1bn 10 year A1/A+ rated project bond in February this year to refinance debt for a gas project for Dolphin Energy, a joint venture that Mubadala has a 51% stake in. The bond was oversubscribed by eight times and priced at 5.5%, or 343bp over mid-swaps, which was the tight end of price guidance. The firm tapped the bond for another $300m, two days after issuance.
"We are focused on being a key driver of the regional project bond market," says Derek Rozycki, executive director, Mubadala structured finance and capital markets. "We work to ensure we present investors with coherent and innovative structures that are priced attractively."
And as Basel III regulations push banks further out of the project finance market, fixed income investors will have to take their place, Rozycki adds.
Meanwhile, the eurozone crisis is making emerging markets more attractive. Abu Dhabi-owned Mubadala, rated at Aa3/AA/AA, is proving appealing.
"During times of heightened volatility in Europe, we have witnessed a flight to differentiation and quality as investors reassess the relative strengths of European and new market issuers," Rozycki adds. "Mubadalas strong investment grade ratings, its ownership by the government of Abu Dhabi, combined with a conservative leverage policy and commercial operating business plan creates a unique opportunity for fixed income investors."
Mubadala manages a multi-billion dollar portfolio of investments and projects, both regionally and internationally. As well as long term instruments like project bonds and loans, the company funds itself using shareholder contributions, cashflow and by leveraging its P1/A-1+/F1+ short term rating for its trailblazing CP programme that was established in October 2010.
"So far we are the only non-bank CP issuer in the Middle East," says Rozycki. "We look forward to other issuers entering this space to help this important market and create a broader and deeper pool of CP liquidity for the Middle East as a whole."The coming year should see Mubadala in the debt capital markets again. The firms 50/50 JV with Dubai Aluminium, Emirates Aluminium (Emal), needs a $4.5bn investment for its second phase of development. The first phase, signed in December 2007, was a roaring success. It consisted of a $1.8bn 16 year term loan, a $2.8bn six year bridge loan and a $270m letter of credit facility. Emal received more than $15bn of commitments to the financing package.
Saudis SEC drives global sukuk story
|Saudi Electricity Cos $1.75bn sukuk in March exemplified how strong companies in the Gulf region are fast becoming globally recognised issuers, writes Dan Alderson.|
The government-backed power providers breakthrough success, with a record $18bn order book, will add impetus for other names looking to make the transition.
"The phenomenal success of SECs debut international sukuk issuance in the primary trade as well as aftermarket, and the tight benchmarks set, ensures that other strong credits from the Kingdom get substantial attention from global investors when they come to market," says Rajiv Shukla, head of investment banking at HSBC Saudi Arabia, which managed the sale.
"The absence of any sovereign paper also means that SECs sukuk is the best proxy for the sovereign benchmark, as is appropriate given the sector and government involvement and linkage, and therefore helps in pricing up other issuer credits."
SECs international debut was no overnight success, however. The deal capped almost five years of preparatory work, which began in 2007 when the company obtained ratings close to the sovereign from the three main rating agencies. Coming in line with subsequent upgrades, this opened the door for the company to tap different funding sources and SEC established a profile in domestic markets through loans, sukuk and export credit agencies.
"SEC is well known in local markets but to go international it was important to introduce the company to global institutions and investors," says Ahmad Al-Joghaiman, SECs chief financial officer. "After that we took some transactions offshore to gauge appetite in the wider Middle East, Europe and Asia. This gave us the assurances that SEC would do well in the international markets and led us to the recent sukuk."
SECs inclusion of a 10 year tranche along with the more regular five year sukuk reflected its need to fund projects with longer dated finance. Since the global crisis this is an imperative for many Saudi companies and has been encouraged by the government, which owns 74% of SEC. Al-Joghaiman says this will lead to even longer sukuk maturities over time.
"It makes sense for a number of corporations that have long term assets that they try to closely match liabilities with longer term funding," he says. "We were successful tapping the 10 year sukuk market and our objective in the future will be to reach a deeper investor base and go to issuances of 15 years or longer. Other international utilities have achieved 20 to 30 years finance and that is the natural ultimate goal for SEC as well."
Al-Joghaiman believes the scarcity value of Saudi issuers and the growing appetite of international investors will help in this goal meaning any issuances from strong local companies should also be positively received.These dynamics are complemented by a shift in perception among Saudi firms to currencies other than riyal in particular dollars, but increasingly also Malaysian ringgit. "The attitude of Saudi companies has changed completely from a few years ago," he says. "A lot of companies here are very comfortable that the Saudi riyal is pegged to the US dollar and it is a natural currency to borrow in the international market. That said, they are on the constant look out for other options based on the scale of their requirements and objectives."
Hutch a beacon for ambitious Asia
|Hutchison Whampoa has a well deserved reputation as one of the savviest and most flexible Asian borrowers, using its global business interests to tap a wide variety of different currencies as well as developing new structures for other companies to copy, writes Matthew Thomas.|
The company was not only the first Asian borrower to sell a euro denominated deal this year, and one of the first companies from the region ever to issue a hybrid bond. But it is also the part-owner of the Hui Xian Real Estate Investment Trust, which became the first issuer of offshore renminbi shares last year. These deals all blaze a trail for other Asian companies to follow.
But Hutchison is not trying to give a helping hand to its rivals. The company does not have the market-opening role that some state-owned Asian issuers do, according to debt bankers, who argue Hutchison flags up opportunities rather than creates them.
The companys first corporate hybrid, sold in October 2010, was a case in point. The $2bn issue was well above what many bankers expected and indeed, hoped the deal would be worth. It was only the second Asian hybrid ever sold, after subsidiary Cheung Kong Infrastructure closed a $1bn transaction, and some rivals feared it would swallow too much liquidity. But it also proved how far the market could be exploited.
The company also pushes into rare currencies. Hutchison alongside parent company Cheung Kong (Holdings) is now a rarity among Asian companies in that it does not rely on the dollar market for its bond funding.
Hutchison raised 2bn from a dual-tranche deal at the end of May, beating its dollar funding costs in the process. That was its first euro deal since November 2009, when it pulled off a 1.75bn transaction.
European and US investors have little appetite for Asias dicier credits in particular, Chinese high yield, high fee-paying names but they are willing to take exposure to companies that have European as well as Asian businesses, and have an established track record.
Hutchisons deal could help drive issuance from other well regarded Asian credits. "Theyve reminded the market that issuers can get a good execution and good pricing even when they go outside of the dollar market," says Alan Roch, head of bond syndicate in Asia Pacific at the Royal Bank of Scotland. "That does not only apply to euros, but also to the sterling market and to the Swiss franc market."
Bankers think that now might be a good a time as any for Asian issuers to tap the market. The region is not the safe-haven that many European and US banks wish it was the global nature of finance ensures that no region can be truly insulated from the worlds problems but bankers think that as Europe worsens, opportunities are only going to become more attractive for companies like Hutchison.But some bankers sound a word of warning about reading too much into Hutchisons own funding, arguing that while other companies may be able to follow the A3/A-/A- rated borrowers example, few will be able to get the cost saving the company can achieve. After all, few can match the borrowers reputation.