Two markets, two directions. In one geographical half, western European sovereigns spent most of 2011 negotiating access to capital markets at rates any rates that might work. In the other half, the central and east European, Middle East and Africa region, where the sovereigns had a flourishing year with a host of new names appearing.
The sovereign CEEMEA sector boomed in 2011 as money flowed in from a non-traditional emerging market buyer base looking for safe opportunities in the region. Investors spent the year chasing high yielding opportunities and the safer debt metrics available in the emerging markets; a trend that is likely to continue at least through the first half of 2012.
"Weve witnessed an increase in the number of institutional investors focused on emerging market fixed income opportunities both in local and hard currency," says Peter Baillargeon, head of debt capital markets, Africa, for Standard Bank in London. "In terms of international issuance from Africa theres been a noticeable increase in the breadth and depth of investor demand in recent transactions."
Despite a difficult year in the capital markets, the volume of sovereign notes placed stayed strong at nearly $50bn by early December only $7bn less than 2010, according to Dealogic data, with trades from Lithuania, Romania, Turkey, Qatar and Bahrain being printed before the end of the year. Moreover, the yields achieved were lower than those of Italy or Spain in the secondary market as the future of the Eurozone looked more and more uncertain and their borrowing rates spiked accordingly.
Noticeable over 2011 was the increased flexibility of emerging market sovereign issuers, many of whom chose, like their more experienced Western counterparts, to fund early and hit, or if not get close to reaching, their full funding targets for the year before the second half had begun.
"Many sovereign issuers are extremely sophisticated," says Maryam Khosrowshahi, head of CEEMEA sovereign origination at Deutsche Bank in London. "The prudent sovereigns have already done the lions share of their funding and set a great example in completing a large part of their requirements early in 2011."
The strategy played out well for those sovereigns that issued early, such as Hungary, Poland and Turkey.
However, having remained resilient against the bad news coming out of the Eurozone for the first half, heightened volatility in the market spilled over from western Europe throughout the summer and a few unfortunate sovereigns saw their yields rocket Hungarys five year euro yield had climbed to above 9% by November, for example.
While the bond market is not shut for many CEEMEA sovereigns, the rallies as well as the sell-off are pronounced and analysts are divided as to whether EM bonds will be tighter or wider or even just trading in similar levels, in six months time.
With those phenomenal rallies and sell-offs in mind, some wonder whether the first quarter of 2012 will be as busy as usual with Hungarys CDS now blown out to 617bp and many other sovereigns yields having also suffered on fear of contagion from the Eurozone.
Many issuers are wondering whether to wait to issue until after the Eurozone situation has eased and their yields have contracted to more normal levels. Typically sovereigns issue early in the year when investors tend to have the most cash to spend.
Unsurprisingly, bankers are saying that it is still best to play it safe and tap this early liquidity pocket, rather than rely on a rally that may not be forthcoming. Given that the Eurozone situation remains unresolved and the market could just as easily find itself sucked dry of liquidity for these issuers with yields blown even wider this seems sensible.
"In terms of timing, issuing and pricing early in the year is still the best strategy as you can take advantage of the early year liquidity," says Khosrowshahi. "With an expectation of positive momentum and prevailing liquidity, windows of opportunity should exist for CEEMEA issuers in early 2012 so they should get ready to come to market."
How much the CEEMEA sovereigns will need to print this year will depend much upon commodity prices. The higher the oil price, the less pressure there is to fund in the capital markets for oil-rich countries such as Russia, Kazakhstan and those in the Middle East. In 2011 the oil price hit a high of $126 a barrel but it started the year at $93 a barrel.
One feature of last year was the arrival of African sovereign deals they had been expected before the start of the credit crunch, in 2008, but only in 2011 were conditions right for issuance. More should come in the year ahead.
In 2011 Nigeria, Senegal and then Namibia issued new deals, bringing hope that others may follow, together with the banks and corporates of the larger economies. Investors have been eager buyers of these notes.
"Strong investor support for sub-Saharan Africa Eurobonds has been driven by both technical and fundamental reasons," says Baillargeon. "Historically low rates in OECD countries have prompted many fixed income investors to expand their geographic horizons in search of yield. In addition, GDP growth rates which are often at least double those of OECD countries and comparatively low debt-to-GDP ratios in many key sub-Saharan markets provide key arguments for the investment case."
He says that debut sovereign names that are expected to be infrequent issuers offer diversification opportunities and scarcity value. However, because of their riskier nature, only traditional emerging market funds, rather than the newer high grade players in the emerging markets, tend to buy these notes.
Nigerias $500m bond, placed in January via Citi and Deutsche Bank, was the most eagerly anticipated by investors and its main aim was to set a pricing level for its corporates and banks rather than to fill a specific funding need. Senegal and Namibia were more focused on raising funding for their infrastructure development projects, which are intended to help their economies grow the Eurobond market for them was simply the most cost and time-efficient way of raising 10 year money.
The African sovereigns that issued in the Eurobond market are not expected to be frequent issuers and none of them have set up MTN programmes. However there are a handful of other African countries that have publicly declared intentions to issue Zambia, Angola, Kenya and Tanzania and there are other countries that have privately expressed intentions to do so, say bankers.
Of these, Angola is in the best position to price a deal in the near future, having already put credit ratings in place Ba3 from Moodys and BB- from Standard & Poors and Fitch but bankers say the country is opaque with regards to its intentions.
"There was some market speculation that Angola would issue a debut Eurobond following the upgrade of its three sovereign ratings in the middle of the year, but that clearly hasnt happened yet," says Baillargeon. "Oil prices have recovered from their lows of early October and this will likely have eased some funding pressure. Still, a debut Eurobond from Angola continues to be highly anticipated by international investors and we believe the government could issue a successful transaction in relatively short order should it decide to proceed."
Zambia, meanwhile, announced in the first half of 2011 its intention to tap the market. But with presidential elections in September, the country chose to wait, having become close to issuing requests for proposals in the second quarter of the year. There was then some surprise about the change of president, who also brought in new staff for the ministry of finance, delaying the process further.
"Based on investor participation in the three African sovereign Eurobonds to come to market in 2011, we believe that a debut Eurobond from Zambia will be well received by international investors," says Baillargeon. "The new government has decided that it will pursue the prior administrations plan to access the international debt market and a Eurobond has now been included in the 2012 budget."
Tanzania put out an RFP in 2010 to 10 or so banks before mandating Citi for a deal, and there has not yet been any mention of adding more banks to that mandate. The country has begun the process of putting ratings in place though a timeline for a new deal has not been set.
The RFP for a Kenya deal was out in 2008 just before the financial crisis hit. The country needs to develop its infrastructure so it looking more seriously at the bond markets, though has not yet issued a new RFP.
Fees for the notes for this region have so far varied.
The mandate process for Nigeria was the most competitive because of the follow-on business expected from the corporate sector, and the fees were accordingly low two origination officials away from the deal said that zero fees were paid for the note, with banks also picking up the tab for legal expenses.
But with Nigeria being the largest economy in sub-Saharan Africa excluding South Africa, the bragging rights of having arranged that note are considerable especially when the sovereign is not expected to return to the market frequently.
But across the sovereign sector the heat is being felt on fees as banks fight to put their stamp on the region and competition for mandates will be even greater in 2012."Fees are increasingly under pressure for African Eurobonds, particularly the debut sovereign issues, in part because of the perceived value of these mandates to a franchise in a small but growing market," says Baillargeon.