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Emerging Markets: Emerging markets take the limelight

28 Feb 2004

Unlike in 2002, issuers from Europe, the Middle East and Africa had to compete with their Latin American counterparts for investors' attention in 2003. But rock bottom interest rates meant that investors hungry for yield had more than enough appetite for the region's top borrowers. Danielle Robinson and Kathryn Wells report.

The dichotomy between central Europe's imminent EU members and eastern Europe's more populous economies such as Russia and Ukraine developed ever more strongly in 2003.

In emerging Europe, Russian corporate issuers stole all the glory, while central European sovereigns focused on their impending EU accession to bring larger and longer benchmarks.

Hungary and Poland brought 10 year euro benchmarks in January 2003, but diverged in strategy thereafter, with Hungary waiting until September to bring a second Eu1bn deal, this time with a seven year maturity. Poland took advantage of its larger borrowing needs to diversify away from the fixed rate euro markets, bringing debut Samurai and floating rate note issues, as well as tapping the dollar markets.

With the Russian sovereign again absent from the market, the country's banks and corporates took the chance to cement further their post-1998 progress on the international debt markets. Standing head and shoulders above the rest was Gazprom, which scooped both first and second place in the category for best corporate deal in emerging Europe with two blowout transactions.

Best of the bunch was its $1.75bn 10 year 9.625% issue, lead managed by Dresdner Kleinwort Wasserstein and Morgan Stanley in February 2003, that claimed the distinction of being the largest ever emerging market corporate Eurobond.

Its second-placed deal, a Eu1bn seven year 7.8% issue via Deutsche Bank and UBS in September from its newly arranged EuroMTN programme, also recorded the region's largest ever euro denominated corporate issue.

Diamond monopoly Alrosa was praised for its debut issue, a $500m 8.125% 2008 deal that lead manager ING brought in April, one of a growing number of non-oil and gas sector issuers that ventured to market in 2003.

On the sovereign side, Ukraine's first new venture back to market ? it had previously re-opened a restructured bond in November and December 2002 ? since 1998 was well received by yield hungry investors and bankers alike, enabling it to win the award for the best sovereign from emerging Europe in 2003.

Lead managers Dresdner Kleinwort Wasserstein, JP Morgan and UBS were able to launch the bond, an $800m 10 year issue priced at par with a 7.65% coupon, in June.

Turkey in turn took advantage of its newly won political stability to complete its borrowing for 2003 by September, and even go some way towards prefunding its 2004 requirements. As in recent years, the sovereign concentrated its efforts in the dollar markets, raising more than 75% of its $5.4bn of funding there.

Islamic compliant instruments were the hot new financing trend to emerge in the Middle East and African region in 2003. Qatar's $700m 2010 sukuk issue, priced at 40bp over Libor in October by lead manager HSBC, claimed the award for the region's best sovereign deal, while a $400m five year issue for the Islamic Development Bank that Citigroup lead managed in July also garnered much praise for its impact in developing the nascent market.

Latin spectacle
Meanwhile, Latin American bonds staged a spectacular turnaround last year, as the chase for yield and a reversal of fortune for Brazil released an unprecedented flow of capital into the emerging markets and enabled borrowers in the region to reach some important milestones.

Sovereign and corporate issuers enjoyed spread compression on a scale not seen since 1997 and a new issue market that embraced even the riskiest countries and private sector borrowers out of the Latin region.

Although the euro and yen markets remained closed to all but high grade borrowers such as Chile and Mexico, the demand for yield from US investors looking at 40 year lows on Treasury rates was more than enough to accommodate Latin borrowers' needs.

The single most important event was the return of Brazil to the international debt markets, as investors, who had shunned the country in 2002 because of concerns about its political direction, became enamored with its newly elected leftist president, Luiz Inacio Lula da Silva and the progress he was making on economic reforms.

Brazil made a triumphant return to the international markets in April, with a $1bn 2007 global bond led by Merrill Lynch and UBS. The structure and execution of the deal earned it an overwhelming vote from bankers as the best deal of the year.

"Getting back into the market after a major disruption is always difficult and Brazil was brilliant in the way it did the 2007s," says Mohamed El-Erian, managing director in charge of emerging market investments at Pimco, one of the biggest institutional investors in emerging market debt. "They issued in a part of the curve no one expected them to issue in, they exercised a lot of restraint in terms of increasing the deal and the success of that issue ended up supporting the rest of the curve and brought more investors into the asset class."

While Brazil orchestrated its return, Mexico, Chile and Pemex made the most of the tremendous bid for high grade Latin issuers. Mexico, arguably the region's most sophisticated borrower, made a definitive transition from emerging market to investment grade by ridding itself of all of its dollar denominated Brady bonds in a buyback operation in April.

The JP Morgan and Barclays Capital-led deal involved a $3.8bn par bond call and a $2.5bn offering of 5.5 year and 30 year bonds.

By the second half of the year spreads had tightened so much that even Venezuela was able to issue a global bond, through an ingenious trade structured by Credit Suisse First Boston. The deal structure, since repeated several times by the sovereign, allowed Venezuela to sell a $1.7bn seven year global bond with a coupon more than 400bp below international capital market levels by targeting local investors and making the most of the country's strict exchange rate controls.

Uruguay also made headlines with a voluntary restructuring of $5bn of debt, organised by Citigroup ? a groundbreaker in terms of its approach to negotiations with bondholders in a bid to avoid default.

28 Feb 2004