Emerging Europe is experiencing a boom in corporate bond issuance, fuelling concerns about a bubble in lower-rated emerging market debt.
Debt issuance in Central and Eastern Europe, Middle East and Africa is close to $90 billion in volumes already this year, according to Martin Hibbert, head of DCM origination for CEEMEA at Deutsche Bank.
But more significantly, the composition of those volumes has changed. “This year has not been so much sovereign and financial paper, but a lot of corporate issuance,” said Hibbert.
In a typical year, half of the market is sovereign, 30% financial institutions and 20% corporate, but this year almost half of all issuance has been corporate, including multi-billion dollar deals for Gazprom, Lukoil and Saudi Electric.
In one particularly eye-catching deal, Russia’s Lukoil, which is rated Baa2/BBB, raised $3 billion in an offer last month that was three times oversubscribed.
“This is no longer a fringe asset class but a mainstream part of the market with substantial issuance, market access, and the ability to do large transactions,” Hibbert said.
The increase in issuance, and the fervent appetite for it, has begun to cause some alarm. Last week Charles Robertson, global chief economist of Renaissance Capital, spoke of a “dollar bond bubble”, citing as evidence the issue of 10 corporate dollar bonds from Ukraine so far this year and the yield on single B-rated Rwanda’s debut 10-year bond, which was below 7%.
He argued that a bubble in local currency debt in emerging markets would follow. Bankers agree that yields have become tight, and are probably no longer what attracts buyers to emerging Europe paper. “I’m not sure about the yield argument,” said one. “Where’s the yield when 10-year Russia is trading below 3%?”
But they argued this was not in itself evidence of a problem and insisted there was no cause for alarm. Asked by Emerging Markets if there was a risk of a bubble in emerging market debt, Raiffeisen Bank International CEO Herbert Stepic said: “oh for goodness sake! The overall lending activity has reduced considerably. To talk about a bubble, with demand so much reduced – I don’t see it at all.”
Stepic and others argue that higher bond issuance reflects a healthy reduction in loans, with capital markets replacing banks. “This is more or less an Americanization of Europe. This is what the Americans have been doing for the last 50 years,” Stepic said. Bankers expect to see issuance from the region continuing to grow. “If anything, you would say: we haven’t seen too much [financial institution] issuance coming out, and that may step up,” said Hibbert.
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