Emerging market debt issuance slumps but future positive
Emerging market debt trading slumped in the first quarter of 2009 but the recent resurgence in global risk appetite suggests the worst of crisis in the emerging credit markets is over, new figures released this week reveal.
Emerging market debt trading slumped in the first quarter of 2009 but the recent resurgence in global risk appetite suggests the worst of crisis in the emerging credit markets is over, new figures released this week reveal. The Emerging Markets Debt Trading Association (EMTA) announced this week that trading in the first quarter of the year stood at $915bn — a 23% decrease compared with the same period last year when the comparable figure was $1.186tr.
Trading in Eurobonds represented $253bn in the first quarter compared with $360bn during the same period the year before. Two-thirds of this ($168bn) was issued by sovereigns compared with $236bn in the first quarter of 2008.
Total corporate bond activity reached $76bn in the first quarter compared with $114bn in the same period in 2008.
The most frequently traded emerging market Eurobonds were Brazil ($39bn), Mexico ($32bn), Russia ($30bn), Venezuela ($22bn) and Argentina ($15bn) in the first quarter.
Thanks to strategic inflows into hard currency bonds, emerging market issuers have issued just under $70bn of new debt so far this year compared with $56bn during the same period last year. Commerzbank has increased its forecast for total new issuance in 2009 from between $50bn and $70bn to between $100bn and $120bn.
From March, trading in hard-currency cash bonds increased dramatically and spreads tightened by more than 300bp. Yesterday evening JPMorgan’s EMBI stood at 408bp. The sustained spread rally has allowed issuers to price off new risk without dislocating existing yield curves.
But the weak spot in the emerging sovereign bond markets remains credit default swaps for the Baltic region. Fears are mounting that a devaluation of the Latvian lat could imperil economic stability and currencies in central and eastern Europe. Contagion from the crisis has dented the Republic of Lithuania’s planned euro-denominated benchmark via joint bookrunners Citigroup, Credit Suisse and Royal Bank of Scotland. On May 22, its five year CDS stood at 380bp but yesterday it was trading at 470bp.
An investor conference call with the Lithuania debt management office on Monday shed little light on the situation, said a banker on the deal. "Nothing seems to have changed since the roadshow two weeks ago — the issuer and investors are just waiting to see what happens," said the potential bookrunner. The implication seems to be the deal will be shelved until the autumn unless Lithuania’s CDS tightens.
In the near term, the potential for the spreads on emerging bonds to tighten may be constrained by a stream of new issuance from Western sovereigns. Nevertheless, with plenty of cash stockpiled after systemic de-leveraging last year, asset prices in emerging markets will be supported in market dips as investors rush for opportune exposure, say analysts. But many believe the breakneck speed of the re-pricing of emerging market bonds during the rally is not sustainable.
"We expect somewhat less benign primary market conditions than those seen in April-May," said Dmitry Sentchoukov, EM credit analyst at Commerzbank. He said the pace of spread compression — "a necessary condition for above-average new issuance" — is unlikely to continue during the year. This matters because, from historical experience, "the spread direction is more important than the spread level," he says.
In 2007, during six months when the EMBIG spread tightened, the average volume of new issuance was 2.2 times higher than the average month when spreads widened. "In 2008, the multiple increased to 4.0," said Sentchoukov.
- On Wednesday, Standard & Poor’s cut its ratings for the Brazilian oil giant, Petrobras, from BBB to BBB- citing its heavy debt load and ambitious expansion plans in the face of the global downturn.
The price-sensitive borrower has a $174.4bn investment programme. Yesterday, its 7.875% 2019s had traded by 12bp in response to the downgrade.
But RBC Capital Markets was bullish in a research note to clients yesterday. "Petrobras has secured financing for the next two to three years from BNDES (bond issuance and loans from China), which has strengthened the company’s financial position."