The CEEMEA bond markets are alive with issuers clamouring for money and investors happily opening their wallets. But one company this week discovered the limit of investors’ generosity.
Exillon Energy, rated B by Standard & Poor’s and B- by Fitch, failed to print a five year note, having released price guidance of 8% area last Friday. Lead managers HSBC and VTB Capital would not confirm whether the deal is still live.
This high yield no-show, which followed single-B rated Ruspetro’s postponement of its own deal last month after it had released price guidance, proves that while EM investors are keen for yield and exposure to new names, they will not hand over their money for something sparkly without first checking that it is indeed a diamond and not cubic zirconia.
Bankers away from Exillon’s deal have not attributed any fault to the leads’ attempt to price it. Several were bullish on the idea of selling an EM high yield name in this supportive market. Investors said that, as with Ruspetro’s postponement in February, it was simply too early in the company’s growth cycle for investors to feel comfortable and the deal could well be revived at a later date.
Though EM debt is typically high yielding, high yield debt as the West knows it — junk ratings, incurrence covenants, sometimes high leverage — is an asset class that is still small, but trying to grow. The sub-investment grade EM corporates that have succeeded to date have tended to be those constrained by their sovereign ceiling, such as some Ukrainian borrowers.
EM investors already take on geopolitical risk when they buy bonds. They are understandably cautious about adding risk associated with a company’s balance sheet, potential bumps in its development, or a management that they do not feel sure can deliver on its promises. As one banker puts it: “You can take a risk with one ingredient at a time but if you want your cake, or your bond price, to rise, it’s safer not to mess about with the rest of the recipe too.”
The stream of debut issuers that EM investors have gorged on over the last few months is testament to how keen the yield-starved buyside is to branch out into something new. But bankers will still have to take care in selecting the strongest of the nest if they want these EM high yield fledglings to fly.