CEEMEA print sprint to grow into primary marathon
CEEMEA borrowers — sovereigns in particular — were forced to ramp up their capital markets borrowing in the wake of the coronavirus pandemic. The elevated issuance volumes are set to stay, even though there are concerns that some emerging market borrowers will need a strong dose of debt relief amid fears about just how sustainable their borrowing levels are. Mariam Meskin reports.
Bond issuance by borrowers from central and Eastern Europe, the Middle East and Africa rose slightly in 2020 as sovereign issuers looked to raise emergency cash to get through the coronavirus pandemic. But more striking was the size of deals being done compared to the year before. Over $311.2bn worth of bonds had been raised by the start of December in 586 deals, up from $309.3bn from 996 bonds in the same period last year, according to Dealogic data.
As central banks rushed to prop up their economies with quantitative easing and rate cuts, so investors, on the hunt for yield, fled the diminishing returns on offer in the developed markets.
Sovereigns spearheaded CEEMEA supply, borrowing 52% of the total raised for the region, printing over $162.4bn of bonds across 110 deals. Private sector banks raised more individual bonds but for a lower total, with 113 bonds issued for a total of $25.6bn.
“CEEMEA issuance this year has hit an all-time record, driven primarily by sovereigns trying to fill budget deficits,” says Stefan Weiler, head of CEEMEA DCM at JP Morgan in London. “Many issuers took advantage of attractive markets and the cheap credit on offer. The tone will be constructive in emerging markets [in 2021].”
Even as Covid-19 vaccines win regulatory approval, putting in sight an end to the pandemic, governments will need to fill their coffers as budgets grow in the aftermath of one of the biggest global economic shocks of all time.
“Sovereign issuance could make 2021 a bigger year than 2020, especially if constrained demand keeps oil prices between $40-$45 per barrel,” says Nick Darrant, co-head of DCM syndicate EMEA at Citi in London. “2021 will be another bumper year for issuance in CEEMEA, with issuers frontloading funding right out of the gate. Dealflow will be more stable and equally spaced out than this year.”
Oil prices, which tumbled in 2020, will play a big part in determining how much bond market funding needs to be raised and who needs to raise it. The price of West Texas Intermediate oil futures turned negative for the first time in history in 2020 and the price of Brent Crude dropped below $20 for the first time in decades.
Though Brent Crude oil had recovered to $48 by early December, that is still far below where it started the year, at $66, and far below many sovereigns’ fiscal breakeven oil prices.
The Middle East, which was the busiest region in terms of issuance, accounted for 46% of all CEEMEA volume with over $146bn of bonds priced in 2020. With oil prices predicted to remain lower, many oil producing emerging economies, especially those in the Gulf, will rely on international capital markets. As a result, the Middle East is expected to be the mainstay of CEEMEA bond supply again in 2021.
“[New bond issue] pricing has come back down to pre-crisis levels and emerging markets appear to have survived this pandemic very well,” says Khalid Rashid, head of DCM MENA at Deutsche Bank in Dubai. “Volumes in the Middle East will likely be higher in 2021, as corporates and banks begin to re-enter the market.”
Central and eastern European sovereigns took full advantage of cheap funding, with borrowers like Romania entering international debt markets an unusually high four times.
A key sector for growth will be the corporate debt markets. Volumes in both corporate bonds and syndicated loans were muted in 2020, in part due to many smaller issuers having access to domestic fiscal stimulus. But those issuers are expected to have a clear path to debt capital markets in 2021.
“Corporate issuance will be an area of growth in 2021, though many have weathered the crisis very well so far,” says Souhail Mahjour, head of EM, crossover and inbound and co-head of EMEA investment grade corporate syndicate at HSBC in London. “Corporates that have not previously issued bonds are now looking at attractive pricing conditions and considering diversifying away from the bank loan market into debt capital markets.”
Underpinning the supply hopes will be investors’ insatiable appetite for emerging market debt as interest rates stay low.
“Our bet in 2021 is to focus on the convergence between investment grade and high yield credits in emerging markets,” says Francesc Balcells, chief investment officer for emerging market debt at FIM Partners in London. “The yield differential between the two is elevated at around 500bp, with IG yield at 2.7% and HY yield at 7.5%. That differential is larger than the traditional gap of 300bp and we see ample opportunities to invest in the HY space.”
FIM Partners is not the only investment house putting more focus on emerging markets. “Although emerging market debt is not a perfect asset class, it does give investors pretty juicy yield,” says Paul Greer, portfolio manager at Fidelity in London. “Supply-side pressure will remain elevated and we will see an equal amount of demand for the product. Emerging market debt will become increasingly relevant to global bond portfolios — it is not the niche product it was 20 years ago. We will see higher issuance volumes across CEEMEA in 2021.”
That demand has not just allowed borrowers from the Middle East to print in large volumes, but has also encouraged them to push the boundaries of what they can issue. Abu Dhabi and Saudi Aramco both issued 50 year bonds. Only three other sovereign issuers have tapped that tenor in the CEEMEA region before but going further along the yield curve will be a growing trend in 2021.
“The trend towards longer-dated funding will definitely continue as rates are not going to increase anytime soon — if anything, the market is just getting started. Access to 50 year funding will eventually trickle down to quasi-sovereigns and well rated corporates in CEEMEA,” says Mahjour at HSBC.
Some parts of the CEEMEA market have been notably drier than others, with borrowers from sub-Saharan Africa supplying just 7% of total volume, or $23bn, in 2020 from 72 deals.
Again, more supply is expected in 2021. The bellwether deal was Ivory Coast’s €1bn syndication in late November. It was the first sovereign bond from sub-Saharan Africa since the coronavirus crisis erupted in March in the West.
Most sovereigns in Africa instead chose to tap the official sector and multilateral lenders for funding, with the International Monetary Fund disbursing over $16bn to sub-Saharan Africa since the start of the pandemic.
“It is not the case that Africa did not have access to the market, but that pricing was wider and governments chose to be responsible and avoided locking in higher costs,” says Maryam Khosrowshahi, chair of global SSA, co-head of Africa coverage and head of CEEMEA sovereign DCM at Deutsche Bank in London. “Africa has rallied significantly and there is a lot of momentum for issuance going into 2021.”
It has been impossible to have a conversation about how emerging market borrowers are coping with the pandemic without touching on debt relief and that will be a dominant topic for the next 12 months.
The G20 implemented the Debt Service Suspension Initiative, granting debt relief to the world’s poorest countries, which in October was extended. Of the 73 eligible countries, 46 have so far asked bilateral lenders to delay payments under the scheme.
Tensions between the official sector and private bondholders reached a peak in 2020, with the latter group criticised for not providing enough relief to embattled sovereigns under high levels of debt distress.
“There is a convergence between issuers and investors that debt relief must be done on a case-by-case basis,” says Balcells. “The official sector appears to be fed up with private bondholders free-riding on its debt relief initiatives, but the rhetoric is becoming harsher. But bondholders are not ‘free-riding’ as some would suggest — in fact, bondholders take a hit in the secondary market.”
The G20 in November announced a common framework approach for debt forbearance on a case-by-case basis, which some private creditors believe is a step in the right direction.
The pandemic helped push some countries into debt restructuring, including Argentina, Lebanon and Zambia.
“Emerging countries will remain under pressure,” says Greer. “Fiscal and debt metrics are not going to improve any time soon. Across emerging markets, debt-to-GDP metrics have increased by around 15% in 2020. There will be a lot of pressure on bondholders, who so far have taken the most heat in mark-to-market losses through P&L haircuts.”
But many struggling sovereigns have been reluctant to request debt relief from bondholders, which usually bring with them severe measures.
“Ultimately, most African sovereigns do not want to default and risk losing market access and being associated with that stigma,” says Khosrowshahi at Deutsche Bank.
Instead, a return to economic growth, if the pandemic recedes, will allow governments and corporates to access markets. South Africa, Ghana and Nigeria are just some of the names being touted to enter debt markets in 2021.
However, the long-term implications of higher levels of debt raising both before and during the pandemic on debt sustainability will be seen in years to come.
With debt-to-GDP metrics across emerging markets, and Africa in particular, increasing, there are considerable long-term risks.
“Growth in emerging markets will improve next year but it is going to stay at sub-potential levels,” says Greer. “There will be more defaults.” GC