Emerging Europe: Russia rotation lifts CEE sovereign bonds

Strong demand for Hungary, Azerbaijan; new corporate names to follow.

Azerbaijan and Hungary attracted impressive demand for sovereign bond issues last month as cash-rich investors looked for alternatives to Russia elsewhere in emerging Europe.

Despite coming to market as Russian troops were moving to occupy Crimea, Azerbaijan’s long-awaited $1.25 billion Eurobond debut was nearly three times oversubscribed. A week later, Hungary attracted close to $15 billion of orders for a new $3 billion dual-tranche benchmark.

Bankers said the bloated order book for Hungary’s deal in particular was prompted by a combination of a dramatic drop in supply from central and eastern Europe and persistent demand.

On the supply side, issuance from Russia – which last year accounted for more than 40% of total bond volumes from CEE – dried up as spreads on its 10-year government bonds widened by as much as 80 basis points. In the first three weeks of March, Azerbaijan and Hungary were the only deals to emerge from the region.

Strong demand

Meanwhile, demand remained strong. Retail emerging market funds experienced some outflows in response to the Ukrainian crisis, but Nick Darrant, head of CEEMEA syndicate at BNP Paribas, said institutional investors had proved much less risk averse.

Nick Samara, an emerging markets banker at Citi, agreed. "There is a lot of cash out there that would likely normally have been put to work in Russian assets and it has to go somewhere," he said. "As we saw with the Hungary and Azerbaijan deals, for the right name – particularly with a dynamic growth story – at the right price there is a huge amount of latent demand."

He added that Azerbaijan’s combination of strong fundamentals and investment-grade ratings had proved particularly appealing to investors. Petrochemicals wealth has enabled the government to run budget and current account surpluses for the past decade, public-sector debt is barely 10% of GDP and the economy is growing at around 5% a year, led by the non-oil sector.

Fabianna del Canto, managing director, European syndicate, at Barclays, notes that rarity value had also boosted the deal’s appeal. As well as being the first Eurobond debut from a CEE sovereign since Albania in 2010, it was also the first from any investment-grade sovereign since South Korea in 1998.

Scarcity is also expected to work in favour of Bulgaria, which in mid-March mandated banks for its first sovereign Eurobond in nearly two years.