Emerging markets: Debt to pleasure
Competition and jeopardy are on the way back in EM debt issuance.
How can you tell who the good drivers are when the safety car is out? You can’t. The cars and drivers look the same but without real race conditions it’s just a procession: no skill is being used, no risk, no spectacular crashes, no differentiation in ability. The shiny, expensive cars are still driving around the track, making a deafening roar, but there is no competition – and therefore no jeopardy.
As the US Federal Reserve eases back on its market stimulant of quantitative easing the Formula 1 metaphor comes to mind for participants in primary issuance of emerging market debt. Until recently you would be hard pressed not to find a deal that didn’t attract a book of multiple-times deal size, or whose price didn’t tighten substantially from early guidance.
New-issue premiums dissolved as investors had to put liquidity to work in markets that still offered yield. Books were open for such short periods of time, even for high-yield deals, that investors say there wasn’t time to talk covenants or use of proceeds or to look closely at the ebitda to see how closely it matched real cashflows.
Investors know such a lax approach to detail is dangerous, but throw in paralysed secondary markets and the only way for investors to deploy capital was to scramble to put in an inflated order to get paper.
Now the market is changing. Already, deals have been pulled. Differentiation is the watchword from investors, and scrutiny and price sensitivity are returning. Bookrunners will have to get used to market hazards and drive deals with precision and timing to get them over the line.
Risk is back and skill will matter and – more important for issuers, investors and interested observers alike – it will quickly become clear which banks still have the instincts and the talent for this renewal of competition. There will be some spectacular accidents and some nerveless manoeuvres. There will be evident differentiation: of issuers, of specific deals and of bookrunners and bankers.
Competition and jeopardy are returning to DCM in emerging markets. It’s about to get real, and fun, again.