Eurobond issuance from the central and eastern Europe, Middle East and Africa region hit a record $133 billion in the first six months of the year as Russian corporates, Gulf sovereigns and Turkish banks rushed to take advantage of ultra-low funding costs.
The total easily surpassed the previous high of $113 billion set in the first half of 2012, thanks partly to bumper deals from the governments of Oman, Kuwait and Saudi Arabia, which between them raised $22 billion in March and April.
Other regions also saw a resurgence of supply. Russian Eurobond sales in the year to June topped $18 billion, according to Dealogic. While still well below levels seen in the boom years of 2012 and 2013, that was only $2 billion short of the total for the two and a half years after western sanctions and weak oil prices put a dampener on the demand for Russian assets.
Volumes from Turkey also jumped from just $3.5 billion in the second half of 2016 to a record $13.3 billion as a clutch of financial borrowers – including Akbank, Garanti, Fibabanka, TSKB and Isbank – raised capital in the form of new-style Basel III-compliant notes.
Even sub-Saharan Africa, until recently a regional laggard, saw a revival of interest in Eurobond funding as concerns over commodity price volatility eased. A pair of successful sovereign deals from Nigeria in the first quarter encouraged policymakers in Senegal and Ivory Coast to return to the dollar market, while billion-dollar bonds from Sibanye Gold and Naspers in June demonstrated investor enthusiasm for South African corporate risk.
Despite the high volume of issuance, however, credit spreads across the region remained at multi-year lows. Bankers said this was mainly due to the fact that, outside the Gulf countries, the proceeds of most bond sales in the first half went to refinance existing debt.
|Samad Sirohey, Citi|
Even issuers without upcoming redemptions have taken advantage of benign market conditions to replace existing bonds with lower-coupon, longer-maturity notes. Such liability management exercises have proved particularly popular with Russian borrowers; recent participants include Credit Bank of Moscow, Evraz and Metalloinvest.
In central and eastern Europe, bankers say high levels of local bank liquidity and increasingly developed domestic debt markets have also crimped Eurobond supply.
“The institutional investor base in many countries has expanded substantially in recent years, which means borrowers can fund in local currency and don’t have to rely so much on foreign participation or debt,” says Sailesh Lad, an emerging market portfolio manager at Axa Investment Managers in London.
Combined with strong flows into emerging market funds and low levels of secondary market liquidity, this shortage of new supply helped ensure outsize order books and tight pricing for CEEMEA Eurobonds throughout the first half.
Stefan Weiler,, JPMorgan
This has raised fears of overheating among some market participants. “It’s difficult for investors to build up meaningful positions in the secondary market, so primary transactions have been seeing a very positive response,” says Stefan Weiler, head of CEEMEA DCM at JPMorgan. “This has made for a very competitive market and there have been many examples of bonds pricing inside fair value.”
The situation could be exacerbated in the coming months if, as many bankers and investors are forecasting, primary sales slow after the summer lull. Weiler estimates that around two-thirds of expected Eurobond supply for the year came in the first six months of the year as borrowers looked to lock in low rates ahead of potential monetary tightening in developed markets.
Peter Charles, EMEA head of syndicate at Citi, agrees.
“It would likely be wrong to expect the conditions we’ve seen in the first half to continue throughout 2017,” he says. “Recent statements from central bankers suggest the backdrop could be more challenging going into the fourth quarter, so we continue to encourage our clients to come to market as quickly as possible.”
Some market participants sound a more optimistic note, however.
“We may not see the same pace of issuance in the second half, but I would expect reasonably strong flows,” says Richard Segal, a senior analyst at Manulife Asset Management. “Borrowers who are worried about rising Fed rates may look to frontload some of next year’s funding and we could also see more liability management deals.”
Jean-Marc Mercier, HSBC
Jean-Marc Mercier, global co-head of DCM at HSBC, is even more upbeat.
“The next six months could be very buoyant,” he says. “There is plenty of scope for further issuance from the Turkish and GCC [Gulf Cooperation Council] banks. We also expect to see more new names, as well as the return of some corporate borrowers that have been absent from the market for several years.”
On the buy side, demand is expected to remain strong. In early July, flows into both hard and local currency emerging market bond funds showed no signs of abating, while bankers reported that institutional investors were still reversing long-term underweight positions in the asset class.
Meanwhile, as Lad notes, many emerging markets are much better positioned economically than in previous bull cycles.
“Valuations may look tight, but relative to other asset classes emerging market bonds still look attractive,” he says. “Returns on euro, sterling or even dollar paper from developed market names are still in the very low single digits. In EM, for the same kind of rating risk, you can get a couple of percentage points more with a better macro story and growth of 4% to 4.5%.”