Global credit turmoil
Supply of emerging market bonds looks set to shrink more in coming months as upheaval in global credit markets prompts corporates to trim 2007 issuance plans, particularly as the sector does not have urgent funding needs.
By TNN |
LONDON: Supply of emerging market bonds looks set to shrink more in coming months as upheaval in global credit markets prompts corporates to trim 2007 issuance plans, particularly as the sector does not have urgent funding needs.
A raging credit storm has engulfed many funding deals — the large emerging market victims like a $5 billion issue from Russian quasi-sovereign Rosneft and smaller deals like Brazilian Cyrela’s reais-denominated bond. In Asia, at least four sub-investment grade bond issues worth over $1 billion are in doubt because of the worries.
Some issues have gone ahead. Peru for instance issued a 30-year bond at the end of July while some Russian, Ukrainian, South African and Brazilian corporates also sold bonds. A week before Peru, Egypt issued $1 billion in global bonds. Both issues were heavily oversubscribed but issuers may find investors getting fussy going forward.
“Peru and Egypt were basically new issues developing local (sovereign) bond curves. That’s a structural trend that will continue and I expect good demand for that kind of issue,” said Bart van der Made, senior investment manager at ING Asset Management which runs some $13.4 billion in emerging debt.
“On the corporate side, where we already have seen huge amounts of issuance this year, appetite is definitely less and the investor base is less dedicated so I would expect those to have more problems being placed.” Emerging debt issuance volumes are dwarfed by a European and US debt pipeline of up to $300 billion, mainly aimed at funding leveraged buyouts. But for emerging market sovereigns redemptions are outpacing primary placements.
Raiffeisen Bank estimates that just $8-$9 billion in sovereign financing remains to be done in the remainder of 2007 while redemptions and coupon payments total $19 billion. In the first half of the year a total of about $17 billion was issued, excluding issues denominated in local currency.
Even prolific issuers like Turkey will return more to investors than they borrow — the former to issue $1.4 billion in the remaining months of 2007 while coupons and amortisations are around $3.6 billion. This has cut the risk premium investors demand from emerging issuers. “To place $9 billion, globally, for all emerging sovereigns, should not be a problem at all,” Raiffeisen bond analyst Gintaras Shlizhyus said.
The picture is less rosy for corporates which have become accustomed to tapping international markets in recent years. Corporates from the ex-Soviet Union issued $28 billion in the first half of 2007, while external issuance from the Latin American private sector, including quasi-sovereigns, was $26 billion — dwarfing the net $4 billion from Latam sovereigns.
“Rosneft was the first corporate issuer to firmly reject issuance at a higher than anticipated cost and there will probably be others in coming months,” said Dresdner Kleinwort debt strategist Eurgene Popov. Popov forecasts $16 billion in supply from ex-Soviet corporates in the second half of 2007, including the delayed Rosneft bonds but says as little as $8 billion could be issued if market conditions don’t improve.
This is because most of these issuers can afford to wait before tapping international markets, he said, noting Russian issuers also have the option of issuing locally in roubles —telecoms firms MTS and Vimpelcom as well as gas monopoly Gazprom have announced fresh rouble debt plans.
A raging credit storm has engulfed many funding deals — the large emerging market victims like a $5 billion issue from Russian quasi-sovereign Rosneft and smaller deals like Brazilian Cyrela’s reais-denominated bond. In Asia, at least four sub-investment grade bond issues worth over $1 billion are in doubt because of the worries.
Some issues have gone ahead. Peru for instance issued a 30-year bond at the end of July while some Russian, Ukrainian, South African and Brazilian corporates also sold bonds. A week before Peru, Egypt issued $1 billion in global bonds. Both issues were heavily oversubscribed but issuers may find investors getting fussy going forward.
“Peru and Egypt were basically new issues developing local (sovereign) bond curves. That’s a structural trend that will continue and I expect good demand for that kind of issue,” said Bart van der Made, senior investment manager at ING Asset Management which runs some $13.4 billion in emerging debt.
“On the corporate side, where we already have seen huge amounts of issuance this year, appetite is definitely less and the investor base is less dedicated so I would expect those to have more problems being placed.” Emerging debt issuance volumes are dwarfed by a European and US debt pipeline of up to $300 billion, mainly aimed at funding leveraged buyouts. But for emerging market sovereigns redemptions are outpacing primary placements.
Raiffeisen Bank estimates that just $8-$9 billion in sovereign financing remains to be done in the remainder of 2007 while redemptions and coupon payments total $19 billion. In the first half of the year a total of about $17 billion was issued, excluding issues denominated in local currency.
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Even prolific issuers like Turkey will return more to investors than they borrow — the former to issue $1.4 billion in the remaining months of 2007 while coupons and amortisations are around $3.6 billion. This has cut the risk premium investors demand from emerging issuers. “To place $9 billion, globally, for all emerging sovereigns, should not be a problem at all,” Raiffeisen bond analyst Gintaras Shlizhyus said.
The picture is less rosy for corporates which have become accustomed to tapping international markets in recent years. Corporates from the ex-Soviet Union issued $28 billion in the first half of 2007, while external issuance from the Latin American private sector, including quasi-sovereigns, was $26 billion — dwarfing the net $4 billion from Latam sovereigns.
“Rosneft was the first corporate issuer to firmly reject issuance at a higher than anticipated cost and there will probably be others in coming months,” said Dresdner Kleinwort debt strategist Eurgene Popov. Popov forecasts $16 billion in supply from ex-Soviet corporates in the second half of 2007, including the delayed Rosneft bonds but says as little as $8 billion could be issued if market conditions don’t improve.
This is because most of these issuers can afford to wait before tapping international markets, he said, noting Russian issuers also have the option of issuing locally in roubles —telecoms firms MTS and Vimpelcom as well as gas monopoly Gazprom have announced fresh rouble debt plans.
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The investor base may change too, as corporate debt funds which moved into the emerging-market sector in search of higher yields in recent years return to focus on their home turf of Western European corporates as spreads widen. And Kazakh banks are seeing a slowing in the asset growth that motivated their burst of eurobond issuance in recent years. “Most major CIS issuers — sovereigns, quasi-sovereigns and corporates — have a cushion to stay out of the market. That should help outstanding eurobonds,” Raiffeisen's Shlizhyus said. Download
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