Only Bravest Borrowers Need Apply After Emerging-Market Rout

  • Bond sales slide to four-year low before Fed liftoff
  • Gazprom among potential issuers to test investor appetite

Only the bravest and strongest of borrowers are likely to keep emerging-market bonds from extending the slowest quarter in four years.

While the volume of sales is forecast to recover through year-end, the market will remain off limits to all but those issuers ready to tolerate increased costs as investors remain wary of rising U.S. interest rates and a global economic slowdown, according to Union Investment Privatfonds GmbH and PineBridge Investments.

Sales in dollars and euros by governments and companies dropped 34 percent on the year to $62.3 billion in the third quarter, the lowest amount since 2011, as China’s surprise devaluation of the yuan in August roiled global markets, spurring demand for haven assets. Federal Reserve Chair Janet Yellen, who cited financial market turmoil as a reason for keeping rates on hold on Sept. 17, has since signaled the first liftoff since 2006 will probably take place by year-end.

“In terms of issue volumes, I do not expect them to fall further,” Sergey Dergachev, a senior money manager who helps oversee $13 billion of emerging-market debt at Union Investment in Frankfurt, said on Wednesday. “We will see some selective issuance, but a rush like what we have witnessed in the recent five years is unlikely.”

Bond sales reached $172 billion in the second quarter of 2014 as investors faced with near-zero rates in the U.S., Europe and Japan snapped up higher-yielding assets in developing economies. That allure has faded as China’s slowdown spurred a selloff in commodities and damped the outlook for countries including Brazil, Russia and South Africa that count the world’s second-largest economy as their biggest trading partner.

Investors pulled $40 billion from emerging-market assets in the three-month period, the worst quarter since global debt markets froze following the collapse of Lehman Brothers Holdings Inc. in September 2008, according to the Institute of International Finance. Borrowing costs rose, with the average yield investors demand to own emerging-market debt over U.S. Treasuries climbing to the highest since October 2011 this week, JPMorgan Chase & Co. indexes show.  

“The lack of new issuance creates a strong technical backdrop and valuations at current level now look attractive,” John Bates, senior vice president at PineBridge Investments, which has $77.7 billion in assets under management, said on Wednesday. “We do expect a pick-up in primary activity, but still far lower than the level we witnessed in 2014.”

Political turmoil engulfing Brazil, Russia and Turkey has seen issuance in these countries grind to a halt since the end of July, while China along with Hong Kong accounted for about a half of the $21.9 billion in sales for emerging markets in September, the lowest issuance for the month since 2011.

Tough Call

It’s a tough call to say if debt issuance has reached the bottom, according to Michael Ganske, who helps oversee $4.5 billion of debt and currencies as head of emerging markets at Rogge Global Partners in London.

“Several boxes have to be ticked -- more supportive data flow from China, Fed picking up the ball and giving clear guidance, plus stabilization in commodity prices,” Ganske said. “But even in an averse scenario, issuers will come -- it will be just less and with a higher premium.”

Ghana and Egypt are among governments eyeing potential offerings, while Gazprom PJSC, Russia’s natural-gas exporter, is considering a return to the international market for the first time this year.

Ghana may raise as much as $1 billion in a bond sale after completing investor presentations Wednesday, said a person familiar with the matter who asked not to be identified because the information isn’t public. Egypt is in talks with banks to determine the timing, size and maturity of a new international bond, Finance Minister Hany Kadry Dimian said in an interview in Cairo on Tuesday. Albania is holding investor meetings in Europe until Thursday for its first Eurobond since 2010.

Angola Downgrade

Angola postponed plans for a debut $1.5 billion Eurobond sale awaiting better market conditions, a person familiar with the plan who asked not be identified said on Thursday. Fitch Ratings downgraded Angola’s credit one step to B+, four levels below investment grade, on Sept. 25.

"It is no surprise to hear that sovereign and corporate issuers have chosen to postpone new deals,” said Mohammed Elmi, vice president for emerging-market fixed income at Federated Investors in London. “People are still cautious and this is affecting new deals.”

Gazprom is seeking to raise 1 billion euros ($1.1 billion) in its first Eurobond since November and will hold investor meetings in Europe next week, according to a person familiar with the deal. Turkcell Iletisim Hizmetleri AS and PGE Polska Grupa Energetyczna SA held presentations in Europe and U.S. last month.

“With the slowdown in primary issuance, particularly outside of Asia, investors will be looking at these new issues for a reality-check on risk premium,” said PineBridge’s Bates.

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