Online Extra: Boom Times for Emerging-Market Borrowers

Low rates, better credit quality, and strong investor demand are behind a slew of new issues

The appetite for emerging-market securities has risen sharply this year, as investors intensify their search for yield and become less risk-averse. Meanwhile, liquidity conditions in global capital markets have remained benign, with most major central banks maintaining an accommodative stance. Factors such as low interest rates, improving credit quality, and rising investor demand have prompted a healthy pipeline of new bond issues from the emerging markets, even though volumes are still well below levels seen prior to the Asian financial crisis.

Improving credit quality has also had a positive impact on emerging-marke issuance. Downgrades accounted for 54% of all emerging-market rating actions in the second quarter, the lowest share since first-quarter 2000. And receptive global demand has led to an increase in the share of cross-border issuance by emerging-market borrowers year-to-date. Higher-rated issuers -- especially in the Asia-Pacific region -- are likely taking advantage of more attractive margins in the cross-border market in lieu of costlier funding alternatives, such as syndicated loans or domestic bonds.

New bond issues posted a strong upturn year-to-date, recording an increase of 18.9%. Emerging-market entities raised $61.3 billion in the period ending Aug. 6 compared with $51.5 billion in January-August of the previous year and $78.4 billion in full-year 2002. July saw especially heavy volume of $11.7 billion, the highest single-month volume since May, 2002.

The biggest gains by region were seen in the Commonwealth of Independent States (CIS) region, where volumes nearly tripled, albeit from low levels. The Asia-Pacific region -- traditionally the largest borrower by volume -- saw gains of 8.5%, whereas Latin America expanded 50.5%. However, issuers based in Eastern Europe and the Middle East failed to participate in the upside so far this year. Among the top borrowers by country in 2003 have been Taiwan ($8.9 billion), Mexico ($7.8 billion), Hong Kong ($6.4 billion), and South Korea ($5.8 billion).

The telecommunications sector saw a noteworthy increase in volume to $9.1 billion in the year ended Aug. 6, nearly twice the level seen in the corresponding period a year earlier. Some large issues from Hong Kong-based conglomerate Hutchison Whampoa Ltd. -- totaling $3.6 billion -- accounted for a significant portion of that rise, coupled with some sizable issues from Russian and Brazilian telecoms. Banking sector volume advanced 5.6% year-over-year, to $14.6 billion. And bond issues from the smaller utility sector gained 26.4% year-over-year, to $4.2 billion, prompted by increased borrowing from issuers based in Latin America and the Asia-Pacific regions.

Emerging-Market Issuance By Region
Issuers from the integrated oil and gas sector featured prominently on the list of top emerging-market borrowers this year by volume. Of the nine issuers that borrowed more than $500 million, five belonged to this sector. Mexican state-owned oil and gas company Petroleos Mexicanos (PEMEX) had the largest issue on record, valued at $2.5 billion. Russia's Gazprom followed in second place, with new issues totaling $1.8 billion.

Investment-grade-rated entities continued to have an easier time raising funds in the bond market, even though the recent pickup in investor interest has led to a shrinking gap between these two categories relative to 2001 levels. Of the total emerging-market issues with ratings, 76% were investment grade (BBB- and above) and the remainder speculative grade (BB+ and below).

The increased appetite for risk among global investors has set the stage for increased cross-border issuance. So far this year, the proportion of cross-border issues relative to total issuance by all emerging-market issuers rose to 67%, higher than the 52% in the comparable period a year earlier as well as in the two prior years. The increase in cross-border borrowings was especially prominent in Latin America, where they totaled 67%, vs. 41% in the same period a year ago. The Asia-Pacific region has also demonstrated an increase, to 61% from 49% a year ago.

Looking ahead, emerging-market issuers will continue to take advantage of an attractive funding environment, characterized by relatively low interest rates and investor demand. The decelerating upward momentum in commodity prices -- whose trend is generally positively correlates with emerging-market issuance -- suggests that gains may be more modest in the remainder in the year. It also suggests that although issuance conditions will remain relatively attractive, the chances of matching the mid-1990s highs are remote.

By Diane Vazza, head of S&P's Global Fixed Income Research, in New York

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