Cash-on-Tap Means Super September for Emerging Bond SalesBy
Record inflows herald 10-week flurry of new issuances
Saudi Arabia stars in Middle East’s push for Eurobond deals
There’s a 10-week window that emerging-market borrowers don’t want to miss.
Between September and the U.S. elections in early November, bond issuers from Saudi Arabia to Russia, Brazil to Papua New Guinea, are poised to hit the market with tens of billions of dollars in new deals, setting the stage for one of the busiest periods since 2013 after a bumper April.
Borrowers may rush into the market for a final opportunity to raise money at historically low costs before the Federal Reserve increases interest rates and Americans vote in a divisive presidential campaign, potentially stoking volatility and undermining investor confidence. But the greater lure is the abundance of cash: money managers are reallocating funds to emerging markets at a record pace, creating the first net surplus in four years.
“September is expected to be busy, so is October,” said Elena Garcia Hernandez, a London-based associate director at HSBC Holdings Plc, the second-biggest arranger of deals this year and an underwriter for Saudi Arabia’s October sale. “Cash balances are robust versus historical holdings. For issuers, we currently do not see any impediments.”
Emerging-market sovereign dollar bonds handed investors 15 percent this year, and local-currency notes gave 6.3 percent, as major central banks extended dovish policies. Both groups are heading for a third monthly gain in August. Those returns are irresistible to investors fleeing $9 trillion of negative-yielding debt globally.
Emerging-market debt funds received a record $18.7 billion in July and mopped up $4.2 billion in the first half of August, according to EPFR Global. JPMorgan Chase & Co. expects the inflows to reach $40 billion in 2016. That would be a turnaround after three years of net outflows, when a combined $74 billion left emerging markets.
The renewed vigor with which investors are chasing higher yields is a lucky twist for issuers that have debt maturing next year. Emerging-market borrowers face $223 billion of redemptions in 2017, and many may opt to bring their pre-finance plans forward to prepare.
In May, investors bid almost $20 billion in Qatar’s $9 billion Eurobond sale, and the following month they demanded three times the offer at a 1.5 billion euro ($1.7 billion) sale by Indonesia.
“Conditions look very attractive for new deals,” said Sergey Dergachev, who helps oversee $13 billion at Union Investment Privotfonds GmbH in Frankfurt.
Saudi Arabia plans to sell at least $10 billion to help plug a budget deficit, while Kuwait is seeking as much as $9.9 billion and Bahrain hired banks for a third sale of Eurobonds this year. Brazil is considering a retap of 2026 or 2047 bonds and Papua New Guinea picked bankers including Bank of China to meet investors in London, Boston and New York.
Corporate borrowers aren’t far behind. Issuers from Russia, where Eurobond sales dwindled because of international sanctions, are testing the waters. Fertilizer maker EuroChem Group AG has selected six banks including JPMorgan and Sberbank PJSC for an offering. Both underwriters predict more deals out of Russia. Also, China Everbright Bank Co. met investors last week.
“There is a genuine thirst for yield in this market climate,” said Angelo Rossetto, a trader at GMSA Investments Ltd. in London. But “there is a general lack supply. Issuance will kick off again.”
To succeed, issuers may have to strike a balance between exploiting lower borrowing costs and keeping it attractive for yield chasers. The risk premium investors demand to own emerging-market sovereign bonds rather than U.S. Treasuries has fallen about 175 basis points since touching a peak in February. Average yields on local-currency bonds are at a record low and on dollar bonds at the cheapest in three years.
While most investors take that as a vote of confidence in the asset class, some strategists are concerned valuations may discourage buyers if the Fed turns hawkish.
“We are now quite far from spreads on a fair-value basis,” said Bhanu Baweja, London-based head of emerging-market cross-asset strategy at UBS Group AG.. “Unless issuers are willing to issue at well wider spreads, I am not sure the appetite will remain as high.”
Still, the primary market is showing none of that hesitation. Deals in the next several weeks may rival the second quarter when Argentina’s return to international markets spurred combined sales of $60 billion in April alone, according to Rossetto. JPMorgan, the lead arranger of deals in 2016, projects an all-time high of $125.5 billion of sovereign issuances this year.
“Any supply will meet that headwind if the talk about rate hike becomes louder,” said Gregory Saichin, who helps manage $2.4 billion at Allianz Global Investors. “In the main-case scenario of no hike, substantial supply will hit the market.”