Junk Issuers Happy to Oblige Yield Chasers as Costs Decline

Updated on
  • Emerging-market bond yields are at their lowest since 2013
  • South Africa joins Ukraine, Tajikistan, Turkey in bond rush

The lowest borrowing costs in four years are triggering a flurry of bond sales from junk-rated nations.

South Africa said Wednesday it plans to issue dollar bonds, while Turkey completed a $1.75 billion tap. Ukraine is said to be planning a return to international capital markets for the first time since it restructured debt in 2015, and Tajikistan, which has never sold Eurobonds, is also lining up an offering. Bahrain, the only Gulf Cooperation Council nation with three junk ratings, mandated banks for a sukuk issuance.

The sales will follow the busiest mid-year on record for emerging-market bond offerings, with governments and companies raising more than $120 billion between June and August. But those deals haven’t satiated investor demand for higher yields, as low interest rates across the developed world encourage traders to take on more risk.

The average yield on emerging-market debt has dropped to 4.42 percent this month, the lowest level since May 2013, according to the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index. Funds that track developing-nation bonds have received more than $50 billion in flows this year, double the amount for the whole of 2016, according to EPFR Global Data.

Read More: Decade-Low Credit Risk Shows Emerging-Market Optimism Intact

South Africa

South Africa hired Barclays Africa Group Ltd., Deutsche Bank AG, HSBC Holdings Plc and Nedbank Group Ltd. to sell $2 billion of notes, according to two people familiar with the matter. They’ll be the first since Africa’s most industrialized economy was downgraded to BB+ by S&P Global Ratings and Fitch Ratings Ltd. in April, the highest non-investment grade.

The government last tapped the Eurobond market in September, when it raised $3 billion. Since then, as well as the downgrade, it has been rocked by political turmoil, with divisions inside the ruling African National Congress worsening and President Jacob Zuma narrowly seeing off a parliamentary vote of no-confidence last month.

Still, yields on the nation’s dollar bonds due October 2028 have fallen about 50 basis points this year to 4.65 percent.

“It’s the perfect timing for South Africa,” said Guillaume Tresca, a senior emerging-market strategist at Credit Agricole SA in Paris. “Flows into emerging markets are strong, spreads are tight and the carry trade is working very well. So there will be demand for the issue.”


The eastern European nation plans to return to the Eurobond market after a $15 billion restructuring in 2015, according to three people familiar with the situation, who asked not to be identified because details are private. BNP Paribas SA, Goldman Sachs Group Inc. and JPMorgan Chase & Co. are arranging the deal, they said.

The former Soviet nation relied heavily on foreign funding until a revolution and military conflict in 2014 curbed its access to markets and drained reserves, forcing it to ask creditors for debt relief. Bondholders including Franklin Templeton accepted a 20 percent writedown and a four-year freeze on repayments in 2015.

The nation is rated Caa2 by Moody’s Investors Service, eight levels into junk territory.


Tajikistan, an ex-Soviet republic, may price a $500 million 10-year Eurobond today, with yield guidance being about 7.5 percent.

The Central Asian country is rated B- by S&P, six levels below investment grade, and relies on remittances from workers in Russia as well as Chinese investment.

Investors who attended a presentation at a five-star London hotel said Tajik officials emphasized the economic impact of a planned hydro power plant, which the bond will help pay for.

“We all needed education about the country -- no one knows it well,” said Richard Segal, a London-based credit analyst at Manulife Asset Management. “The first slide was a map.”

Read More: No Oil, No Credit History, No Problem in Emerging Markets: Gadfly


Turkey turned to international investors for the sixth time this year on Wednesday, increasing the size of its existing dollar-denominated bonds due May 2047 by $1.75 billion. With the tap, Ankara has raised a record $9.1 billion in the Eurobond market this year as it ramps up domestic and external borrowing to plug a widening deficit. It initially planned to issue $6 billion in foreign debt during 2017.

The tap was priced at 5.7 percent. The bond, originally sold in May with a yield of 5.875 percent, has since rallied, driving the yield down to 5.64 percent. The nation is rated Ba1 by Moody’s, the highest junk grade.


The smallest economy in the six-nation GCC plans the sale of dollar-denominated debt that complies with Shariah principles. The kingdom mandated JPMorgan Chase & Co., Citigroup Inc., BNP Paribas SA, Gulf International Bank BSC and National Bank of Bahrain BSC for the benchmark-sized, three-part offering, with maturities ranging from seven to 30 years.

The country’s credit rating in July was cut to junk by Moody’s, which said it expects the government’s debt burden and affordability to “deteriorate significantly” over the next two to three years. The country is also rated junk by S&P and Fitch Ratings.

— With assistance by Robert Brand, and Lyubov Pronina

    Before it's here, it's on the Bloomberg Terminal.