Throughout 2006 and the early part of 2007, the non-core currency bond markets have continued to offer opportunities to borrowers and investors alike to enter arenas away from the mainstream markets.
While some, such as Australian and Canadian dollars, can now boast strong domestic demand buoyed by interest from international investors and all the incremental size possibilities that confers, others have relied on local buyers, while the use of the market to gain a speculative currency position has added yet another layer.
With the markets growing and assuming an increasingly important position in borrowers’ funding plans, it is little wonder that new entrants are looking to gain a foothold, most notably on the underwriting side, where the historical handful of niche players has seen its dominance challenged by newcomers. Just how sustainable any new entry might be remains to be seen, but it is potentially beneficial for the market, not only as far as liquidity provision is concerned, but also in terms of building swap curves and generally aiding the speed of development in fledgling markets. The resources required to succeed must not be underestimated, however, and while the established participants have been quick to welcome the prospect of more competition – in public at least – they also point to the longevity of commitment needed to become truly accepted as a core non-core player.
In spite of currency hiccups in areas such as Iceland and Turkey, investors still remain keen to add the layer of diversity to their portfolios proffered by the niche currency markets. Case in point was the EIB’s foray into Turkey in January, when it launched the largest single-tranche lira bond to date, a TL1bn long two year offering, an amount previously only conceivable by virtue of a series of taps.
Maturities remain largely at the short end, however, although EIB’s intention to push the Romanian lei curve out to seven-years with its inaugural offering in the currency – the first beyond five-years – demonstrates issuers’ aspirations to push the boundaries out further. Although anything much beyond two-years is still the stuff of dreams in a number of markets, the intentions of both borrowers and arrangers alike is clear.
While the advent of the first fully deliverable Russian rouble deal at the start of the year – a Rbs2bn five-year from KfW – has not yet translated into the active marketplace some predicted, the signs of a widening franchise are clear to see. And as the number of currencies available and the maturity points within them grow, so will the army of issuers hoping to get involved mirror the surge in underwriting hopefuls. That many of these will come from lower down the ratings spectrum than has historically been the case will also bring a welcome credit diversification to add to the pure currency angle.
In the early days of developing markets, it will still be the Triple A borrowers that dominate, however, although domestic investor pushback to pricing through local benchmarks could serve to hinder proceedings. (Apart from the oft-mentioned Ontario situation in Canada, witness Rabobank’s Chilean venture that caused a sharp intake of breath at head office.)
That aside, the quest for diversification and yield remains and the outlook for the non-core currency bond market looks buoyant.
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