Time to turn the page
Issuers are likely to look at non-US dollar markets.
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After a pivotal year, in which issuance volumes reached record highs and secondary performance the worst return since the financial crisis of 2008, market participants are hoping for a turnround for emerging markets bonds in 2014.
Overall primary market activity is expected to remain below last year’s highs, so an increase in non-US dollar-denominated transactions and new bank capital deals is likely to emerge as dominant themes this year.
Analysts at JP Morgan expect total EM corporate issuance to decline to US$294bn in 2014, down 18% compared with last year’s US$359bn. For sovereign issuers, a 50% increase in redemptions will see issuance volumes increase slightly to reach US$85bn compared with US$78bn in 2013.
Lower refinancing needs, combined with slower M&A activity, lower capital expenditure and a weaker outlook for commodity prices will all contribute to the decline in corporate issuance, said market participants.
But redemptions and coupon payments estimated to reach US$137bn in 2014 – according to RBS – will leave investors with plenty of cash to put to work, especially during the first five months of the year, when most of the payments are due.
In a continuation of a theme that has intensified in the second half of 2013, bankers are betting more issuers will tap non-US dollar markets, taking advantage of favourable basis swaps and a divergence in monetary policies among developed economies.
“I think this might be the year when we finally see a lot more EM credits in euros,” said Eric Cherpion, global head of DCM syndicate at Societe Generale.
Cherpion highlighted Gazprombank’s five times subscribed €1bn five-year issue in October as evidence that the appeal of the single currency is widening. “Everyone can live with the idea of corporates issuing in euros, but Gazprombank was one step further,” he said.
As more countries follow in the footsteps of Russia with the implementation of Basel III guidelines, bank capital and subordinated bond issues are also likely to attract much attention.
“Turkey and South Africa are moving into the Basel III universe, but you might see more out of Central and Eastern Europe and the Middle East as well,” said one syndicate official.
Challenges, however, might arise from the buyside, where investors are going to become more selective and might require higher premiums to engage in new issues.
“It’s like a New Year’s party. You have your canapes and venue ready, and you are just waiting for people to show up”
“Select emerging market corporates have been very aggressive in pricing new deals last year, but you can’t continue to have negative performance and low new-issue premiums,” said Polina Kurdyavko, senior portfolio manager at BlueBay Asset Management. “You can only get away with that game for so long.”
In particular, while the market backdrop is likely to remain constructive in the first half of the year, the secondary market performance of new issues will set the tone for more EM supply.
“Institutional accounts want to time the market. Only when you see performance you can have a rally of some sort,” said Sergio Trigo Paz, head of emerging markets fixed income at BlackRock. “It’s like a New Year’s party. You have your canapes and venue ready, and you are just waiting for people to show up.”