Back from the brink

It has been an extraordinary year for the debt capital markets. Just over a year ago the world economy flew so close to the flames that it seemed like complete meltdown was the most likely outcome. In the aftermath, most markets ceased functioning in any meaningful way. The loan markets went into a paralysis from which some are still tentatively emerging, while even those that resumed business more quickly have shrunk. The equity markets went into freefall, and though they have since bounced back, opinion is sharply divided over how sustainable that recovery is. Even the bulls would have to concede it will take years before they get back to where they were.Structured finance was dealt a mortal blow from which it will never fully recover: its challenge will be to adapt into something less opaque, while maintaining its usefulness as a source of funding. Similarly, derivatives have had a disastrous time from a PR perspective, and must work hard to recover the confidence of politicians and regulators, which have set them in their sights.DCM alone stood up at the end of 2008 and into early 2009 to provide the funding needs for a broad range of issuers – and an increasing breadth of uses. In a year that has seen it prove hitherto unknown versatility, bonds have been used to finance M&A – stealing market share from the loan market – as well as enabling put-upon companies to repair their balance sheets.Of course, it would be wrong to imply DCM rose above the wreckage to continue functioning unaffected. The cost of doing deals rose sharply – though it normalised quicker than elsewhere. The door was also slammed in the faces of lower rated credits – though again, those weaker credits were admitted into the bond markets before they found the doors open elsewhere.There were also inevitable geographical variations: the high-yield market was up and running in the US before Europe; Asia recovered quicker than Latin America; Japan remained open when the crisis reached its crescendo elsewhere, but declined as other markets perked up.Now there is talk of new bubbles forming. The covered bond market is currently as busy as it has ever been, prompting concern among some that the ECB has created another potential problem, the effects of which will be visited upon the beleaguered markets once its purchasing programme comes to an end. Of even more concern is how markets will respond to the removal of government support from banks.The markets are still in a state of flux, and it remains to be seen how the landscape will have changed once things settle. But whatever happens in the next 12 months, the world economy will owe much to DCM, which for many months was the only place governments, agencies and companies could find capital.

Hardly a week has past this year without another record of some sort being broken in the corporate bond markets. Risk appetite moved from the more recession-proof sectors to more cyclical credits as investors chased yield, but there has consistently been activity. At the end of September there had been 213 benchmark corporate bonds denominated in euros, totaling €223bn. The year had already comfortably smashed the previous annual record of €200.2bn set in 2001, with a quarter of the year remaining, according to data from SG CIB. Moreover, all but three of these transactions were trading in positive territory, reflected by the iBoxx Euro Corporate index that was quoted at 192bp over the benchmark at the end of the third quarter this year, having tightened in by 59% since the start of this year and 24% since before the collapse of Lehman Brothers in September 2008. The pace of issuance was bouyant from the word go, with €48.5bn of investment grade supply emerging in January alone. Investors were scrambling for opportunities to deposit cash with the mainly lower beta defensive corporate names that dominated issuance in the first quarter of the year. "This was needed to initially attract cautious investors back to the market at levels that could effectively ensure a sufficient return for many that had been burnt on a number of occasions since the onset of the crisis," said Russell Schofield-Bezer, head of European corporate debt capital markets at HSBC. Asset allocations were also boosted by shrinking deposit rates, low government bond yields and volatile equity markets, he added. The depth of the market earlier in the year was highlighted by Roche Holdings (Aa1/AA–/AA), blowing the primary corporate market out of the water in February with the largest corporate Eurobond ever at around €12.66bn equivalent. The dual-currency multi-tranche exercise commanded over €24bn of combined interest, and followed on the heels of the healthcare company's record-breaking US$16.5bn six-tranche Yankee issue the previous week.This deal actually emerged during a temporary bout of spread widening that indicated some nervousness after such a bullish start to the year. Since then, however, the corporate market has gone from strength to strength: spreads have tightened sharply, having overcome another minor wobble in early August that also proved short-lived.Everyone is in on itThe increasing demand for yield has seen the composition of corporate issuers consistently evolve throughout the year, as funding costs have become considerably more attractive. This initially started with the emergence of more cyclical names in the Triple B space earlier in the year, before gravitating towards rarer and unrated issuers. The explosive performance of the corporate bond market this year has elevated it to a position where it can often offer a competitive advantage versus the loan market.For example, German automaker Daimler (A3/BBB+) recently launched a €3bn two-year refinancing that pays 160bp over Libor, not including fees. This is probably about 50bp cheaper than the company could have secured two-year funding for prior to the summer. But it compares unfavourably with Daimler's €2bn five-year bond, which was priced at the end of August at mid-swaps plus 185bp, and had tightened to the swaps plus 150bp area on the bid side as of last week. The automaker was forced to pay mid-swaps plus 600bp to take €1bn out of the three-year bond market in December 2008, underlining how far the market has rallied this year.Schofield-Bezer expects the improved funding conditions to continue to tempt more unrated and higher beta names to the market going forward. "The frequent issuers will always be around but should start to favour more niche markets now with more reverse enquiry and privately placed deals, supported by the fact that many are now well funded for the year and well into 2010 in many cases,” he said. “If you are a non-frequent and/or unrated high yield name looking

Before the European Central Bank even spent a penny of its proposed €60bn covered bond purchase programme, the announcement in May that it would prop-up Europe's €2trn covered bond market was enough to put the asset class on the fast-track to recovery.The ECB had essentially set three goals: a tightening of spreads, the resumption of issuing activity in the primary market and a revival of activity in the secondary market. Two months after buying commenced, covered bond spreads had tightened 60bp on average. So profound was the effect, it "probably had the most significant impact of all the crisis-fighting measures taken by the ECB," according to Florian Hillenbrand, a covered bond analyst at UniCredit. It "brought immediate relief for market participants,” he added.Having ground to a complete standstill following the collapse of Lehman Brothers, September yielded its second busiest month since its 1995 inception for jumbo issuance. At about €28bn, new covered bond issuance far exceeded the supply from the first four months of this year, when investor demand only facilitated €15bn of new deals (see chart).Even the secondary market has seen some revival in activity, though according to Ralf Grossman, head of covered bond origination at SG CIB, it remains below the level it was at before the crisis. "The banks are now focusing much more on client service and less on interbank activity." The goal of reviving activity in the secondary market clearly has further to go. But it has at least moved away from the seller only market it had become before the announcement. More two-way flows are being reported. According to Andrew Porter, global head of covered bonds at HSBC, "as Pfandbrief spreads moved down below the mid-swaps plus 20bp level, we began to see a much greater willingness of investors to take profit on holdings causing bid/offer spreads to narrow quite sharply."The increased appetite for covered bonds among investors, particularly from those looking for a pick-up in spreads, has facilitated issuance from a number of jurisdictions that had barely been visible since the collapse of Lehman Brothers. At least for the time being, the covered bond market appears open to all jurisdictions that prior to the ECB announcement would have found it difficult to place a jumbo deal – even those that suffered the most in terms of market spreads and underlying housing sector concerns, such as Ireland and Spain.Beyond the EurozoneThe improving sentiment in this market from the purchase of bonds within the Eurozone has also facilitated the issuance of new covered bonds outside this region. After a two-year absence, the UK was the last European jurisdiction to finally return to covered bonds, with Barclays Bank – a debut issuer in the jumbo asset class – completing the jigsaw with a €2bn 4% 10-year deal.But not only has the marketability for covered bond issues outside the Eurozone improved, the cost has also lessened. Take Stadshypotek's €1.5bn 3% October 2014 at mid-swaps plus 35bp: Swedish covered bonds are not included in the ECB buying programme, yet the deal was well supported in the market, with investor orders totalling €3.4bn.According to Porter, the deal – joint-led by HSBC – would have had to pay a mid-swap spread in the high double digits before the purchase plan. Despite being excluded from the scheme, the issuer still achieved a spread of plus 35bp as a result of the overall tightening in this market."I would currently put the differential that non-Eurozone issuers are being asked to pay at around 10bp," said Porter. "We will see that premium reducing as the market appreciates the strength of demand from central banks and official institutions buying covered bonds outside the purchase plan."With talk of investor fatigue where the tighter-trading jurisdictions are concerned, the majority of supply continues to come away from the so-called "core" France and Germany, the latter seeing some of its covered bonds trade as tight as mid-s

In a year that has seen many bond markets enjoy the most frenzied issuance for years, the Samurai market has been relatively subdued. After bumper years in 2007 and 2008, when Japan was often one of the few markets where funding was available, 2009 year to date Samurai issuance stands at ¥1.101trn (US$12.27bn) according to data from Thomson Reuters, including a private deal from the Republic of Indonesia. This is just over 58% of last year's volume and around 55% of 2007 issuance, though it already surpasses 2006 levels by ¥537bn.The pendulum looks to be swinging back again, principally because of the guarantees being offered by governments. The most prominent guaranteed public deal was Westpac's ¥201.3bn Samurai printed in February, guaranteed by the Commonwealth of Australia. It was a symbolic deal that reopened the public yen market, kick-stating a roster of high-grade foreign issuance. The deal saw huge demand, coming out at the limit of its shelf and becoming the fifth-largest Samurai ever – and the third-largest excluding self-led deals. Led by Daiwa SMBC, Nikko Citigroup and Nomura, it was accompanied by an additional ¥44bn Euroyen issue via Nikko Citigroup.The Samurai was split into a ¥11.8bn three-year fixed piece with a 1.27% coupon at 40bp over yen Libor; a ¥133bn five-year fixed tranche carrying a 1.70% coupon at 70bp over; and a ¥56.5bn five-year FRN paying 70bp over three-month Libor. The Euroyen priced at the same level as the three-year Samurai tranche.Both sell and buy-side investors were comfortable with Australian sovereign risk. The Samurai’s domestic structure was essential, widening the Japanese investor universe beyond the limited number that participated in the Australian banks' modest-sized guaranteed Euroyens issued in December 2008.When Westpac had closed, ANZ came to market with a guaranteed public deal. It was part capped as a ¥150bn five-year dual-trancher via the same leads, alongside a ¥30bn 3-1/2-year retail Samurai, through Nikko Citigroup.The US dollar/yen basis-swap has been in deeply negative territory throughout the year. With the proceeds from these Samurais mostly swapped out of yen, Australian banks faced a deteriorating cost of funding, a situation that deterred National Australia Bank, another potential issuer.The Aussie Samurais, however, did pave the way for three chunky Australian Euroyen private placements in May: Macquarie Bank, CBA and NAB each issued ¥100bn five-year floaters. The deals were done privately to avoid the punitive swap dynamics moving against potential deals. Being quicker to execute, the Euroyen format helped ensure the unfavourable US dollar/yen basis swap did not move further against the deals."If you have to do a deal, it is better to do a private one now, unless the issuer wants to do a very visual deal, diversify the investor base and perhaps aim for a larger size," said one DCM banker in May. Private deals also help large investors maintain a low profile on their foreign credit investments.Shiny, high-grade rarityWith the benefit of hindsight, many fixed-income bankers believe Japanese investors missed the opportunity to buy foreign bank government-guaranteed bonds in G3 currencies, when these were at attractive levels over Libor. The foreign credits that followed soon after the guaranteed supply were all rare names with Triple A ratings – predominantly European high-grade issuers – to some extent offsetting the pain when proceeds swapped back to euros.At the end of February sole-lead Mizuho brought Export Development Canada’s first Samurai since November 1995. The ¥31.6bn five-year floater priced at 35bp over three-month yen Libor. EDC avoided the basis by keeping the yen.After completing its maiden foray in the Samurai market in June 2008, Rabobank returned in February this year with its second ever Samurai - a ¥27.5bn five-year FRN at 140bp over three-month yen Libor - through joint leads Daiwa, Mitsubishi UFJ and Mizuho.The largest public-sector lender

It is shaping up to be a great second half for Latin America. In September and early October alone, the region saw close to US$13bn in new DCM supply, not including a US$3bn plus local Reg S issue from Venezuela. That is almost half of the approximately US$28bn in international issuance seen between January and August.The healthy US$41.6bn sold by October 2 is also more than double the US$20.29bn seen during a lacklustre 2008, when markets began to feel the full brunt of the global financial crisis and liquidity dried up. If momentum triumphs over fatigue, volumes near to the US$55bn seen in 2007 are conceivable."We were expecting the market to come back, but not that fast....the credit markets have been positive but I don't see a scenario where we will have a major shutdown, though there will be volatility," said Katia Bouazza, head of global DCM, Latin America at HSBC.Where few dared to treadUntil recently the composition of LatAm bond borrowers was mostly confined to sovereign, quasi sovereign and blue chip names, as investors sought safety and liquidity in new issues. Just US$6.55bn of the US$20.29bn generated last year came from pure corporate names, the rest coming from governments or state controlled entities such as Pemex and BNDES.It was the same story earlier on this year: between January and August, US$21bn of the US$28.67bn issued was generated from sovereigns, quasi sovereigns or development banks such as CAF. That has started to change during the summer. Mexican homebuilder Javer (Ba3/BB-) stepped forward in late July with what some considered a rather ambitious five-year international debut, given how investors were naturally wary of anything that smelt of real estate, although Mexico's housing story is very different from the US’.Javer proved such credits could be sold, but also illustrated some of the pitfalls for names lower down the credit scale, especially for smaller issues. Its status as a privately held company also gave pause to investors worried about transparency. The paper priced at par with a juicy 13% coupon, but slipped on the break and hit as low as 95, though it did bounce back on the back of market rallies post summer.The deal paved the way for others in August with Brazilian sugar and ethanol concern Cosan (BB-/BB-), Mexican telecom Alestra (B2/B+/BB-) and Mexican petrochemical company Petrotemex (BB/BB+) all coming with five-year issues.September will probably prove the busiest month this year. Double B corporates continued their march to the capital markets, with Homebuilder Geo (Ba3/BB-/BB-), telecom Axtel (Ba2/BB-/BB-) steel concern CSN (Ba1/BB+/BB+) and Latin American McDonald's franchise operator Arcos Dorados (Ba2/BBB-) all enticing leads, often bringing in guidance as demand grew.Brazilian bank Bradesco also successfully tested investor appetite for different structures. Its US$750m Tier 2 bond achieved a tight 6.75% yield for what was, after all, subordinated deferrable debt – at least compared with global comps. Its success is likely to encourage other banks to follow suit.Both corporates and sovereigns were pushing tenors out further, with final maturities moving out to the 10-year mark: Uruguay and Mexico, raised 16 and 31-year money in September, while Brazil created a new 2041 benchmark with record tight pricing. Colombia and others are expected to follow suit.The post summer rallies were driven by growing faith in a global economic recovery and what had really been a relatively light supply this year, especially from corporates. In the primary market borrowers saw healthy book sizes as crossover investors, including an increasingly large retail component, return to EM after sticking to their home markets for most of the year.Reviving interestThis year LatAm borrowers have seen a marked broadening in the investor base. Previously the preserve of dedicated EM buyers, it is now seeing interest from local, retail, US institutional crossover and European investors.With the exception

The US high-grade bond market came full circle in 2009. Several large, high-profile trades in the first half were driven by M&A volume, notably Pfizer and Roche, two pristine credits. They funded their purchases with bonds while that market was hot – and the loan market was anything but. Both record-breaking offerings – US$16.5bn from Roche and US$13.5bn from Pfizer – priced before the purchases they backed were completed. That in itself was an anomaly in the credit markets: acquirers usually obtain loans to fund a deal’s cash portion, before tapping the bond market to term out the bridge once the merger is finalised. But desperate times called for drastic measures: Pfizer replaced its bridge loan commitment with bonds before its deal was funded, saving a lot of money; Roche didn’t even bother arranging a loan at all. All sizeable bridges were eventually termed out, and an emerging equity bull market, alongside other factors, soon made large acquisitions almost impossible. Throughout the resulting downturn in M&A activity the bond market stayed strong. Issuers continued to come to market, but now for different reasons – for example balance sheet repair. Some infrequent and first-time issuers even exploited the capital-raising opportunity when they didn’t need the cash. Take Microsoft’s US$3.75bn offering in May, the first bond for the tech giant. Investors and analysts had been urging Microsoft to rearrange its pure equity capital structure for years. Taking heed, the company saw the spring-time market as the ideal moment, assembling a US$15bn order book, with all three tranches pricing at around 100bp over Treasuries. Most impressively, the five-year notes came at plus 95bp. Before that, no industrial credit had beaten the 100bp barrier since 2007. More recently, M&A activity has picked up again, and the bond market is expected to benefit once more. On September 28, Abbott announced it would acquire the Solvay Group’s pharmaceutical products business for €4.5bn or US$6.6bn in cash. On the same day, Xerox said it will buy Affiliated Computer Services in a cash and stock deal worth about US$6.4bn. JP Morgan agreed to provide a US$3bn one-year bridge to bond to fund the deal and repay ACS debt. ACS shareholders get US$18.60 in cash per share plus 4.935 Xerox shares for each ACS share they own, the cash portion totalling US$1.886bn. Xerox will also assume US$2bn of ACS debt and issue US$300m in convertible preferred stock to ACS’s class B shareholder. The deal will close in Q1 2010.The bridge agreement gives Xerox an incentive to repay the loan quickly – or to circumvent the loan market altogether in favour of more slimly priced bonds. Timing is important, according to the fees and spreads: the bridge carries a duration fee of 75bp 90 days after the acquisition closes, 150bp 180 days after, and 225bp 270 days after; the Libor spread is potentially even more damning, with a margin ranging from plus 250bp in the first three months after closing date, at current ratings, to plus 875bp 33 months after closing, at speculative ratings. The receptivity bond market is another stimulus for M&A. Kraft is pursuing a US$16.7bn debt-financed merger with Cadbury, despite Cadbury’s rejection of the offer. Kraft’s persistence is fuelled by the availability of debt. "We have strong banking relationships and good access to the debt capital markets and feel quite confident that we will not have difficulty with financing," said Tim McLevish, Kraft’s CFO, during the September conference call to European analysts. If the deal is completed at the offer price, Kraft would need a roughly US$8bn bridge. Cadbury’s swift rejection of the offer had analysts anticipating an increased cash portion from Kraft, in which case the bridge financing could reach US$11bn. Walt Disney’s US$4bn cash and stock acquisition of Marvel Entertainment, Baker Hughes’ purchase of BJ Services for US$5.5bn in cash and stock and other deals are set to keep the market busy. "Recent

It has been a busy year for Middle Eastern bond markets. The region’s credits have printed 20 deals for US$23.34bn in 2009. Lebanon was the first to bring the new supply in 2009, followed by an offering from Israel, but it was the deals from Abu Dhabi and Qatar in April that shook the market into action. Those deals paved the way for more supply from the Arab Peninsula, with banks happy to oblige, amid fierce competition for market share. Gulf issuers, including four sovereigns, tapped the US dollar, UAE dirham, Singapore dollar, Saudi riyal and Hong Kong dollar markets, in both traditional and Islamic deals.Abu Dhabi dominated Gulf issuance, with 12 deals. Saudi Arabia brought three deals and Israel two, while Bahrain and Lebanon produced one each. But it was Qatar that emerged as the real darling of the region’s investors: Qatar Telecom brought the region’s first ever telecoms bond with a dual-tranche US$1.5bn bond 10bp through guidance and was nine times subscribed. Ras Laffan's triple-tranche US$2.23bn deal continued the trend, attracting the largest ever order book for a Gulf bond, at US$17.6bn. The pricing came between 80bp and 120bp through its pre-announcement outstanding curve, with final pricing causing a rally across the board in Qatari assets.The bookrunner shuffleAll this activity has seen a transformation in the region’s bond issuance league tables relative to the same period in 2008, when 29 deals worth US$15.31bn were printed. Last year, StanChart topped spot table; this year, it stands in ninth position. Emirates NBD, Calyon, Bank of Abu Dhabi, Dubai Islamic Bank and Lehman Brothers are absent from the Top 10, in part thanks to the total disappearance of supply from Dubai.Citigroup, HSBC and BNP Paribas maintain strong positions and currently take the top three spots, HSBC having made the biggest jump – from the ninth place in 2008 to the second this year. But the demise of some of the stronger players in this region has created a bookrunner vacuum that was filled by new names such as Goldman Sachs, Deutsche Bank, RBS and Samba Financial Group. When Abu Dhabi and Qatar sold a combined US$6bn in new bonds in April, worries remained about exactly how much liquidity would be available. It was not a foregone conclusion that the market would have the appetite for two benchmark offerings in rapid sequence. However, the high quality of the credits, and the scarcity feature, attracted huge interest in both trades, setting the tone for the next six months. The UAE capital priced a US$1.5bn 5.50% 2014s at 400bp over Treasuries, yielding 5.652%, while a US$1.5bn 6.75% 2019s came in at plus 420bp, yielding 6.856%. The following day Qatar came with a similar size, printing US$2bn 5.15% 2014s at plus 340bp, yielding 5.171%, and US$1bn 6.55% 2019s at 380bp above, yielding 6.594%. Bahrain was the first Gulf sovereign of the year to issue sukuk in June, printing a successful US$750m 6.247% 2014 Sharia-compliant offering at 340bp over. Ras al-Khaimah followed up with another sukuk, its first greenback offering: a US$400m five-year issue pricing at 8%, equivalent to plus 560bp. Kuwait, Oman and Saudi Arabia are thought to be in the pipeline, while one Double A-rated Gulf sovereign is said to be preparing a yen debut. This bond bonanza reflects a changing attitude among global investors: many are increasing their exposure to Middle Eastern risk, believing it to offer high quality and diversified assets.Gulf corporate supply remains popular – with Americans in particular. Israel Electric Corporation was the first issuer of the year, but the floodgates were opened by Mubadala, which tapped a red hot market in April. Its maiden US$1.75bn benchmark priced in line with guidance.Abu Dhabi Commercial Bank was first to come with international dirham-denominated paper this year, while the National Bank of Abu Dhabi printed the region’s first US dollar bank transaction of the year, before debuting in Hong Kong dollars. More deals from UAE

There is certainly no shortage of appetite from cash rich investors for interesting opportunities at the moment. Russian quasi-sovereigns and CIS energy blue chips are especially appealing: Gazprom secured stellar books of €9.4bn and US$7bn for July's increased €850m and US$1.275bn 8.125% dual tranche five-year issues.Even troubled Kazakhstan's state-controlled KazMunayGaz attracted US$3bn of orders for its US$1.25bn 11.75% long five-year, printed in July before being tapped by US$250m two weeks later at 11%.These two energy giants were preceded by Rosselkhozbank, which in early June became the first Russian bank to print a Eurobond in almost a year with a very well-received US$1bn five-year 144a/Reg offering. That deal that priced at the tight end of 9.0%–9.25% guidance. On the other hand Russia's second largest bank, Vneshtorgbank, did not find levels to its liking in the dollar market. Instead, it focused on the Swiss franc market in 2009, raising Sfr750m from a 7.5% two-year issue.The Eurasian Development Bank (A3/BBB/BBB) became the year's fourth US dollar Eurobond issuer from the CIS on September 21, having attracted a US$5.4bn book for a US$500m five-year debut that priced at 7.375%. Recent deals confirm that the international bond market welcomes Russian quasi-sovereigns and CIS blue chips. That bodes well for investment grade oil firms like TNK/BP and Lukoil, if and when they decide to return to the international market. The key question for EEMEA syndication desks is whether investor appetite will stretch further down the credit curve. So far, Russian Double B corporates have been excluded from the party, and it remains to be seen whether they, and their lower rated peers, will find their way in before the end of the year. Jonathan Brown, head of emerging markets and European credit syndicate at Barclays Capital, expects little issuance from the Double B space in 2009. Such names have alternative sources for funding, he said, not least via Vnesheconombank and the rouble market. "The growth in Russia domestic liquidity has become, and will remain, a key source of funding for local credits," he said. Renaissance Capital (B1/B+/B) surprised the markets on September 25 by securing more than US$120m of fresh money. It exchanged just over US$100m of its November 2009 Eurobond into a new, 12.0% April 2011 issue via a voluntary debt exchange. However, with the new bond's reoffer price at 96.099, an implied yield of 15.0% for 18-month risk is a pretty hefty re-entry level for other Single B names to follow.Meanwhile, steaming aheadOutside the CIS, Turkey has already exceeded its 2009 Eurobond issuance target of US$3.5bn, while Croatia (for the first time in four years), Macedonia, Lithuania, and Hungary have all raised money from the international market this year. And more is in the pipeline: Romania and Croatia have mandated for fresh supply in 2009, while Turkey is also expected to return.Lithuania, Hungary and Romania had little choice but to return to the market, despite their budget and balance of payment positions unravelling to the extent that they had to pay a heavy price to attract investors. "EU entry is no longer seen as a one way ticket out of EM," said one syndication manager. Not to be outdone, South Africa returned to the international market with a blow out, upsized US$1.5bn in May that was tapped by a further US$500m three months later. Its government is anxious to avoid crowding out state-owned enterprises, which have massive financing requirements in the next few years. Eskom, SANRAL and TCTA have colossal financing needs which could potentially represent a significant proportion of EEMEA supply – and could even exceed all CIS issuance. For now, SOEs are happy to utilise the local bond and syndicated loan markets, given the pick up they currently have to pay over the sovereign curve. But syndication desks that are sitting on a number of SOE mandates obviously hope that the Eurobond market will secure a la

In the months before the start of the year, US high-yield issuance was nearly non-existent. The credit freeze ensured that between October and December 2008, only three US dollar denominated deals priced. It was against this backdrop that issuers and underwriters began 2009. Under such tenuous conditions, issuers gingerly stepped back in, pricing only strong Double B credits with high yields, steep discounts and favourable uses of proceeds to attract buyers. As the New Year began, however, investors appeared to be ready to turn over a new leaf. The first deals of the year proved successful: as buyers surfaced, confidence in the market built, leading to more issuance and cash inflows. A virtuous circle had been created. Since then, even riskier deals have been successful. JP Morgan, Banc of America, Citigroup, Credit Suisse and Deutsche Bank led the first deal of the year: a US$844m five-year bullet offer for Cablevision. To attract wary investors, the B1/BB rated deal included a non-call life feature and a deep discount at 88.885. Proceeds were used to take out Cablevision's FRN due 2009.The notes initially traded up to 92 in the week of pricing. This proved to the market that buyers were back. MetroPCS, Fresenius US Finance II, Nielsen and a host of energy related issuers followed suit, pricing mostly high quality offerings at attractive prices, in what were considered blow-out deals. The spigot had re-opened. Investors found new issues very attractive relative to the secondary market and to CDS. "There is cash out there for the shrinking universe of companies that are considered to be stable in the current economic environment," one investor said early in the year. A question of qualityThe market remained heavily bifurcated for most of the year. While high quality companies could get deals done, albeit at higher prices than they would have liked, many of the riskiest, most leveraged entities were left out in the cold. The unlucky ones have since filed for bankruptcy protection. Concerns remain that there is a massive amount of highly speculative paper maturing in the near-term. Worse still, Triple C issuance has been minimal this year, with investors remaining relatively risk averse. According to an S&P article published in August, US$695bn in outstanding debt will come due through to 2014 for companies rated B– or lower, with either a negative outlook or ratings on creditwatch with negative implications, or for those companies with issues trading at more than 1,000bp. That amount includes bonds, loans and revolvers. Most of these issues are rated Triple C. The bulk of companies within this group are rated in the Single B category. In the past few weeks Triple C deals have begun to trickle into the market in larger numbers than has been seen for the past two years. Issuers are securing the deals with first liens and offering hefty yields to get them done, but demand has been there. That's good news for default rates, which, at Moody's, have already been revised downward from earlier predictions. For an increasing number of companies, the risk of covenant violation or the inability to refinance is subsiding. The default rate hit 11.5% in August, up from a revised level of 11% in July, but the outlook is improving. In September, Moody's predicted the global speculative-grade default rate will peak at 12.6% in the fourth quarter of this year before declining sharply to 4.3% by August 2010. Back in January, the agency had predicted the default rate would peak at 16.4% in the fourth quarter. JP Morgan also revised its forecast down earlier this summer. Betting the houseThis turnaround has been reflected in the performance of a number of individual corporates in the sector. MGM Mirage, for instance, was on the brink of collapse, before completing a life-saving financing in May that raised US$2.5bn. A full US$1.5bn of that came in the form of a high-yield bond, with the rest comprising equity. To attract investors, the company p

The EBRD was the first SSA issuer to push spreads back through Libor. That trend began in June and has continued since, helped by the fact that many borrowers are already a substantial way through their requirements. As the market reopened in September, new issue spreads were again contracting: the risk aversion trade at the beginning of the year looked increasingly like an historical aberration in the history of SSA debt issuance.It was a nervous start to the year for the SSA sector. Participants understood that overall funding levels were likely to be higher for all capital market issuers. Many adopted a policy of borrowing as much as the markets would allow as quickly as possible, just in case there was a repetition of the previous year, when those issuers that spread their issuance lost out as capital diminished late in the year.At the beginning of 2009 the first issuers to appear achieved relatively attractive levels of funding – albeit still largely reliant on the shorter end of the yield curve – despite the refinancing implications for forthcoming years. By late spring the early optimism had evaporated. Conditions deteriorated amid competition with burgeoning sovereign-guaranteed bank supply.The EIB was amongst the first to test the waters in early January with a US$4.5bn three-year Global deal, priced at mid-swaps plus 20bp. In autumn 2008, before the shift in SSA pricing, a similar transaction was sold at mid-swaps less 40bp. Around the same time SFEF, the French state guaranteed entity created to support the banking sector, sold its third euro-denominated deal at mid-swaps plus 15bp – around 10bp wider than the two and three-year issues it had sold in 2008. These early trades attracted significant book sizes and suggested the worst of the buyers strike may have been over, as interest rates and equity markets declined. The Dow Jones Industrial Average fell from around 9,000 at the beginning of the year to 8,000 by mid-January, before selling off to just below 6,500 in early March.By late January, when the EIB sold its first five-year deal of the year, not only had its cost of funding risen to mid-swaps plus 40bp but the issue only attracted US$2.7bn of interest for a US$2bn deal. As March came to a close, the EIB sold its second five-year Global which was, at US$3.5bn, it's largest to date, albeit at an eye-catching 85bp over mid-swaps or almost 140bp over US Treasuries. This deal and a five-year trade for KfW completed at mid-swaps plus 95bp, marking the wide point in the issuing cycle. The deals were made possible by stronger US account participation than had been seen in previous SSA deals – 59% of the EIB and 62% of the KfW deals went to the US."The level of the euro/US dollar basis swap acted to mitigate the cost of the high optical spreads being paid by issuers,” said PJ Bye, head of SSA syndicate at HSBC. “Meanwhile, the high headline numbers attracted a significant asset swap bid for Triple A paper that hadn't been relevant previously."The same pattern was seen in the euro market, although the more diversified investor base there ensured the deterioration in new issue terms was more muted. The €3bn 3.125% April 2014 deal for the EIB, sold in January at mid-swaps plus 20bp was tapped twice in the spring at plus 50bp, before a final addition at plus 28bp in May took the total outstanding to an impressive €8.25bn.KfW attracted strong demand, doubling the size of the existing €3bn 10-year benchmark sold in January at mid-swaps plus 37bp with an additional €3bn at plus 65bp in early April. "The steepening of the yield curve helped issuers restore some of the duration lost elsewhere as continental European insurance companies in particular looked to buy assets offering particular absolute yields to match their liabilities," said Bye.The result of the steady new issue flow, albeit on increasingly expensive terms, was that by the end of the first quarter both KfW and the EIB were around half way to their annual fundin