Yield-rich emerging bonds enjoy first-half boom

Fri Jun 29, 2012 9:22pm IST

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* Emerging debt issuance on course for record year

* Sovereigns, corporates have met 2/3 of funding needs

* High yields, euro zone switches attracting investors

* Corporate bonds appealing, local FX debt less so

By Sujata Rao and Carolyn Cohn

LONDON, June 28 (Reuters) - Emerging market borrowers have already met most of their 2012 external fundraising targets half way through the year and are on course for an annual debt-raising record,

They are benefit ting from investors favouring debt over equity and developing markets over the troubled euro zone.

Signs the world's major central banks will keep world markets on liquidity support have helped borrowers issue hard currency debt worth over $190 billion so far in 2012, data from Bank of America/Merrill Lynch (BofA/ML) shows.

The bank forecasts full-year issuance at $293 billion, just pipping record levels hit in 2010.

Both companies and govenments from emerging economies have raised around two-thirds of 2012 funding needs as of June 25, BofA-ML estimates.

Issuance is nearly 10 percent above year-ago levels, due to the attraction to investors of high-yielding debt denominated mainly in safe-haven dollars.

"Interest from strategic institutional investors is very strong across the board, there is tremendous allocation going on," said Rob Drijkoningen, who oversees 12 billion euros ($15 billion) in emerging debt at ING Investment Management.

"The overall shift to fixed income is also helping at a time when allocation to equity is getting downsized and the quest for yield pick-up intensifies."

Deutsche Bank also calculates sovereigns have met two-thirds of their $71 billion funding needs for the year.

And some countries including Poland and Turkey have finished their 2012 borrowing plans but say they may return to markets in order to start pre-financing the coming year. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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Even in investors' headlong dash for cash, appetite for new emerging issues seems intact. Turkey's $1 billion tap of an existing 2041 dollar bond drew total bids of $7 billion despite offering virtually no new issue premium.

Similarly Bahrain, mired in political turmoil, this week raised $1.5 billion 10-year cash at 6.125 percent. The deal attracted orders of more than double the issue amount.

Even BB+ rated frontier credit Guatemala sold a $700 million Eurobond at the end of May, paying just 5.875 percent.

The lure of returns in a zero yield world is a powerful one, especially after the U.S. Federal Reserve's recent moves made it clear Treasury yields will continue to languish, said Jeremy Brewin at Aviva Investors.

The Fed this month launched another round of monetary stimulus under its "Operation Twist". The Bank of England also extended its bond-buying programme while the European Central Bank is likely to cut interest rates.

"Bearing in mind cash is yielding zero and investment grade emerging credit gets you 4 percent, you don't want to be out of that income stream for too long," Brewin said.

He noted that emerging sovereign dollar bonds currently yield a premium of 390 basis points over U.S. Treasuries though the pick-up offered by the investment grade component of JP Morgan's EMBI Global bond index 11EML is just 238 bps.

Emerging entities' funding progress compares favourably with euro zone governments, which have so far raised 40-65 percent of their vast 2012 targets.

David Hauner, head of EEMEA economics and fixed income strategy at BofA/Merrill Lynch Global Research noted that cash fleeing the euro zone periphery would also need a home.

"People used to hold Spain and Italy for a bit of pick-up over Germany and now the search for yield could be driving some of this money into emerging debt," Hauner said.

Markets will not be receptive to all sovereigns, with Ukraine possibly facing a financing crunch if it fails to get an IMF programme soon after its October election. Indebted Hungary too has not yet started its overseas borrowing for 2012.

But these flashpoints so far appear to be the exception rather than the rule.

"Views of sovereign creditworthiness in emerging markets are relatively good," said Marc Balston, emerging debt strategist at Deutsche Bank. "There are some concerns over some credits, but generally the asset class tends to be looked on favourably."

DOLLARS AND CORPORATE DEBT

Two bets stand out.

Investors have pumped over $22 billion into emerging debt this year, $7 billion more than the first half of 2011, data from fund tracker EPFR Global shows.

JP Morgan notes 80 percent of this has flowed to hard currency debt, reflecting unease over the exchange rate swings in emerging currencies and the preference for dollar exposure.

"The market is very keen to lend money if you find a good story at the right price," said Pierre-Yves Bareau, head of global emerging debt at JP Morgan Asset Management.

"But people are cautious about FX volatility, so commitment to local currency debt has diminished by a big margin."

That bet has paid off, with returns on the EMBI Global index at 7 percent so far this year, among the best performing assets of 2012. Local debt returns are 5 percent in dollar terms, hit by the almost across-the-board depreciation of emerging currencies versus the greenback.

In hard currency markets, investors have been fans of debt from high-grade emerging companies which, as in the developed world, often offer a sizeable yield pick-up over the sovereign, better balance sheets and can carry state guarantees.

Russian state bank Vnesheconombank, for instance, raised $1 billion via a 10-year Eurobond on Wednesday, following two other Russian bank bonds last week. It received orders of $3 billion.

"Corporates tend to be cyclical so when the growth cycle and commodities get challenged, we will see more volatility on corporate bonds, said Bareau.

"But you are getting very good spreads and companies are in good shape so it's an area where you want to be positioned."

($1 = 0.8047 euros)

(Additional reporting by Nevzat Devranoglu in Istanbul)

((sujata.rao@thomsonreuters.com)(44 20 7542 6176)(Reuters Messaging: sujata.rao.thomsonreuters.com@thomsonreuters.net)) Keywords: EMERGING DEBT/ISSUANCE

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