Bangladesh: coming soon to a portfolio near you

Fri Mar 1, 2013 5:59pm IST

* Papua New Guinea and Bangladesh eye dollar bonds

* Lack of sovereign issuance makes deals attractive

* Better terms abroad than in local markets

By Christopher Langner

March 1 (IFR) - Mongolia's capital Ulan Bator boasts few similarities with the capital of Papua New Guinea, Port Moresby, apart from the latter featuring in a list of the top ten most dangerous cities in the world and the former being among the ten most polluted places on Earth. Sri Lanka and Bangladesh also have little in common apart from being in the same southerly region of Asia, the Indian subcontinent.

Yet, all those countries may soon be sharing the same space in the portfolios of global debt investors. This week, the Independent State of Papua New Guinea (B1/B+) hired Barclays, BNP Paribas and JP Morgan to help the country issue its first ever dollar bond. At the same time, bankers said the People's Republic of Bangladesh (Ba3/BB-) is seeking advisers to help it on its first foray into international markets.

For the past decade there have been rumours about the two sovereigns - alongside Pakistan - issuing dollar bonds. However, they have never gone so far as this time. "Bangladesh has told us that they are determined to issue their first dollar bond this year and Papua New Guinea has already picked the banks," said one banker.

The two prospective deals follow the success of similar debut issues last year from Sri Lanka (B1/B+/BB-) and Mongolia (B1/BB-/B), both of which were met with strong demand. Analysts and bankers agree that dollar bonds from Bangladesh and Papua New Guinea are likely to generate the same level of interest.

LACK OF OPTIONS

Investors seeking higher returns in a world of record low yields tend to be more willing to buy riskier credits, which explains their interest in debt from lower rated credits. But beyond that, analysts said, emerging markets investors are currently willing to buy almost any sovereign paper offered to them.

"Sovereign supply is very small and it is a shrinking market, so any new name will be welcome," said Shankar Narayanaswamy, head of credit strategy at Standard Chartered Bank in Singapore. "The scarcity value of these issues has increased, even the Philippines and Indonesia have been issuing less bonds."

Indeed, in Fitch's Global Sovereign Outlook published in December 2012, the rating agency said that emerging markets as a whole are net external creditors to the tune of more than USD6.3trn and are set to improve that position by 5.8% by the end of 2013. In Asia, apart from the newcomers, only the Philippines and Indonesia have remained active in the dollar bond markets, and both issued less foreign currency bonds last year than they did in 2011, according to the Asia Development Bank.

TOO GOOD TO PASS

The volume of emerging market sovereign bonds is dwindling just when investors are happiest to buy them. Growth in developed countries has been slow - negative in some cases - while in emerging economies it has remained strong.

Mongolia's GDP, for instance, grew 17.5% in 2011, the last data available, according to the World Bank. That year, Sri Lanka's economy expanded 8.25%, Papua New Guinea's 9%, and Bangladesh, the laggard, grew 6.7%. Meanwhile, the eurozone and the United States have lately been showing negative or flat growth numbers.

If investors are happy to buy the bonds, the current conditions on offer in the dollar debt market may be too hard to resist for the governments in these countries. Mongolia, for instance, clinched a 5.125% coupon for its 10-year dollar bond issued in December and 4.125% for a five-year printed at the same time. The sovereign raised a combined USD1.5bn with the transaction. In July, Sri Lanka raised USD1bn with a 10-year bond paying a coupon of 5.875%.

Meanwhile, after years of effort, Papua New Guinea has developed its local market enough to be able to mostly fund itself at home. The conditions at home, however, are not nearly as enticing as those abroad.

The sovereign has only recently managed to extend its local currency debt curve to 15 years. In its latest auction of the 2029 bond, Papua New Guinea paid a yield of 10.91%, while 10-year local money comes out at around 8.44%. Considering its ratings, it is likely to get 10-year dollars for as little as 6.25% - some say even less. Bangladesh is the same. Its 10-year local debt yields 12%, but terms abroad are likely to be even better than those for Papua New Guinea.

"We are in a world where investors still have a lot of interest in inaugural issues, and in that category they seem to prefer sovereign issuers to corporate," said Guy Stear, credit strategist at Societe Generale in Hong Kong.

Asked if he would invest in Papua New Guinea or Bangladesh, a high-yield portfolio manager said the diversification is welcome. As to the question of visiting Port Moresby to evaluate his investment, however: "I think I may have a prior engagement." (Reporting By Christopher Langner, additional reporting by Neha D'Silva; editing by Julian Baker)

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