September 19, 2018 / 12:10 PM / a year ago

Emerging-market debt issuance on ice after turbulent summer

LONDON, Sept 19 (Reuters) - Emerging-market debt issuance is on hold after a summer of volatility, with the market effectively closed for borrowers like Turkey and Russia, although Asian and Middle East issuers can still get their bonds to market.

Bond sales usually rebound in September after a quiet August, but this year currency crises in Turkey and Argentina and worries about rising U.S. sanctions risk for Russia have kept volumes dramatically lower.

“Emerging markets had a rough time, and we have seen the effects of that when it comes to debt issuance - the pipeline is pretty empty,” said one senior debt capital markets banker, who declined to be named.

“It would be very difficult for Turkey to come to the market, and Russia has the Damocles sword of sanctions hanging over it.”

Emerging-market sovereigns have issued just $3.4 billion of hard-currency debt so far this month, according to Thomson Reuters data, compared with $28.8 billion for September 2017. This year’s third-quarter total is running at $9.9 billion to Sept. 17, versus 2017’s $36.6 billion.

The sovereign market was “basically dead”, Regis Chatellier, global sovereign credit analyst at Societer Generale, said. But that followed bumper issuance in January and April of $38.5 billion and $37.5 billion respectively - the two biggest months ever. This meant funding needs were less pressing.


On the demand side, emerging-market bond funds have suffered net outflows of $21.6 billion so far this yea, according to data from EPFR Global, compared with inflows of $64.4 billion over the same period in 2017.

Of this, hard-currency emerging-market debt funds have lost $6.26 billion, compared with net inflows of $35.47 billion in 2017.

It’s a stark contrast to 2017 when asset managers were so flush with cash that even frontier markets such as Tajikistan could sell bonds.

A sustained sell-off in Turkey and Argentina triggered a bout of contagion in August, prompting spreads to blow out to a two-year high and clobbering emerging-market debt fund performance - already underwater at the half-year mark .

On the sovereign side, Chatellier said that only the strongest names had issued, such as the Philippines, which set an Asian Samurai bond record in early August with a $1.38 billion three-tranche deal.

Saudi Arabia also raised $2 billion in sukuk, while South Korea hit the road for an SEC-registered bond issue.

“For high yield, the market is difficult,” Chatellier said. He does not expect see any improvement this year, given the poor geopolitical backdrop and the fact that the U.S. Federal Reserve is tightening, raising borrowing costs for countries issuing dollar debt.

On the corporate side, issuance is running at $8.7 billion in the quarter to Sept. 17, compared with $41.6 billion over the third quarter in 2017.

Post-summer issuance has come mainly from Asian and Middle Eastern issuers, including property companies such as Poly Real Estate, and banks such as First Abu Dhabi Bank, and Agricultural Development Bank of China. .

In emerging Europe, issuance has been much thinner, although Poland’s mBank, a BBB-rated credit, and Czech Republic’s Atrium Real Estate managed to close transactions - the latter at its second attempt - at a new-issue premium of about 60 basis points.

“That’s real estate which is over-supplied for the year, but the broader point is that not everything works and if you don’t fit within what investors want to buy it will be difficult,” said Ranko Milic, head of CEEMEA debt capital markets at UBS.

For the remainder of the year, he thought there might be some opportunistic issues from less frequent borrowers, or a couple more from the CEE area: “But I don’t see a very extensive pipeline, except perhaps a continued flow of issues from the Middle East.” (Reporting by Claire Milhench, additional reporting by Karin Strohecker, editing by Larry King)

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