* Volumes already at record levels
* Bond market activity contrasts sharply with equity and loans
By Sudip Roy
LONDON, Sept 18 (IFR) - Emerging markets sovereigns, corporates and financial institutions could raise nearly USD400bn of external debt this year as they seek to take advantage of benign issuance conditions, according to ING.
Borrowers have already raised a record USD314bn year-to-date, one-third more than the amount they issued over the same period last year. And the Dutch Bank foresees a further USD78.4bn of issuance this year, including some pre-funding for 2013.
The past two weeks, in particular, have seen a hot streak with more than USD24bn raised globally in emerging markets driven by record low interest rates, a big rally in credit spreads thanks to decisive central bank action in the US and Europe, and cash-laden investors seeking to deploy funds almost as quickly as they are receiving them.
For 2012, emerging Europe, Middle East and Africa leads the way with issuance at USD113.28bn as of September 13, a smidgen ahead of Asia, where funds raised stand at USD112.70bn. Latin American borrowers have raised USD87.57bn.
That has meant that net new investment into the asset class has totalled nearly USD150bn. “So far this year, the stock of outstanding EM debt has grown by USD205bn. Assuming the recycling of interest payments, this means that net new investment into the asset class has totalled USD149bn.”
“This already exceeds the USD106bn of investment raised over all of 2011,” said David Spegel, global head of emerging markets strategy at ING in a research report, adding that more than 90% of new money has gone into corporate bonds.
Of the USD314bn raised in external bond markets, USD37bn has come through private placements and convertible bonds, with the rest from conventional issuance.
Conventional issuance is up by USD53bn or 24% over the same period last year, added Spegel. Corporate volumes (including financials) are up 41% to USD206bn - with Asia accounting for about half and Latin America just over one-third - while sovereign issuance is actually down 9% to USD72bn. Emerging Europe, the Middle East and Africa remains the most prominent region for sovereign issuance.
High-yield issuance is struggling, amounting to just 21% of total issuance in the third quarter, down from 28% during the three months from April to June, though that’s still much better than the 15% in the first quarter.
“The drop of speculative-grade issuance is something of a mixed blessing, however,” said Spegel. “Although EM bond issuance levels have hit record highs and sparked claims of a speculative bubble, the fact remains that most of the money is going into higher-quality assets and the speculative portion of new debt remains well below the 50-65% levels seen over the last bubble in 2006-1H07.”
Local currency Eurobond issuance is USD15.7bn this year, just 5% of the overall external debt amount and below last year’s level of 8.3%.
The surge in debt issuance volumes contrasts starkly with the subdued activity in the emerging equity and bank lending markets. Both have seen volumes fall significantly from 2011 levels, putting further pressure on the bond market to provide financing.
And despite the buoyancy of the debt markets, Spegel warned there will be further periods of volatility.
“While the favourable supply/demand technical dynamic should be supportive of most new issues, the higher-than-usual investment could leave the market prone to greater bouts of volatility should a rush for the exits ensue, for whatever reason. Fortunately, most of the new money is being placed with higher-grade names.”
Reporting by Sudip Roy; Editing by Julian Baker