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Emerging debt sales hit surprise record in 2013, outlook upbeat

Carolyn Cohn and Sujata Rao
Tuesday, 24 Dec 2013 | 6:09 AM ET

LONDON, Dec 24 (Reuters) - Emerging market dollar bond sales hit record highs of $450 billion this year, surprising industry players who had predicted issuance to suffer from the threat of U.S. monetary stimulus withdrawal.

Worries about the squeezing of the U.S. lifeline that had fuelled demand for risky assets drove money from emerging market debt funds and hit returns in 2013, after several years of inflows and double-digit gains.

But low interest rates in historical terms and an absence of the expected tapering of U.S. stimulus kept borrowers coming, with only a relatively brief market freeze.

"The market was only really closed in June and July, that's generally a very quiet part of the year," said Marc Balston, emerging debt analyst at Deutsche Bank. "We probably only missed a month or six weeks. We saw a catch-up in September."

Sovereign and corporate issuance together totalled $450 billion this year, compared with $437 billion last year, which was already a record, according to data compiled by ING.

JP Morgan saw record corporate issuance for this year at $335 billion, with total issuance around $420 billion.

A frenzy of interest in emerging debt at record-low yields in the first few months of 2013 culminated in an oversubscribed offering for debut African borrower Rwanda.

But Federal Reserve Chairman Ben Bernanke put a brake on the issuance schedule in May by guiding markets to expect a tapering of the Fed's $85 billion-a-month bond-buying programme.

After an issuance lull in the summer months, the expected tapering did not happen in September, and issuance picked up once more. Tapering is now scheduled to start in January, the Fed announced earlier this month.

Highlights for the second half of the year included bonds totalling around $7 billion in much-delayed offerings from Russia, and dollar debt from Gabon, Nigeria and Tanzania. African issuance reached record levels above $8 billion.

Sovereign issuance totalled $90 billion by mid-December, Deutsche's Balston said, with another $91 billion forecast for 2014, compared with $97 billion last year.

For sovereign borrowers, a lack of supply next year is likely to keep borrowing rates low, while high-yield corporates have room to outperform, emerging market analysts said.

LIFE AFTER TAPERING

Yields have risen but markets have had months to adjust to the concept of life with tapering, and the yields remain relatively low by historical standards.

Emerging sovereign debt yields average around 6.2 percent, according to JPMorgan's EMBI-Global index, after hitting record troughs below 5 percent early in the year.

And principal and interest repayments are likely to be around equal to the levels of new supply, Deutsche said, supporting demand for new issues next year.

"We are seeing a relatively constructive outlook for 2014," Balston said.

But despite the high levels of issuance, emerging sovereign debt is one of the worst-performing asset classes this year, Deutsche said, calling it "a year to forget" in a client note.

Returns fell 6.4 percent this year, and analysts cite data from fund-tracker EPFR showing $18 billion left emerging market hard currency funds to end-November, after the asset class absorbed $37 billion in 2012.

But with this year's uncertainty behind it now the Fed has played its tapering hand, emerging debt could attract new investors next year.

"The market is still looking for paper, (fourth quarter) issues were many times subscribed," said Sergei Strigo, head of emerging market debt at Amundi.

Bank of America-Merrill Lynch sees issuance of $425 billion next year, compared with $410 billion for 2013, though it only sees returns of 0.3 percent on hard currency debt.

The withdrawal of U.S. monetary stimulus is likely to bring investors back home, attracted by higher yields without the country risk. In that environment, riskier emerging borrowers can still attract investors because of their higher yield.

ING's head of emerging debt research David Spegel says speculative grade issuance has risen to 35 percent of the total issuance this year, compared with 30 percent in 2012.

"Despite the increased market uncertainty, it seems that investor appetite for risk has actually increased," he said.

The emerging corporate debt market crossed the $1 trillion threshold last year and new high-yield deals came this year from borrowers such as London-listed Nigeria-focused oil company Afren and Bulgarian telecoms firm Vivacom.