CEE borrowers to test market boundaries
LONDON, April 13 (IFR) - Just as momentum was building in Central and Eastern Europe's primary bond markets, negative headlines from elsewhere have put a big question mark over how much new supply will emerge over the coming days.
Several borrowers are lining up transactions even amid the growing volatility flowing from renewed concerns about the eurozone and the US economy. Bankers remain hopeful that most will be able to follow state-owned Turk Eximbank's lead, which is due to price a benchmark US dollar, seven-year transaction on Friday.
But with the market's mood darkening over the past week or two, issuing new debt is no longer the easy one-way street it was when the rally was at its peak in February and the first half of March.
Aside from Turk Exim, nine other potential issuers have either finished or are about to embark on investor meetings, with seven of them announcing their definite intention to launch transactions. Adding to the uncertainty is that almost all of these possible candidates are lower-rated credits.
Even most of the sovereign and state-owned entities hitting the road are non-investment grade, including Nigeria, Serbia (both doing non-deal roadshows) and Turkey's Vakifbank.
The only investment-grade names that have publicly announced a potential transaction are Croatia and Black Sea Trade and Development Bank. The latter completed investor meetings more than three weeks ago but a deal has yet to emerge.
In the private sector, meanwhile, high-yield Russian credits such as Promsvyazbank, Evraz, Nomos Bank and Raspadskaya are all in the pipeline.
"These names don't sell by themselves," said one banker referring to the Russian supply. "They will be a true test of how resilient the market is."
"Up to now we've seen sovereigns, quasi-sovereigns and the odd national champion, which have all been slam dunks," he added. "It felt like investors were ready to go one step further down but then the market sold off.
"A lot of names have announced and are getting ready. But no one is really sure what can and what can't get done. These names will be closing their eyes and hoping that this is a blip and the market recovers."
Although credit spreads tightened after a horrible Tuesday, when the market plunged on the back of a poor non-farm payroll number in the US and worries over Spain's outlook, issuance windows could be much narrower than at the beginning of the year as conditions have become more challenging.
No one, however, believes the market is heading back to the dark days of August and September when primary issuance came to a halt. Even if some borrowers have to wait for the optimal moment, bankers say opportunities to issue will arise as investors still have cash that needs to be invested.
"Even as volatility has spiked up fund flows have continued to come in. Year-to-date, fund flows are so much greater than they were over the same period last year. There is plenty of liquidity," says Spencer Maclean, head of syndicate West at Standard Chartered.
Even last week emerging markets hard currency funds had positive flows of USD236m, although the asset class overall saw net outflows.
Maclean adds that those borrowers that need to undertake extensive marketing are doing the right thing in announcing roadshows, meeting investors and taking their feedback.
"When there's volatility we've seen plenty of issuers finish their roadshows and then wait for the market to recover before launching their transaction. That's no negative reflection on the borrower," says Maclean.
Borrowers, though, will have to pay considerably more than they would have even less than a month ago. One banker reckons that Ba3/B+/BB- rated Evraz, for example, will have to pay a 25-35bp new issue premium, while Raspadskaya (B1/B+ from Fitch), which has a US$300m bond maturing in May, will probably have to concede at least 50bp.
"Raspadskaya will be testing the boundaries. If it can't refinance that bond in May then they're in trouble so the pressure is on them," said one banker away from the deal. "They are in something of a corner."
Investors for their part remain optimistic about the asset class. "I do think that the market is open to supply in good quality CEE names, such as Russian oil and gas investment-grade names as long as they come at attractive valuations," says Polina Kurdyavko, senior portfolio manager at BlueBay Asset Management.
Another investor is especially ebullient. "Appetite for EM is huge - I would even use the word insatiable," he says.
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