Risky sovereigns join dollar bond rush

Fri Apr 19, 2013 5:25am EDT

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* Falling yields tempt Vietnam back to market

* Rwanda also looking at dollar bonds

* Hunt for returns leads to risky assets

By Neha D'Silva

April 19 (IFR) - Surging interest in emerging-market bonds is opening the door for sovereign offerings from the world's lower-rated countries.

On Thursday, the Socialist Republic of Vietnam (B2/BB-/B+) and the Republic of Rwanda (B/B) began a series of investor meetings ahead of potential US dollar bonds. Papua New Guinea and the People's Republic of Bangladesh are looking to follow suit.

Bonds sold last year by the Democratic Socialist Republic of Sri Lanka (B1/B+) and first-time issuer Mongolia (B1/BB-/B) have surged.

The renewed appetite for risky debt shows that governments in Asia and elsewhere are benefiting from the latest injection of money from the world's biggest central banks. Even countries, which were once taboo among debt investors, are expecting a warm welcome from yield-starved global funds.

Since the Bank of Japan announced unprecedented monetary-easing measures on April 4, interest in the bonds of lower-rated sovereigns had increased significantly. Mongolia's 2022s gained US$5 in price terms in the second week of April.

Even though they have since given back some of those gains, the latest bid of 96.50 is one of the highest the bonds have seen in secondary markets since they priced on November 28.

Similarly, in the second week of April, Vietnam's most liquid dollar bond, the 2020s, hit their lowest yield ever, below 3.6%, helping to explain its decision to return to market after three years.

"The last time Vietnam issued a 10-year bond was at a coupon of 6.95%. Now, they can issue at 4% or lower," said a Singapore-based credit trader. "Investors want yield and they are willing to go down the credit spectrum."

Vietnam has been absent from the bond market since 2010, partly because investors blacklisted the sovereign after state-owned shipbuilder Vinashin defaulted on a US$600m loan signed in 2007.

At the time, the government shocked markets when it refused to stand behind a letter of comfort on the loan. However, the strong demand for Vietnamese paper in secondary seems to indicate that event is no longer important. Deutsche Bank, HSBC and Standard Chartered are handling the roadshow.

FUND INFLOWS

On the day that Vietnam hit the road, Rwanda, a name that was, until recently, taboo for credit investors after a bloody civil war and the 1994 genocide, began meeting investors with an eye on its first dollar offering. BNP Paribas and Citigroup are handling the meetings. Analysts put the appetite for risky assets down to monetary policies in Japan and elsewhere.

"(This) can ultimately be attributed to demand arising from quantitative easing and the amount of money coming into Asian bond markets," said Krishna Hegde, head of Asia credit research at Barclays. "From the issuer perspective, the cost of financing in the dollar bond market is clearly motivating them to come to raise funds for capex or refinancing."

All-time-low yields and strong risk appetite have powered high-yield bond sales from Asia to their most active quarter in history. As of April 16, US$14.4bn of sub-investment-grade bonds had been printed in dollars from Asia excluding Japan and Australia, already beating the previous full-year record, according to Thomson Reuters data.

Despite that surge in supply, demand remains strong. Emerging-markets debt funds recorded US$16.8bn of inflows year to date, according to research firm EPFR.

Much of that has gone toward Global Emerging Market funds - known as GEMs - which focus more on sovereign bonds.

In the week ended April 16, for instance, GEM funds received US$733m in new money, while all other sub-classes of funds either saw outflows or inflows of less than US$50m.

While these strong inflows to GEM funds may have been partly to blame for the rising interest in risky sovereign bonds, analysts believe it is simply because the yields on offer are attractive for the risks involved.

"Liquidity is abundant at this point and risk free rates are low," said Hegde. "If you see the spread investors are getting versus the expected default rate, one can argue that the spread compensation is adequate." (Reporting By Neha D'Silva; editing by Christopher Langner and Steve Garton)

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