Emerging market sell-off squeezes SSA new issues
* FX weakness sidelines key central banks
* Issuers rush to take size on scanty books
* Syndicate bankers still positive given volatility
By John Geddie
LONDON, Sept 13 (IFR) - Public sector borrowers face a challenging new issue environment as a number of key emerging markets central bank investors have cut back their participation in bond deals as they fight to prop up their ailing currencies.
Weakness in the likes of the Indonesian rupiah, Malaysian ringgit and the Brazilian real have sidelined the central banks of these countries from stocking up on debt issued in US dollars, the global reserve currency.
Whether this is a trend borne out of general market volatility, or outright selling of foreign exchange reserves to stabilise their own currencies, at the margin, demand for dollar debt issued by supranational, sub-sovereign and agency borrowers is waning.
"For the rest of the year, dollar funding is set to become increasingly difficult for top quality names," said Leopold Olma, head of funding at German agribusiness agency Rentenbank, who is hoping to issue a new dollar benchmark later in the year.
"From what we have seen in recent deals, orders are smaller in general. Some central banks which would normally take USD200m tickets are only taking USD20m at a time."
Like many European borrowers, Rentenbank issues a large portion of its annual funding programme in dollars because of the favourable cross-currency basis swap.
Central banks and official institutions are very influential buyers of quasi-sovereign bonds, which offer a combination of top credit ratings and spread over their government backers.
Europe, in particular, has a sophisticated network of these type of borrowers. According to Barclays research, these issuers have had annual funding volumes of around EUR380bn in the past two years, and have total outstanding tradeable debt of about EUR1.76trn.
Since markets have reopened after the summer break, central banks have bought around half of the USD27bn of debt issued by these borrowers via a dozen or so transactions, according to IFR calculations.
On the face of it, this seems like a healthy share, but the distribution statistics only tell part of the story.
In nominal terms, overall order books sizes have been shrinking, and the bumper dollar deals issued at the start of the year are no more.
German development bank KfW was only able to hit its minimum USD3bn benchmark size with a seven-year bond after receiving orders of USD3.6bn this week, whereas in January it issued a more testing 10-year benchmark and was able to print USD4bn off a book of nearly USD6bn.
"At the moment there are a few of the bigger accounts that aren't active, particularly in Asia, but also elsewhere globally," said one head of syndicate in London.
"This is not showing itself up in the headline distribution statistics because there are two large Asian central banks still active for certain names."
While syndicate officials are careful not to name their clients, the two central banks in question are widely understood to be China and Japan. If those two don't participate, deals automatically become tricky.
Just a day after KfW launched its transaction, another Triple-A rated German entity, FMS Wertmanagement, launched a three-year Global. That deal limped over the line for a USD1.5bn trade, despite pricing at the wide end of guidance.
Even the handsome 3-4bp new issue premium on offer was not enough to lure some cautious investors, said one syndicate official who worked on the FMS trade.
As a result, there have been a number of heavy-handed allocations, as borrowers look to take maximum size out the market and reduce their funding needs for the remainder of the year.
As well as the scantily covered FMS deal, last week Dutch agency BNG printed a USD1.75bn three-year bond with just USD1.8bn of orders, while Asian Development Bank issued a USD2bn five-year on USD2.2bn of demand.
All of those deals performed poorly in secondary markets. BNG's deal is still bid 4bp wide of reoffer, while ADB's and FMS's deals are 1bp wide, according to Tradeweb data on Friday.
While the deals may not be remembered fondly by the investors that participated, some syndicate officials have actually been impressed by the issues getting done given the latent market volatility.
"The new issue market is certainly tougher than it was at the start of the year because there is not as much granularity among central bank investors," said PJ Bye, global head of public sector syndicate at HSBC.
"That said, this is only really a factor at the margin. In fact we have been surprised to the upside on recent deals given what is happening in the background: Syria, German elections, tapering concerns." (Reporting by John Geddie, editing by Sudip Roy and Julian Baker)
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