| LONDON, July 2
LONDON, July 2 Developing countries that did not
take advantage of historically low yields by selling
international bonds in the first half of 2013 are finding
themselves left high and dry as borrowing costs rise.
Emerging market borrowers sold more than $200 billion of
bonds between January and July, a record-breaking streak that
culminated in April with the startling sight of Rwanda issuing a
10-year dollar bond at a yield of less than 7 percent.
But the U.S. Federal Reserve's indication that it will turn
off the liquidity taps which have depressed interest rates in
the West and fuelled demand for higher-yielding assets has burst
a bubble that had developed in emerging debt, bankers say.
"In March/April, some valuations were very high - investors
were awash with liquidity and were desperate for higher-yielding
instruments," said Chris Tuffey, head of EEMEA debt capital
markets at Credit Suisse. "Prices got to levels driven by
technicals rather than fundamentals."
Issuance fell dramatically last month, when only 25 bonds
were issued, according to Thomson Reuters data, compared with 82
in May, 103 in April, and 66 in June 2012. Emerging debt prices
have fallen as a sharp rise in U.S. yields robs riskier
borrowers of their usual yield appeal.
Countries such as Bahrain, Nigeria and Russia have continued
to hold investor presentations, known as roadshows, or assigned
lead managers for planned international debt sales, but no bonds
Borrowers have regularly held "non-deal" roadshows since the
2008/09 financial crisis made them nervous of committing to a
particular timetable for issuing debt, although investors say
such pitches always take place with a bond sale in mind.
Markets have been so favourable until recently, however,
that even unfamiliar names, such as last year's debut borrower
Zambia, were able to raise money as soon as their roadshows
ended, drawing massive demand.
Emerging market debt was yielding on average less than 5
percent in April, an unprecedentedly low level, but that has now
risen to around 7 percent, meaning that borrowers will
have to pay much more for their funding.
Rising interest costs could make life difficult for
countries already struggling with high debt and deficits.
"A lot of issuers have not fully woken up to the fact that
issuance at higher yields will significantly change the debt
sustainability picture," said David Hauner, head of EEMEA fixed
income strategy at BofA-Merrill Lynch Global Research.
Nigeria finished a roadshow last week but no bond followed,
while African countries waiting in the wings include Kenya and
Tanzania. Other countries which have held roadshows in the past
few weeks include Latvia and Ukraine, according to Thomson
Reuters market news and information service IFR.
Some, such as Kenya, which has made and dropped plans for
its first Eurobond several times since 2007, may not have any
pressing need to borrow, while others may find alternative - and
cheaper - sources of funding.
Ukraine's debt insurance costs have recently hit 18-month
highs, however, as investors worry that without an International
Monetary Fund deal, the country will not be able to refinance
its debt. Kiev sold a $1 billion 10-year Eurobond in April and
said it aimed to raise another $2.5 billion this year.
More regular sovereign borrowers may also struggle to
complete their annual issuance programmes, let alone borrow in
advance of next year's plan, as countries often seek to do.
Turkey has raised $4.2 billion of its $6.5 billion borrowing
target for this year, while Hungary has completed $3.25 billion
of a 2013 target of around $5.5 billion.
"People used to do a lot of pre-funding and that won't be
the case any more," said Gorky Urquieta, co-head of emerging
markets debt at asset manager Neuberger Berman.
Companies and financial firms, which made up the vast bulk
of this year's issuance, are also holding back.
Turkish banks Ziraat and Yapi Kredi are among
those who have said they are waiting for better market
conditions, while Nigeria's Diamond Bank ended a
roadshow last week without a deal.
Bankers involved in emerging market debt remain optimistic
the recent rise in U.S. Treasury yields may be temporary, saying
this month's U.S. employment numbers and Federal Reserve meeting
could put a different complexion on the Fed's intentions.
If that is the case, for emerging market borrowers, "the
summer should be active, rather than quiet," said Credit
But countries and companies who missed the window which
closed in April will have to resign themselves to borrowing at
higher rates. "Emerging markets will never have it as good
again," BofA-ML's Hauner said.
(Additional reporting by Sujata Rao in London and Seda Sezer
and Nevzat Devranoglu in Istanbul; Editing by Catherine Evans)