* Pace of supply quickens despite underlying risks
* Boundaries of investor appetite tested
* Latin American high-yield borrowers jump through window
By Sudip Roy and Paul Kilby
LONDON, Nov 8 (IFR) - With year-end approaching, the rush to sell emerging markets bonds is intensifying. But some cracks are beginning to appear in the primary market and might deepen as rates spike again.
Potential deals from Indonesia’s Metropolis Propertindo, China’s Wanda Properties and Thailand’s Ananda Development were postponed this week. Nigeria’s Guaranty Trust Bank and South Africa’s Transnet were forced to compromise respectively on size and price, while Peru’s Andino Investment Holding (AIH) did so on both, as issuers tested the boundaries of investor appetite.
While bankers stress that the market has sufficient depth to absorb all the potential supply likely to come over the last few weeks of the year, they are also keenly aware of the lurking dangers that lie ahead, not least Fed tapering.
Friday’s stronger than expected non-farm payroll data will add to the uncertainty about the timing of tapering, though one origination official said the number was not a market breaker.
Bankers will hope that proves true. The primary market is at full throttle despite continued outflows from bond funds and many recent deals struggling in the secondary market. “It’s an interesting phase. Trying to characterise the markets is challenging,” said one London banker.
In CEEMEA, for example, only Turkey’s blowout return to the euro market is trading well among recent new issues and even a stellar credit such as Abu Dhabi lender First Gulf Bank saw its USD500m January 2019 bond trade down almost half a point before staging a recovery.
Still, many issuers continue to jump into the market, encouraged by their syndicates to print before the cash dries up at year-end.
“At the moment people are holding on tight, half closing their eyes and pushing on,” said the banker. “You almost want the end of the year to arrive and let the market take a breather.” However, he doesn’t think there is a sense of panic, saying: “I’m not sure it’s desperation but there is a palpable sense of urgency among the syndicate community.”
What’s standing out, in particular, is the slew of deals that are at the riskier end of the credit and structural spectrum. This week, for example, relatively unknown private Russian lender, Vneshprombank, priced a USD200m three-year bond at 9%.
Such is the market’s lack of familiarity with the bank that when the mandate was announced some bankers mistook it for (very well-known) state-owned Vnesheconombank, which, co-incidentally, has also just announced a new mandate. To VPB’s credit the deal got done, albeit at a smaller size than it had targeted.
There are plenty more names in the pipeline that will require intense credit work. To an extent, high-yield deals make sense as tapering edges closer, as these issuers are less exposed to US interest rate volatility. But there will be a limit to investors’ tolerance for liquidity risk.
Nowhere is the high-yield spree more evident than in Latin America, especially from debutantes. There was a spike to USD13.2bn in cross-border issuance from the region in September. However, junk credits comprised just USD2.9bn of that, and not one first-time issuer tried its luck.
That all changed last month, with several debut issuers venturing forth. They included Peruvian bottle manufacturer San Miguel Industrias (Ba2/BB), Guatemala cement company Cementos Progreso (BB/BB+) and Banco Nacional de Costa Rica (Baa3/BB+).
In the dollar market, Latin American borrowers printed close to USD9.5bn in new supply in October, with about a third of that coming from sub-investment grade issuers.
“The insatiable demand for these deals, as evidenced by massively oversubscribed books for small deals from first-time, high-yield rated issuers, underscores the irrationality of a market fuelled by QE-related technicals,” said Robert Abad, emerging markets specialist for fund manager Wamco.
“The tapering delay, perhaps until some time early next year, was like throwing a birthday candle into a barrel of diesel.”
The strong bid has even been evident for sub-USD300m deals that do not qualify for inclusion in JP Morgan’s corporate emerging-market bond index (CEMBI) and come with considerable liquidity risks.
This week, Mexican copper minder Cobre del Mayo (B2/B), Guatemalan bank Banco de los Tabajadores (Ba3/BB-) and Peruvian logistics company Andino Investment Holding (B+/BB-) all printed deals.
A USD200m seven-year from little-known San Miguel Industrias perhaps best epitomised the buyside’s willingness to throw some caution to the wind.
The credit arguably had several factors working in its favour, including a recent sovereign upgrade, Peru’s comparatively strong GDP numbers, a strong local bid and a dearth of corporate paper from the country and in the secondary markets in general. However, the USD2.6bn book for such a small deal surprised some market participants, as did the pricing, which was ratcheted in by 125bp.
“A few years ago, if you had done something like this, you would have angered accounts,” said a banker covering the region.
Higher new-issue premiums might initially be required to get investors’ attention, but the buyside has been willing to tolerate price compression in certain instances.
That tolerance for smaller deals was showing signs of fatigue, however, when AIH struggled to print its USD115m seven-year bond issue and was forced to widen pricing to accommodate investors seeking a liquidity premium ahead of the payrolls data.
“There was a universe of investors that was willing to buy illiquid paper, but there was only so much room in their portfolios,” said one banker.
Treasury rate volatility, which burned investors earlier this year, remains a big threat. Yields on 10-year Treasuries have spiked again this week on better economic data and the jobs data.
The question is whether or not investors want to minimise damage to portfolios by reducing exposure or take a broader strategy to increase returns, said one strategist. (Reporting by Sudip Roy and Paul Kilby; Editing by Richard Stanbury and Han Nee Tay)