January 23, 2014 / 4:20 PM / 4 years ago

EM bond issuance gets off to a flier

* January record on course to be broken

* Dollar bond index up

* Local currency bonds and FX in the doldrums

By Sudip Roy

LONDON, Jan 23 (IFR) - Emerging markets bond issuance has got off to a roaring start with supply for the month on course to beat last January’s new year spree.

About USD51.8bn had been issued in the international market up to January 21, according to Thomson Reuters, a 55% increase on the amount raised over the same period in 2013, and just USD10bn less than the volume issued for the full month of January. That record should be smashed in the coming days.

“Spreads are in, new issue premiums are negligible, it’s the perfect storm,” said one banker in London. “Who knows how long it’s going to last.”

Asia leads the way, accounting for roughly half of this year’s volumes. While sovereigns, such as Indonesia, Sri Lanka and the Philippines have sold the big deals, the main theme, as last year, is the slew of property companies hitting the market.

The supply has not surprised bankers, who say that many Chinese developers have maturities coming up this year, and with local rates higher, it makes sense for them to tap the offshore bond market.

However, some stresses are beginning to show in the property sector. Powerlong Real Estate Holdings earlier this week became the first emerging markets issuer to postpone a new issue this year, delaying an offshore renminbi transaction.

The developer did not give a reason, though rival bankers attributed the postponement mostly to some investors asking for higher yields.

There then followed a generous new dollar bond from Wanda Properties that dragged the rest of the sector down. “The property sector is fragile and is vulnerable, and Wanda’s deal has just repriced the sector,” said a high-yield trader.

Still, those concerns aside, most emerging markets new issues have gone smoothly, with Turkey’s USD2.5bn 10-year transaction on Wednesday in particular seen as an encouraging sign of its market access given the political problems in the country.

POSITIVE PERFORMANCE

Another encouraging sign, and in contrast to the beginning of last year, is that secondary performance is holding steady, with emerging markets dollar-denominated bonds up nearly 1%, according to JP Morgan’s EMBI index.

That positive number will provide a fillip to investors after a disastrous 2013, when many were nursing losses of 6% or more. Indeed, all emerging markets sub-asset classes performed terribly last year, but since the beginning of this year hard currency sovereign debt has become more resilient.

In contrast, emerging markets FX and local currency bonds remain in the doldrums, with returns on indices for both in negative territory, driven by dollar strength and exacerbated by worries about slowing economies and growing political risks in several countries.

In Turkey, for example, the lira has fallen to a record low even after the successful bond sale as a corruption probe has ramped up political tensions. With the lira extending losses against the US dollar, Turkey’s central bank has made its first direct intervention in the FX market for two years, selling around USD2bn-USD2.5bn of its reserves - more or less the amount it raised through the bond sale.

The hard currency surge, however, is being driven more by technical factors. With the Fed’s tapering programme under way, investors feel more comfortable putting their cash to work, which still remains plentiful despite bond outflows from emerging market funds over past year.

Although there were USD11.1bn of redemptions from hard currency funds last year, according to EPFR Global, this is more than offset by the amount of incoming money from amortizations and coupon payments on outstanding bonds.

“EM hard currency bond investors have continued to be net receivers of capital, which in turn explains the large demand for new issuance,” said Regis Chatellier, emerging markets senior credit strategist at Societe Generale.

Investors, though, remain cautious about the medium-term prospects of both hard currency and local currency debt.

“After the underperformance of the asset class in the second half of last year, both emerging market US dollar-denominated sovereign and corporate bonds are beginning to look attractive relative to developed market corporates,” said Benjamin Brodsky, head of fixed income asset allocation at BlackRock.

“But emerging markets, especially local bonds and currencies, will remain volatile and ultimately differentiation will drive return opportunities.” (Reporting by Sudip Roy; Editing by Julian Baker)

Our Standards:The Thomson Reuters Trust Principles.
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