September 27, 2017 / 10:16 AM / a year ago

From Chinese giants to new frontiers: emerging dollar bond sales boom

LONDON (Reuters) - Frontier economies including Tajikistan and Iraq along with credit-hungry Asian firms led emerging market borrowing in the July-September quarter, as 2017 shapes up to be another record year for debt sales.

Stronger economic growth in the developing world and sizeable inflows into bond funds have left asset managers eager for new high-yielding paper, encouraging less frequent issuers to test the market’s appetite.

“It’s a bit of a Goldilocks scenario for EM issuance,” said Regis Chatellier, sovereign credit analyst at Societe Generale. “For a lot of countries, they don’t know what tomorrow will look like and they would rather issue now.”

The U.S. Federal Reserve has signaled one more rate rise by end-2017, but subdued inflation means it is likely to tighten gradually, maintaining a benign backdrop for emerging market borrowers.

Third quarter issuance was running at around $108.3 billion at Sept. 20, according to Thomson Reuters data, taking the year-to-date total to $471.9 billion.

This was well up on the $370.7 billion raised in the first three quarters of 2016, with some issues still in the pipeline for the current month including a triple-tranche dollar offering from Saudi Arabia that could top $10 billion.

Governments from developing countries raised some $17.7 billion in debt between July and September, TR data showed, with Africa, Middle East and Central Asia accounting for 40 percent.

JPMorgan analysts said they expected a record year for emerging sovereign issuance of around $142.5 billion.


Among unusual third-quarter deals was a debut $500 million bond from Tajikistan, the poorest country in the former Soviet Union, which attracted bids of over $4 billion.

Iraq issued a $1 billion bond for its first deal in more than a decade and Ukraine sold a $3 billion bond, its first since a 2015 debt restructuring.

Gabon also issued for the first time since 2015, following African peers Senegal and Ivory Coast to the market.

“The market is now happy to lend to any issuer pretty much,” Chatellier said.

Many deals have enjoyed huge order books from fund managers flush with cash. Year-to-date, emerging market bond funds have attracted $64.6 billion, according to EPFR Global data, with hard currency funds accounting for $35.6 billion.

Net inflows over the same 2016 period totaled $36.6 billion, of which hard currency funds attracted $22.1 billion.

Debt sales from emerging market companies totaled $92 billion so far in the third quarter, taking the year-to-date total to $342.5 billion. Asian corporates accounted for 44 percent of issuance and China alone 27 percent.

Chinese state-run oil company Sinopec this month sold a four-tranche $3.25 billion bond, following a $3.4 billion deal in April.

“It’s all about China once again,” said Guy Stear, co-head of fixed income research at Societe Generale in Paris. “EM companies outside China have tried to stabilize or reduce their dependence on the dollar market and Chinese companies have happily wandered into the breach.”

JPMorgan said it had revised up its 2017 corporate supply forecast to $440 billion from $380 billion.

Ranko Milic, head of CEEMEA debt capital markets at UBS, said companies were still keen to borrow while conditions were supportive.

“Base rates in dollars are slowly creeping up but are still very low, so the yields on offer are still very attractive,” he said.

But some new deals were pricing at very tight yields, especially for those companies known to investors, Milic said, citing the examples of Russian steelmaker NLMK and KazTransGas, which both came at around 4 percent.

“Given the search for yields, when a Tajikistan comes at low 7s or Ukraine at 7-3/8 – that’s where the interest really comes in,” Milic said.

Reporting by Claire Milhench; editing by John Stonestreet

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