Jumbo gov’t deals lift 2016 sovereign emerging bond sales to record high

logo-cropped-112016 saw emerging markets raising $450 billion in global bond markets, with 2017 expected to be robust


Source: Thomson Reuters

Dec 22 Emerging governments and companies have raised close to $450 billion on global bond markets in 2016, with sovereign sales hitting record highs, and issuance next year will likely be robust as borrowers scramble to repay maturing debt.

The year got off to a slow start after emerging market assets were roiled by violent selloffs in January. But Argentina’s $16.5 billion deal in April – its first in 15 years – sounded the starting gun for big-ticket deals.

Qatar followed in May, selling $9 billion while Saudi Arabia’s sold a mammoth $17.5 billion in October. . Even Russia, under sanctions from the West, managed to raise $3 billion, returning to international markets after three years.

“2016 was dominated by some jumbo jet action in Saudi, Argentina, Qatar, and we will see more jumbos next year, that’s for sure,” said Paul Greer, senior EM debt trader at Fidelity International.

Total bond sales by governments amounted to $128.8 billion in 2016 while net issuance – taking into account maturities – stood at $101.9 billion, or more than double 2015 levels, according to mid-December data from JPMorgan.

Next year, JPMorgan expects issuance to total $104.7 billion, but sees net sales falling at $68 billion – a third below this year.

Issuance is likely to increase in coming years due to a sharp increase in debt repayments, as bonds issued after the 2008 crisis start maturing.

Greer said Argentina and Saudi would likely return next year with significant deals, but warned that the overall outlook for emerging markets remains unclear following the election of Republican Donald Trump to the White House.

“Once Trump gets into the White House and we start to get clearer picture of the policies he will proceed with and how the relationship between the U.S. and emerging markets plays out, that will have an important impact on the ability of emerging market borrowers to tap international markets,” he added.

US YIELDS

The risk for emerging markets is that Trump’s plans to boost spending further lifts the dollar and U.S. Treasury yields, potentially increasing developing nations’ borrowing costs.

This is not necessarily a disadvantage, given stronger U.S. growth usually feeds through to developing economies, including through commodity prices.

Plus corporate bonds, with shorter 4-5 year maturities, are less correlated to Treasuries and can perform well if there is “orderly repricing” of U.S. assets, says Zsolt Papp, client portfolio manager at JPMorgan Asset Management.

“It’s a trade-off between short-term market volatility and longer-term growth. Even if commodities don’t go up and stay at this level, emerging markets will be fine,” Papp said.

Emerging market firms issued $306.3 billion worth of bonds in 2016, up almost 30 percent year-on-year but well below 2014 levels. Net issuance this year was $191.4 billion, JPM said.

Once again, issuance was lifted by bumper deals, notably the $16 billion bond from Israel’s Teva in July.

“For corporate issuance, we started off thinking it was going to be a slow year, but it really picked up after Brexit,” said Kristin Ceva, senior portfolio manager EM debt strategies at Payden & Rygel. “We wound up having more than expected.”

For 2017, JPMorgan forecasts gross corporate debt sales at $315.0 billion. But net issuance was expected to fall to $141.6 billion.

The tally will be boosted by Latin America, especially by Mexican firms, which have stayed on the sidelines due to fears over how Trump’s victory will affect the country.

Already this month, the region has shown signs of an issuance pick-up – Mexico’s state oil company Pemex raised $5.5 billion in the first dollar deal from Latin America since Trump’s win. Bids totalled $30 billion. (Additional reporting by Sujata Rao and Claire Milhench)