LONDON Jan 11 Asian firms and African
governments will lead emerging borrowers hoping to tap into
buoyant appetite for high-yield assets in 2013 although issuance
levels and investor returns may fall short of last year.
The new year has already got off to a flying start -
investors lent Turkey cash repayable in 10 years at a cost of
3.47 percent, the lowest it has ever achieved in the dollar debt
This comes hot on the heels of a year in which the emerging
bond sector saw record sales and almost 20 percent returns.
Issuers as well as investors benefited in 2012, with the
collapse in U.S. yields slashing borrowing costs for emerging
entities and allowing them to sell a total $411 billion in
bonds, according to estimates from JP Morgan.
That's a jump of more than 30 percent from 2011 levels.
Bond buyers, meanwhile, enjoyed robust premia over
zero-yield German and U.S. debt, shovelling a record $94 billion
in new cash into the sector and earning equity-like returns on
dollar bonds as well as on emerging currency debt.
On some segments such as Venezuelan dollar bonds, returns
were as high as 45 percent.
"Demand for emerging markets fixed income remains strong,
fuelled by the on-going search for yield, as well as a
supportive economic backdrop in many regions and the likelihood
that currency volatility will remain subdued," HSBC says.
But HSBC analysts warn: "But there is little scope for a
repeat of 2012 returns, given a starting point of tighter
spreads and much lower yields."
The premium paid by emerging borrowers over U.S. Treasuries
as measured by the leading EMBI Global index compressed
161 basis points over 2012. That of corporate bonds fell 142
Analysts at HSBC expect 4 to 7 percent returns in external
bonds, while local currency debt is expected to provide 8
percent. JP Morgan, which runs the most-used emerging debt
indices, expects sovereign dollar bonds to return 5-6 percent
this year, versus 18.5 percent in 2012.
Issuance is also set to fall back, in part due to a hangover
from the borrower-friendly conditions seen in 2012.
The fall in U.S. yields allowed emerging issuers to raise
capital cheaply, with many taking advantage by pre-financing
2013 needs. Sovereigns are also reckoned to have a lower net
financing need than last year.
JP Morgan says companies will issue $281 billion in dollar
debt, down from last year's record $329 billion. It predicts $78
billion in sovereign sales, a touch under 2012.
Inflows, too, should moderate to $70 billion, JPM reckons,
after last year's 150 basis point yield spread compression.
The environment may be turning less bond-friendly. If global
growth continues to pick up, more cash could rotate into
equities, while higher U.S. yields may also pose a challenge.
U.S. 10-year yields jumped to 8-month highs this week on signs
of economic recovery and fears of an inflation bump.
On the other hand, developed world central banks are still
pumping liquidity, with monetary easing from Japan now expected
to push another wave of cash into emerging assets.
Nick Darrant, who heads the CEEMEA debt syndicate desk at
BNP Paribas, says a structural shift in the global investor base
is bringing in more and more non-traditional buyers of emerging
"Some of the barriers are being broken down, some who only
looked at OECD countries before have dropped that criteria," he
said, referring to the group of 34 industrialised countries.
CORPORATE, FRONTIER BOOM
A few themes stand out - corporate debt, Islamic bonds and
debt from poor, so-called frontier markets. Their success in
today's yield-scarce environment is unsurprising - companies for
instance pay a 60 basis point yield premium over sovereign
The corporate bond boom can also be attributed to the
lockdown in the syndicated loan market, due to banks' needs to
comply with tighter regulations on capital buffers.
"Cross-border bank lending will be modest compared with
historical levels. Syndicated loans are expensive and lending to
lower-rated corporates requires even higher capital adequacy
ratios. This suggests bond markets will take up the slack," said
Jeremy Brewin, a fund manager at Aviva Investors.
Chinese property firms' debt sales in the first two weeks of
the year alone are already running at nearly half of total 2012
dollar issuance, analysts note.
Analysts see CCC-rated Chinese developer Hopson's recent
$300 million bond as a harbinger of more junk issuance in Asia.
"This year we will see a move down the credit spectrum, a
move from quasi-sovereign to the private sector, people will
look geographically where they did not look in the past, will go
further down the capital structure, and to deals that are
smaller than benchmark," BNP's Darrant said.
On frontier debt, Zambia's Eurobond last year was 17 times
subscribed. That may encourage other potential debut borrowers
such as Kenya, Bangladesh, Angola, Uganda and Tanzania.
JP Morgan predicts frontier issuance of $9.3 billion, double
last year's levels.
Islamic debt, or sukuk, volumes last year doubled from 2011
levels to almost $20 billion, according to Thomson Reuters data,
testifying to the appetite of cash-rich Gulf investors.
There are worries too. Hungary, keen to evade IMF aid and
with the equivalent of $6.7 billion in external debt maturing
this year, wants to tap capital markets soon but will likely be
forced to pay a hefty premium. Egypt, grappling with a currency
crisis, must also refinance around $2.5 billion in 2013.
Another possible flashpoint is Argentina, which escaped
default in December via a court reprieve until March.
But defaults are expected to be lower than 2012, which
kicked off with a $2.1 billion crash from Kazakhstan's BTA Bank.