December 18, 2017 / 2:15 PM / a year ago

Record year for emerging-market bond sales as frontiers step up

LONDON, Dec 18 (Reuters) - Bumper issuance from Saudi Arabia and Argentina, debuts from poor frontier markets such as Tajikistan, and a flood of Chinese corporate bonds ensured a record year for emerging-market debt sales in 2017 - and 2018 could repeat the feat.

Strong inflows into emerging-market bond funds and robust economic growth, coupled with slow-and-steady U.S. policy tightening, have created a benign backdrop that has tempted issuers great and small to try their luck in bond markets.

Hard currency issuance was running at a record $670.5 billion by Dec. 8, up from $491.2 billion for the whole of 2016, Thomson Reuters data shows.

“This year was phenomenal – the best ever year from however you want to look at it,” said Alexander Karolev, head of CEEMEA debt syndicate at ‎BNP Paribas. “It has been helped from a demand perspective by all these crossover funds and high-grade investors and also by passive money coming in through exchange traded funds.”

Crossover investors don’t normally invest in emerging markets but are permitted by their mandates to do so. They are believed to have accounted for a large chunk of this year’s debt fund inflows.

Bond sales by governments topped $201.4 billion, versus $172.9 billion in 2016, lifted by Gulf supply. Saudi Arabia alone raised $12.4 billion in September following a record $9 billion sukuk Islamic issue in April.

Ratings agency Moody’s estimates sukuk sales around $95 billion in 2017, up from $85 billion in 2016. For 2018, it predicts $148 billion, driven by high borrowing needs for oil-dependent Gulf states.

“The centre of gravity of sovereign debt is moving to the Middle East,” said Regis Chatellier, sovereign credit analyst at Societe Generale.

Bank of America Merrill Lynch (BAML) expects Saudi Arabia, Oman, Qatar and Kuwait to account for $44 billion of a total $140 billion net sovereign issuance in 2018.

Excluding sukuk, Argentina was the single biggest sovereign issuer in 2017, raising almost $17 billion, making up for lost time after ending a decade-long dispute with creditors. Demand was such that Argentina even placed a 100-year bond .

Frontier markets made up a quarter of total sovereign issuance, versus 10.5 percent last year, Chatellier calculates.

Aside from Tajikistan’s $500 million debut, Iraq issued $1 billion in its first deal in over a decade and Nigeria placed a 30-year bond.

Ecuador, which defaulted in 2008, also managed to borrow $6 billion.


Emerging-market debt funds absorbed all this supply with inflows of $76.7 billion year-to-date, according to fund flows tracker EPFR Global. Of that, $43.5 billion went to hard- currency funds. Total inflows for all of 2016 were $41.6 billion.

Most reckon demand will continue next year even if the U.S. Federal Reserve continues to tighten policy.

“If we are looking at an orderly increase in rates, I don’t see a massive outflow from emerging market assets, as the difference between the yields on offer in developed and emerging markets is still relatively high,” said Ranko Milic, head of CEEMEA debt capital markets at UBS.

Emerging-market dollar debt pays a yield premium to Treasuries of almost 3 percentage points .

But markets may look slightly pricey to some after a 50- basis-point tightening in yield spreads during 2017.

“I am very constructive for at least three to six months, then it gets a bit trickier,” Karolev of BNP Paribas said, citing Fed hikes and the likelihood of the European Central Bank dialling back asset purchases next year.

Emerging-market corporate bond sales totalled $469.1 billion by Dec. 8 this year, up from 2016’s $318.3 billion, according to TR data. Chinese and Hong Kong firms accounted for $141.8 billion, with a whopping 261 issues.

For 2018, JPMorgan expects corporate debt sales of $442 billion, with Asia again accounting for the lion’s share.

Milic noted that some emerging European companies that might have found it difficult to tap markets in the past had managed to debut this year with attractively priced deals.

“It’s all driven by the fact that it’s difficult for investors to find (high) yielding opportunities,” he said. “Investors are trying to find unusual names to add yield into their book.”

For example, in October supermarket chain Eurotorg became the first Belarusian company to issue debt.

Another offering that went well was the jumbo $2.75 billion triple-tranche for state-owned Kazakh oil and gas company KMG, with books peaking in excess of $9.2 billion.

“KMG priced very aggressively, with the 30-year at a negative new issue premium – that shows the pent-up demand for some of those more liquid transactions,” said Milic. (Reporting by Claire Milhench, additional reporting by Karin Strohecker, editing by Larry King)

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