LONDON (Reuters): Dollar bond sales by smaller, junk-rated emerging countries have sprung back to life in October following a three-month hiatus as governments rush to raise much-needed cash before US interest rates start rising.
Sliding commodity prices and political turmoil have pummelled many countries labelled as ‘frontier’ – a fast growing but less developed and higher risk sub-set of emerging economies that ranges from Angola and Belarus to Egypt and Pakistan.
A mauling for emerging market assets sparked off by doubts over China’s economic health and a devaluation in the yuan in August saw Eurobond issuance grind to a halt in the third quarter. For the first time since the 2008 financial crisis there was no fresh debt sale from frontier markets for more than two months, according to Thomson Reuters data.
Yet in October, issuers rushed back to the markets, selling $ 2.5 billion – the heaviest month of issuance since January. November looks set to follow in that vein, having already seen $ 2 billion of issuance via bonds from Jordan and Angola.
“There are weaker credits that do need the money for budget financing where commodity weakness has opened up financing gaps,” said Mark Baker, investment director at Standard Life Investments. “That’s especially the case in Sub-Saharan Africa.”
Some of these issuers, like copper producer Zambia or oil exporter Angola, had to pay hefty yields to plug the holes emerging from revenues getting hammered and fiscal positions deteriorate in the wake of tumbling commodity prices.
Zambia, which sells almost 50% of its exports to China, issued $ 1.25 billion in July at 9.375%. The country has seen its Kwacha currency lose more than half of its value against the dollar since the start of the year.
Angola, which exports more than 60% of its crude to Beijing, had to promise 9.5% when raising $ 1.5 billion on Thursday..
And Ghana at the start of October paid investors a 10.75% coupon, even though its $ 1 billion bond was partially guaranteed by the World Bank. With few financing options, Accra wants to return to global bond markets before year-end.
Looking at their credit worthiness, most frontier issuers – like Angola or Jordan – have a ‘junk’ rating, meaning governments have to pay a premium over more secure ‘investment grade’ issuers.
Ppent up demand
And little change seems to be on the horizon. Ratings agency Moody’s found that growth potential among frontier markets was strong compared to emerging markets overall, yet very few were well placed for credit improvements.
“None of the 29 rated frontier-market sovereigns in the study has seen dramatic credit improvements over the past 10 years,” Moody’s analysts said in their recent report.
While some investors harbour doubts over the economic health of frontier commodity exporters, the issues got a warm welcome from investors, with order books for Angola’s issue bulging to more than $ 7 billion.
“Angola was a reflection of a recent recovery in appetite towards commodity-sensitive emerging markets, they managed to take advantage of that,” said Baker.
There is much pent-up demand in general. Despite Sri Lanka’s recent economic troubles, investors placed orders worth $ 3.3 billion for its end-October Eurobond, allowing it to expand the deal size to $ 1.5 billion.
With interest rates set by most major central banks hovering at record lows for extended periods, many western investors are hunting for yield around the globe.
Jordan sold $ 500 million earlier in the week at a yield of 6.125%, while Oman has hired banks for its dollar-denominated issue.
From the Western Balkan region, Albania sold a 450 million euro issue on Thursday while Macedonia is on the road speaking to investors about a euro-denominated issue.
Yet the issuance window is tight, with US Thanksgiving Holidays at the end of November and another US Federal Reserve meeting looming in early December, which could see policy maker increase interest rates for the first time since June 2006.
“Everyone who is ready will try and execute in the next couple of weeks, unless we get another big surprise in US data,” said one London-based fund manager.