Emerging market equity underperformance has further to run
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10 May, 2013Emerging Market EBRD editions, May 10 2013
Emerging Europe is experiencing a boom in corporate bond issuance, fuelling concerns about a bubble in lower-rated emerging market debt. But market practitioners insist there is no cause for alarm.
According to Martin Hibbert, head of ECM origination for CEEMEA (Central and Eastern Europe, Middle East and Africa), Ceemea debt issuance is close to $90 billion in volumes already this year.
But more significantly, the composition of those volumes has changed. “This year has not been so much sovereign and financial paper, but a lot of corporate issuance,” said Hibbert. In a typical year, half of the market is sovereign, 30% FIG and 20% corporate, but this year almost half of all issuance has been corporate, including multi-billion dollar deals for Gazprom, Lukoil and Saudi Electric. In one particularly eye-catching deal, Russia’s Lukoil, which is rated Baa2/BBB, raised $3 billion with a $9 billion book in April. “This is no longer a fringe asset class but a mainstream part of the market with substantial issuance, market access, and the ability to do large transactions,” Hibbert said.
The increase in issuance, and the fervent appetite for it, has begun to cause some alarm. Last week Charles Robertson, global chief economist of Renaissance Capital, spoke of a “dollar bond bubble”, citing the issuing of 10 corporate dollar bonds from Ukraine so far this year and the below-7% yield on single B rated Rwanda’s debut 10 year bond as evidence. He argued a bubble in local currency debt in emerging markets was following. At last week’s Asian Development Bank meeting, the impact of capital flows into these assets, particularly in light of aggressive monetary easing from the Bank of Japan, was one of the main talking points.
Bankers agree that yields have become tight, and are probably no longer what attracts buyers to emerging Europe paper. “I’m not sure about the yield argument,” said one. “Where’s the yield when 10-year Russia is trading below 3%?”
But they argued this was not in itself evidence of a problem. Asked by Emerging Markets if there was a risk of a bubble in emerging market debt, Raiffeisen International CEO Herbert Stepic was outspoken. “Oh for goodness sake,” he said. “The overall lending activity has reduced considerably. To talk here about a bubble with demand so much reduced! I don’t see it at all.”
Stepic and others argue that higher bond issuance reflects a healthy reduction in loans. “The development that loans are being replaced by bonds is the development which we want,” he said. “This is more or less an Americanization of Europe. This is what the Americans have been doing for the last 50 years.”
“That is no danger at all,” he said. “It’s a normal development.”
Bankers expect to see issuance from the region continue to grow. “I don’t see issuance slowing down,” said Hibbert. “If anything, you would say: we haven’t seen too much FIG issuance coming out, and that may step up.”
