Emerging market debt trading
slumped in the first quarter of 2009 but the recent resurgence
in global risk appetite suggests the worst of crisis in the
emerging credit markets is over, new figures released this week
reveal. The Emerging Markets Debt Trading Association (EMTA)
announced this week that trading in the first quarter of the
year stood at $915bn a 23% decrease compared with the
same period last year when the comparable figure was
Trading in Eurobonds represented $253bn in the first quarter
compared with $360bn during the same period the year before.
Two-thirds of this ($168bn) was issued by sovereigns compared
with $236bn in the first quarter of 2008.
Total corporate bond activity reached $76bn in the first
quarter compared with $114bn in the same period in 2008.
The most frequently traded emerging market Eurobonds were
Brazil ($39bn), Mexico ($32bn), Russia ($30bn), Venezuela
($22bn) and Argentina ($15bn) in the first quarter.
Thanks to strategic inflows into hard currency bonds, emerging
market issuers have issued just under $70bn of new debt so far
this year compared with $56bn during the same period last year.
Commerzbank has increased its forecast for total new issuance
in 2009 from between $50bn and $70bn to between $100bn and
From March, trading in hard-currency cash bonds increased
dramatically and spreads tightened by more than 300bp.
Yesterday evening JPMorgans EMBI stood at 408bp. The
sustained spread rally has allowed issuers to price off new
risk without dislocating existing yield curves.
But the weak spot in the emerging sovereign bond markets
remains credit default swaps for the Baltic region. Fears are
mounting that a devaluation of the Latvian lat could imperil
economic stability and currencies in central and eastern
Europe. Contagion from the crisis has dented the Republic of
Lithuanias planned euro-denominated benchmark via joint
bookrunners Citigroup, Credit Suisse and Royal Bank of
Scotland. On May 22, its five year CDS stood at 380bp but
yesterday it was trading at 470bp.
An investor conference call with the Lithuania debt management
office on Monday shed little light on the situation, said a
banker on the deal. "Nothing seems to have changed since the
roadshow two weeks ago the issuer and investors are just
waiting to see what happens," said the potential bookrunner.
The implication seems to be the deal will be shelved until the
autumn unless Lithuanias CDS tightens.
In the near term, the potential for the spreads on emerging
bonds to tighten may be constrained by a stream of new issuance
from Western sovereigns. Nevertheless, with plenty of cash
stockpiled after systemic de-leveraging last year, asset prices
in emerging markets will be supported in market dips as
investors rush for opportune exposure, say analysts. But many
believe the breakneck speed of the re-pricing of emerging
market bonds during the rally is not sustainable.
"We expect somewhat less benign primary market conditions than
those seen in April-May," said Dmitry Sentchoukov, EM credit
analyst at Commerzbank. He said the pace of spread compression
"a necessary condition for above-average new issuance"
is unlikely to continue during the year. This matters
because, from historical experience, "the spread direction is
more important than the spread level," he says.
In 2007, during six months when the EMBIG spread tightened, the
average volume of new issuance was 2.2 times higher than the
average month when spreads widened. "In 2008, the multiple
increased to 4.0," said Sentchoukov.
- On Wednesday, Standard & Poors cut its ratings for
the Brazilian oil giant, Petrobras, from BBB to BBB- citing its
heavy debt load and ambitious expansion plans in the face of
the global downturn.
The price-sensitive borrower has
a $174.4bn investment programme. Yesterday, its 7.875% 2019s
had traded by 12bp in response to the downgrade.
But RBC Capital Markets was bullish in a research note to
clients yesterday. "Petrobras has secured financing for the
next two to three years from BNDES (bond issuance and loans
from China), which has strengthened the companys