Even by their own standards, the notoriously fickle
international capital markets have fallen back in love with the
emerging markets with almost indecent haste.
By the end of September, banks were busily restocking their
teams as the velocity of emerging market dealflow from
sovereigns as well as corporates and financial institutions
from across Asia, emerging Europe, the Middle East, Africa and
Latin America approached, and in some cases even exceeded,
pre-crisis levels. Meanwhile, key EM (emerging markets)
sovereign CDS (credit default swaps) spreads were back to
around their July 2008 marks.
You could be forgiven for thinking the collapse of Lehman
Brothers never happened.
But just six months ago, it was all very different: many
banks couldnt get out of the business fast enough. Deal
volumes were depressingly low. Following the final quarter of
2008, during which no issuance saw the light of day, there were
just $5 billion of bonds, all at the sovereign level, in
January. February and March were even worse, with $2 billion
As a result, and as unpleasant as it was, it was
unsurprising that senior emerging market staff, including
experienced origination and syndicate officials from both the
bond and loan markets, were being ignominiously jettisoned, as
banks looked to cut costs to keep their capital markets
The bond syndicate communities in Europe and Asia were
especially badly hit, with Deutsche Bank, Citi, UBS, Merrill
Lynch and Morgan Stanley all getting rid of EM syndicate
specialists. Other houses such as Credit Suisse and JP Morgan
shifted their EMEA (Europe, Middle East and Africa) syndicate
bankers over to the corporate sector.
Some capital markets businesses managed to persuade other
parts of the bank to take on the costs, for example, Citi moved
Maryam Khosrowshahi, who was co-head of sovereign, agency and
supranational debt capital markets, over to the banking
Others who saw their EM syndicate specialists leave on their
own volition, such as Jonathan Brown of UBS, chose not to
replace the position, instead sharing the workload around the
To even the most experienced emerging market specialists, it
looked like appetite for EM risk had been destroyed, and the
progress its capital markets had made over the last 20 years
all but wiped out. In particular, eastern Europe was in danger
of becoming a capital markets graveyard.
BACK FROM THE DEAD
But almost as soon as the last rites had been read over the
emerging markets as a mainstream business for banks, signs of
life began to appear in the form of deals towards the end of
March and early April.
The recovery was sudden and largely due to five key factors:
Chinas robust response to the crisis in the form of a
powerful stimulus (and proof that it was beginning to bear
fruit); the general tracking by emerging markets of the
improved global market; the implementation of bailout packages
from the IMF for countries such as Hungary, Ukraine and the
Baltic states, and flexible credit for the likes of Mexico;
worries over Russia easing; and the bounce in commodities
fears about banks and Russian corporate refinancing
dissipated somewhat when oil prices increased and Russian
reserves came back up.
In CEEMEA (central and eastern Europe, Middle East and
Africa), some $12 billion of bonds came to market in April, $8
billion from sovereigns and $4 billion from corporates, and
while June only posted $7 billion, volumes roared back in July
with $14 billion issued. Even August, the holiday month,
managed to contribute $2 billion of deals.
The volumes have been so impressive that some banks that had
dumped parts of their emerging markets business could not
capitalize on the reinvigorated sector.
With the last new issue of 2008 printing in
September and the outlook for emerging markets very uncertain,
there was a dramatic cutback in the industry, says
Jonathan Brown, who after leaving UBS joined Barclays Capital
in August as head of its emerging markets and European credit
syndicate in London.
Many banks simply cut their EM DCM [debt capital
market] and syndicate staffing down to minimal levels and that
then prevented them participating in the vibrant market we have
enjoyed in 2009.
The large volumes so far this year help make up the
remarkable statistic that, despite the first three months of
the year being almost a write-off, and despite three more
months to go until the end of the year, 61 new issues have been
priced in CEEMEA in 2009 with a total value of $63 billion,
surpassing the $52 billion full-year level for 2008.
We had a very volatile start to the year, and all
markets were suffering, says Eirik Winter, managing
director and head of debt capital markets, EMEA, at Citi in
But there was a big over-reaction when it came to the
emerging markets. People perhaps forgot about the underlying
factors that had made these countries attractive in the first
place commodities, genuine growth potential, big
populations and good companies. And on top of this, many
countries have powerful backers in the form of sovereign wealth
The return of deals has seen the partial if not
complete recovery of the EM capital markets workforce,
in particular in the bond market. Many bankers who lost their
jobs have found new positions since the market recovery.
For Brown at Barclays, having an emerging market capital
markets function is not just about the fees that come from
winning bond mandates the sector itself is a fundamental
and interlinked part of a banks offering to its
Emerging market new issuance touches many points
within a banks sales and distribution and is a sector
that cannot be ignored, he says. At the same time
it needs experienced practitioners who are comfortable advising
issuers on how to access liquidity. On a macro level, the EM
component of global GDP growth is increasing all the time.
Understanding these countries is critical to the success of a
firm within global markets.
Paul Tregidgo, vice-chairman of debt capital markets at
Credit Suisse in New York, agrees with Brown about the
strategic importance of the emerging markets business, but also
argues that emerging markets themselves were not to blame for
their harsh treatment at the hands of the investment banks.
The fact that some investment bank firing and hiring
practices have been volatile round the emerging market space is
as much a function of investment banking industry constraints
and practices, not the fundamentals of emerging market
prospects and opportunity, he says.
The picture is clear if you look at recent rating
agency actions, including in Brazil and Indonesia, the inflows
into emerging market funds and the bond markets reception
of sovereign and now corporate deals.
As Tredidgos positive reading of the emerging markets
suggests, and as the recent restocking of emerging market
talent implies, competition in the bond business is returning.
And in some cases to cut-throat levels last seen in the boom
years of 2006 and the early part of 2007.
The recent bidding process for Romanias sovereign bond
mandate is a case in point. The sovereign sent a request for
proposals to 22 banks and shortlisted 10 before choosing three
Deutsche Bank, EFG Eurobank and HSBC and agreeing
to pay eye-wateringly tight fees of 4bp.
To the consternation of the vast majority of the original 22
banks, Deutsche had bid zero fees, EFG 2bp and HSBC
Romania has a reputation for squeezing the fees for its
Eurobonds in June 2008, when Credit Suisse, UBS and EFG
Eurobank were chosen for its $750 million deal, similar
criticisms were made. But still, bankers not part of the
winning group were amazed that fees on this latest deal had
been squeezed so hard and so early on in the cycle.
When they were whittling down the 10 to three, there
was a lot of pressure to decrease fees, and we were hearing
that this was what the choice would come down to, said a
banker involved in the process.
It was pretty much exclusively a fee discussion. We
had made the decision, along with several other top-tier names,
that we would not go below the 12.5bp mark. We have learned our
lessons from the credit crisis, and we will be very firm on
that we have to make money on these trades, irrespective
of how strategically important certain EM sovereign mandates
are and how prestigious they can be.
Were only a year on from the collapse of Lehman,
and its far too early to be returning to these
loss-making fee levels in our emerging markets business. But
somehow we are back there.
UGLY BUT UNDERSTANDABLE
Normal service among the banks, it appears, has resumed in
the emerging markets. But is it all a bit too early and too
much? The recovery in confidence and dealflow seemingly ignores
the dangers still stalking the global economy. The risk of a
double-dip recession for the global economy is still uncertain.
And there is also the fear that once China exits its fiscal
stimulus it will reveal the true extent of the damage left by
nine months of rampant, state-sponsored growth, and that could
spook sentiment across the asset class.
The emerging markets are also particularly vulnerable to
rate rises in the US almost inevitable when the US exits
from its monetary and fiscal stimulus and attempts to drain
liquidity from the system and curb inflation.
The rules havent changed, as one emerging
markets DCM specialist in London points out. The old
weaknesses are still there despite all that has gone on over
the last two years in the West. Decoupling was always a
fanciful idea in an interconnected world, and the emerging
markets, including their capital markets, will always be at the
mercy of events that they cannot necessarily control.
And if the old weaknesses are still there, what is to stop
banks repeating what they did earlier this year, throwing the
baby out with the bathwater?
Not much is the answer. DCM teams live and die by deal flow,
and if there are no deals in front of them irrespective
of the promise of pipeline then banks will act quickly
and decisively by cutting costs, which means getting rid of
A leopard doesnt change its spots, says a
senior EM banker. But thats not just the
behavioural pattern towards EM in particular: its much
broader than that. The hiring back into EM is no more or less
than the frenzy across other areas.
However, as it relates to EM, the approach will need
to evolve, because you could make the case for extinction of
investment banks much easier than the case for extinction of EM