EM supply has continued with multiple deals - but far worse pricing

Development Bank of Kazakhstan, which has investment grade ratings, placed USD500 million of three-year bonds on 5 May at 5.95%, in line with initial guidance. The issue is the first from the former CIS region since the Russian invasion of Ukraine. The sale will fund a partial tender for its 4.125% bond due in December 2022, of which USD1.26 billion is outstanding. Asa comparison point, in May 2021, the same issuer raised USD500 million of ten-year bonds with a 2.95% coupon. State railway operator Kazakhstan Temir Zholy (KTZ) then mandated for a three-year US dollar transaction, reportedly to repay its outstanding CHF185 million 3.64% 2022 issue and general purposes.

On the same day, Trinidadian state-owned energy firm Heritage Petroleum raised USD500 million of seven-year bonds at 9%, also pricing at initial guidance.

At the upper end of the Emerging Market credit spectrum, Poland arranged a ten-year Euro-denominated benchmark on 18 May. It placed EUR2 billion at 2.85% yield, 110 basis points over mid-swaps, with the orderbook "exceeding EUR4 billion", according to the Ministry of Finance statement. Poland last issued in the Euro sector in July 2020 when it raised a EUR2 billion 0% sale at a negative yield.

Additionally, Romania sold USD1.75 billion of 5.5 and 12-year dollar debt on the same day, its third sale in 2022. The two tranches were priced at 5.3% and 6.2%, spreads of 240 and 310 basis points, 10 tighter than initial price talk. The issue showed clear deterioration versus its USD2.4 billion sale on 19 January, when it raised USD1.35 billion of five-year bonds at 3.15%, a margin of 150 basis points over comparable US Treasuries at the time, while its USD 1.06 10-year bond was priced at 3.72%, a margin of 185 basis points.

Wider market dynamics are worsening - although supply has continued

According to a Bloomberg report, Emerging Market debt sales in April - of USD30.6 billion in dollars and Euros - were at the lowest level for a decade and 48% lower than in April 2021. The report claimed that "surging yields are deterring" borrowing. The average yield on EM dollar debt exceeded 6.3%, its highest level for two years.

More broadly, debt market assets are displaying very weak price performance. A Financial Times report using Ice Data Services index data on 12 May stated that European high grade issues have declined severely in value - by over 10% in price - since their peak nine months ago, describing this as the sharpest fall for the asset class this century. The same article- again using ICE data - claimed European junk bonds have declined in value by 10% on a total return basis within 2022, while European junk bond spreads have widened to an average of 515 basis points versus 331 basis points at end-2021.

Ironically, given the above source, Intercontinental Exchange (ICE) itself sold a USD8 billion six-tranche acquisition bond on 12 May, spanning three, five, seven, 10, 30 and 40-year maturities. These were priced at yields ranging from 3.689% to 5.240%. The longer-dated tranches were set at spreads of 200 and 220 basis points over comparable US Treasury Bonds, with pricing tightened by 20-25 basis points versus initial guidance across the whole issue. There have been multiple other large sales, including a USD6 billion five-part sale for UnitedHealth, including 20 and 30-year portions, priced with coupons of 4.75% and 4.95%. Other long-end dollar supply also has been active, including long-dated sales this week by four US utilities and consumer firm Church and Dwight. Banks also have also been busy, with Citigroup placing a USD6 billion shorter/medium dated package.

Equity markets remain very difficult

India's record USD2.7 billion IPO for Life Insurance Corporation of India (LIC) opened at discounts of over 8% on 17 May, despite having been 2.95 times subscribed. Early trading on the BSE was at INR867.2 versus the INR949 issue price: at these levels, retail buyers and policyholders, allocated at discounted levels of INR904 and INR889 respectively, faced early losses. The adverse opening performance had been indicated consistently by discounts in "grey" (pre-formal) market trading and reflects wider weakness in stock markets since the deal was priced. The shares fell further in subsequent trading and closed on 19 May at INR845, an 11% drop.

The US IPO calendar remains soft: three corporate deals raised USD330 million in the week to 13 May along with four SPAC sales, with no corporate flotations slated for the week to 20 May. The Renaissance US IPO index has now declined 50.8% in 2022, with a 35% drop in its international equivalent, and a 28% fall for the technology-oriented Nasdaq index.

Our Take

Overall, the risk of weaker credits being priced out of the bond market is increasing.

Both Poland and Romania appear to have gained adequate market traction, with little obvious damage to the former for its leading role in absorbing Ukrainian refugees, disruption to its gas supplies after its refusal to follow Russian payment requirements, and its proximity to Ukraine. Romania's issue does show material deterioration in its spread, along with the adverse impact of higher reference rates, a less positive indicator. Its worsening market performance is also likely to reflect its sizeable deficits, forecast by the European Commission at 7.5% of GDP this year (under its accounting treatment): although its debt sustainability is not yet threatened, Romania remains at the lowest levels of investment grade ratings.

Nevertheless, the combination of widening spreads and raised reference rates threatens to pose an increasing challenge to market access for weaker credits. Kenya's latest weekly central bank report (to 13 May) states that "in the international market, the yields on Kenya's Eurobonds increased by an average of 109.9 basis points" in the preceding week. Kenya's outstanding debt now yields between 11.5% and 12%, which would seem to preclude completion of its planned USD1 billion sale if current conditions continue or deteriorate further, despite recent government pledges to proceed with issuance. At the prevailing yield levels, even if a given deal did get placed at heavy double digit coupons in USD, the burdens of servicing this would be highly challenging.

Posted 20 May 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.