Emerging market bond issuance hits record high in 2014

Wednesday, 31 December 2014 00:30 - - {{hitsCtrl.values.hits}}

EM bond issuance totals nearly $480 bln in 2014
China was biggest issuer, followed by Brazil
Prospect of US rate rise set to depress issuance in 2015
Some EM borrowers may switch to euro-denominated issues

LONDON, Dec 29 (Reuters) - Emerging market borrowers issued a record volume of bonds denominated in hard currency during 2014, seizing the opportunity of ultra-low interest rates though few expect the trend to carry on into 2015. According to Thomson Reuters data, total issuance from emerging market borrowers, both sovereign and corporate, amounted to nearly $480 billion in 2014, across 742 deals, compared with $439 billion in 2013 and 725 deals. The bulk of issuance this year came from companies, which sold $367 of bonds across 647 transactions, while sovereign borrowers issued $106 billion across 72 deals. “It’s not surprising. We are coming to the end of an ultra-low rate environment in the U.S. and credit spreads have been very low. The market’s been wide open for issuers,” said Michael Cirami, co-director and portfolio manager at Eaton Vance Investment Managers. China was the biggest source of hard currency issuance this year, accounting for $101 billion of bonds across 137 deals, followed by Brazil with $44 billion and 45 issues, and Mexico with $36 billion and 42 issues. However, with the U.S. Federal Reserve expected to start to raise rates at some point in the coming year, the cost of servicing dollar debt is expected to become more expensive and therefore less attractive for borrowers. David Hauner, head of fixed income and economics for Emerging Europe, Middle East and Africa at Bank of America/Merrill Lynch expects dollar-denominated sovereign issuance to fall by around a quarter next year. “Sovereign issuance in total as of end-November was $106 billion and for next year we forecast gross issuance of $75 billion, so quite a bit of decline,” he said. “From an investor point of view it is actually helpful for the asset class.” The drop in sovereign issuance will be partly countered by relatively robust corporate issuance, estimated at around $350 billion, around half of which will come from “rapidly growing” Asian companies, BofA Merrill Lynch estimates. It could be a case, however, of EM countries switching into one of the other major global currencies. Regis Chatellier, director of emerging market sovereign credit strategy at Societe Generale, said that with the European Central Bank now scoping out its first full-scale quantitative easing programme the euro will be the obvious choice. “We estimate that 40% of emerging market sovereign debt is going to be issued in euros next year and that will be up from around 27% this year,” he said. While the Fed moves towards tighter monetary policy, ECB moves in the opposite direction should keep the euro depressed and make the cost of servicing euro-denominated debt cheaper. “You have seen countries like Chile and Indonesia issuing in euros already so this shows you what is happening,” Chatellier added, underlining that these countries have little real economic link with the euro.

Asia Pacific syndicated lending smashes $ 500 b barrier

Reuters: Syndicated lending in Asia Pacific (excluding Japan) scaled new heights in 2014 to $523 billion as demand from Chinese companies continued to increase despite an economic slowdown and regulatory constraints, helping regional loan volumes surge 13% higher than the $462 billion clocked in 2013. Loan activity created history with volumes crossing the $500 billion mark, quite remarkably in a short period of time since the 2008 global financial crisis. At the start of the millennium loans transacted in Asia (ex-Japan) totalled $110 billion and only breached the $200 billion mark in 2006. In a repeat of the previous year, China set the bar higher with loan volumes in 2014 reaching $141.31 billion, a 20% increase over 2013. Hong Kong continued to benefit from China-related deal flow with loan volumes hitting a record of $92 billion as Chinese borrowers propelled borrowing activity nearly 15% higher year-on-year. Increased volumes in China, Hong Kong and Macau boosted North Asian numbers to $276 billion, around 13% higher than $244 billion in 2013. Outbound M&A loans, project and infrastructure financing in China accounted for the bulk of the transactions in 2014. “China will continue to throw up acquisition financing opportunities that will drive loan volumes up, in North Asia,” said Aditya Agarwal, head of loans, Asia at Royal Bank of Scotland. Others agreed pointing out that M&A financing activity could increase over the next year. “Given the significant drop in oil prices, we expect some M&A and related financing opportunities to arise from the oil & gas and ancillary industries sector,” said Ashish Sharma, head of loan syndications, Asia Pacific, at Credit Suisse. M&A activity accounted for more than 11% of Asia Pacific (excluding Japan) loan volume in 2014, at $57.1 billion via 42 deals. It marked the highest level since 2007 when M&A loan volume reached $80.8 billion. In 2014, the largest M&A financing was the $6.96 billion loan backing Hong Kong-listed MMG Ltd’s purchase of the Las Bambas copper mine in Peru from Glencore Xstrata Plc. Other acquisition financings of note were the HK$38.4 billion (US$4.95 billion) loan backing Singapore’s OCBC Bank’s takeover of Hong Kong-based Wing Hang Bank, COFCO Corp’s $3.2 billion loan for its acquisition of Noble Group’s agribusiness and the HK$37 billion financing for Power Assets Holding’s spinoff of Hongkong Electric Co Ltd. While M&A activity from China was expected to be robust, the pace of privatisations of US-listed Chinese companies has certainly slowed down leading to lower expectations of leveraged buyouts from the country. “The volume of take-privates of US listed Chinese companies is slowing, as many have transacted in the past few years. Future activity is always possible, as major shareholders’ views on the merits of a take-private evolve,” said Clayton Carol, head of debt capital markets, Asia (ex-Japan) at Nomura. Although China loan volumes recorded an increase over the previous year, it is worth noting that exposure to Chinese credits was a thorny issue for regulators in Hong Kong, Singapore and Taiwan. Making matters worse were instances of poor corporate governance among some borrowers that cast a pall on privately owned entities and made lenders wary of such credits. Chinese dominance With China accounting for around 27% of the loan volumes from Asia (ex-Japan), it is no surprise that Chinese lenders topped the mandated arranger league tables. Industrial and Commercial Bank of China, which ranks among the largest banks in the world by market capitalisation, trumped its rivals in Asia (ex-Japan) to top the mandated arranger league tables for 2014 with a market share of 8.8%. Bank of China, which held that position in 2013, slipped to number two in 2014, while China Development Bank, which ranked second in 2013, slipped one notch in 2014. Australia and New Zealand Banking Group and HSBC took fourth and fifth spots respectively.