Eurobond market in good health

The normalization of US monetary policy has a lot further to run by all accounts. The latest increase in the Fed funds rate in June to a range of between 1.75% and 2.00% has brought real rates close to zero. Consensus within the FOMC currently points to another two hikes this year, and three more in 2019. It has since been underpinned by a very strong GDP report for Q2 2018 (first estimate) as well as some gung-ho talk from the US Treasury secretary, Steve Mnuchin, about growth prospects in the two to three years ahead. This would not normally be the background to buoyant debt issuance by EM sovereigns.                                                                                                     

  • Yet according to the UK-based Financial Times, EM governments raised US$129bn from bond launches in H1 2018 and could still create a record for issuance in the full year. Curiously the average life of the new debt has increased by about seven years from last year while the rating has fallen.
  • The boost to the average life can be explained in part by the maiden 30-year Eurobonds issued by a number of African countries including Nigeria and Egypt. In general, market conditions for issuance from Africa have been supported by the sanctions imposed on Russia, which is normally a prominent issuer in the sovereign and the corporate space.
  • Ratings downgrades notwithstanding, investors are in the hunt for yield, above all it would appear on longer dated issues. Angola raised US$1.25bn from the sale of 30-year paper in April at 9.375% and reopened the issue earlier this month by selling a further US$1.75bn on more favourable terms.
  • More often, the terms for the borrower worsen on account of normalization and the downgrades. The question then becomes whether foreign currency issuance is still preferable to local. In this context it is significant that many EM central banks (such as Indonesia) have recently raised their policy rates.
  • Investors will generally expect a higher yield in this market environment, and will generally get it.
  • One way to sustain investor interest in a challenging market is to offer a new narrative. The reforms pledged by Abiy Ahmed, the Ethiopian prime minister appointed in April, amount to one such. The door is to be opened to foreign investment in telecoms, retail and perhaps financial services. Minority stakes in Ethiopian Airlines, one of the few profitable state-owned carriers, and Ethio Telecom would be marketable. For the latter, there is an obvious sub-regional buyer.
  • At the other end of the credit spectrum, we note reports from the wires that an unnamed Turkish company may refinance Zambia’s US$750m Eurobond maturing in 2022. The Zambian government is also looking to refinance some of its outstanding Chinese loans. Last week Moody’s downgraded Zambia to Caa1 (sub-speculative).

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