* Global EM bond volumes lowest since 2011
* Euro first quarter issuance highest ever
* US rate rises spark warnings about EM debt
By Michael Turner
LONDON, April 2 (IFR) - Emerging market first quarter bond issuance volumes have slumped to their lowest levels in four years, and the prospects for the asset class remains bleak after an industry lobby group gave a stark warning of the risks that rising US treasury rates pose to issuers.
Asian emerging market issuers propped up the muted volumes in the first three months of 2015 to print US$52.3bn-equivalent of hard currency bonds, compared with US$31.8bn in Latin America and US$35.4bn in Central and Eastern Europe, Middle East and Africa, according to Thomson Reuters.
This US$119.5bn total is the lowest amount of hard currency bonds sold in the first quarter in global emerging markets since 2011, when US$70bn was issued. In the first quarter of 2014, emerging markets bond sales totalled US$145.3bn.
In Asia at least, volumes have stood firm with overall issuance of G3 and offshore renminbi bonds slightly up over the same period last year.
“While most of the market felt Q1 was quieter than past years, perhaps due to reduced volumes in China high yield, total issuance volumes were actually higher,” said Duncan Phillips, managing director and head of Asia-Pacific debt syndicate at Citigroup.
“Thus, it’s probably a case of fewer deals, but bigger deals. This was especially the case in the Reg S market where local liquidity felt super-charged at times.”
The biggest hits to global emerging market volumes have been in Latin America and CEEMEA, which are down by 39.5% and 13% respectively year-on-year.
In Latin America, issuance has struggled thanks to the absence of Brazilian names, as the country reels from a corruption scandal surrounding state champion oil firm Petrobras.
In CEEMEA, Russian names continue to be locked out of the market with Western sanctions for Russia’s involvement in conflict with Ukraine and the lower oil price curtailing issuance.
Blocked from issuing new bonds - either by direct sanctions or investor nervousness around permitted issuers - Russian firms have been managing their debt piles with liability management exercises. Russian Standard Bank, Tinkoff Bank and Fesco are the latest names from the country to open tender offers.
But some fear this will only make the drought in primary worse, as it reduces the need for issuers to tap new debt.
“All of these tenders that keep happening are adding to the lack of supply in primary,” said a bond trader.
Fesco is looking to buy back US$85m of bonds and is skipping the bond market by partly funding the repurchase with money raised from Russian banks.
Furthermore, some investors are effectively locked into holding onto their Russian debt, which has dampened appetite for new issuance from the country.
“US institutional investors are not willing to give up what they own because they are worried that they can’t reinvest in new deals for fear of breaching sanctions,” said the trader. “This adds to the lack of supply.”
Of the CEEMEA deals that have printed, many have had a tough time in secondary. New deals for Turkish banks, Turkey’s tap of its 2043s and euro deals for Montenegro and Croatia are all bid below their reoffer levels, according to another bond trader.
There are some positives though. The period from January to March can lay claim to the honour of seeing the largest amount of euro-denominated deals printed in the first quarter by global emerging markets issuers, according to Thomson Reuters data.
There were 20.84bn of deals printed, 3bn more than the previous record set in the first quarter of last year.
“There’s never been a better time to print euros,” said a syndicate banker.
The European Central Bank’s 1.1trn quantitative easing programme is the cause of the increased thirst for euros. With the initiative just a month old, issuers are already benefiting from low yields in the single currency.
Poland, for example, printed a EUR1bn 12-year bond at a 1.022% yield on Monday, which came with a jaw-dropping coupon of 0.875%. Both Bulgaria and Slovenia also raised funds at record low coupons, while issuers from China and Mexico have also locked in low rates.
However, in a market still dominated by the dollar, the outlook is uncertain as investors wait to see when the Fed will begin to raise rates. The Institute of International Finance warned on Wednesday that the normalisation of US monetary policy, which is expected in the summer, means that “a number of EM countries are likely to face daunting debt services and refinancing risks in the next few years.”
“While the debt service burden and default risk have both been quite manageable thanks to sustained low rates, both will surely rise as monetary conditions normalize - in some cases potentially leading to stresses,” added the IIF.
Rising rates could also lead to volatile swings in FX, exposing issuers to debt redemption and currency risks. Corporates in Brazil, Mexico and South Korea were highlighted by the IFF as most under threat from FX swings.
Still, with secondary market prices rallying across the board in CEEMEA, some in the market remain positive.
“So much for the talk about the EM Great Unravelling,” said one bond trader. (Reporting By Michael Turner; additional reporting by Frances Yoon; editing by Sudip Roy, Julian Baker)