Argentina in junk bond spree as emerging issuers line up

Bloomberg

Argentina’s blockbuster $16.5 billion bond sale is opening up the floodgates for junk-rated issuers in developing countries.
The Latin American country’s return to global capital markets for the first time since its 2001 default brought high-yield issuance from emerging markets to $18 billion this week. That’s more than the previous 11 weeks combined, and money managers from Aviva Investors to Bluebay Asset Management are predicting the deluge isn’t over.
Speculative-grade borrowers in the developing world are seizing on yields near three-year lows as accommodative central bank policies embolden risk appetite, creating what Goldman Sachs Group Inc. is calling the best financing conditions for emerging markets since 2012. Lebanon, the most-indebted Arab nation, raised $1 billion on Tuesday, and Georgian Oil & Gas Corp. JSC sold $250 million of five-year notes while Mol Nyrt. of Hungary was preparing its first Eurobond sale since 2012.
“The scale of the book in Argentina will certainly alert issuers to what appears to be a deep underlying demand for high-yielding assets,” said Aaron Grehan, a London-based fund manager who helps oversee $4.5 billion in emerging-market debt at Aviva Investors and bid for Argentinian bonds. “As an issuer there is an obvious attraction to coming at the current time.”
Demand was so high for Argentina’s four-part offering that the government, shut out of global capital markets for 15 years by legal disputes with creditors, was able to narrow initial guidance on the 10-year debt by 50 basis points to 7.5 percent. Investors placed bids for almost $69 billion, according to Finance Minister figures.
Almost simultaneously, Lebanon, whose economy is reeling from the influx of more than a million Syrian refugees, marketed debt due in eight and 15 years at 6.65 percent and 7 percent.

Landmark Deal
“For other high-yield issuers it would have been risky, and potentially expensive, to try to come to market ahead of that landmark deal” from Argentina, said Graham Stock, head of emerging-market research at Bluebay Asset Management, which oversees $60 billion of fixed-income investments. With the “new, liquid, high-yield emerging-market benchmark, there are a lot of issuers who will look to get their fundraising done quickly,” he said.
Emerging-market issuance started picking up in March as the European Central Bank expanded stimulus and the Federal Reserve signaled it wouldn’t rush to raise interest rates. Investors seeking refuge from negative yields from Europe to Japan helped push the average rate on the Bloomberg U.S. Dollar High Yield Emerging Market Sovereign Bond Index down almost 1.2 percentage points from a six-month high in February to 6.32 percent.
JPMorgan Chase & Co., the third-biggest manager of emerging-market bond sales this year, in March raised its forecast for 2016 sovereign sales by 64 percent to $100 billion.
One of the drivers of the swell of issuance will be oil powerhouses looking to plug deepening holes in their budgets resulting from oil’s 60 percent plunge since the start of 2014. Abu Dhabi, which holds about 6 percent of the world’s proven crude reserves, is sounding out investors over plans for its first international sale in more than seven years, while Saudi Arabia wants to tap debt markets for the first time ever. Both Gulf Arab borrowers hold investment-grade ratings.

Turning Sentiment
Argentina “will certainly make other issuers look at coming out with new deals,” said Angelo Rossetto, a trader at GMSA Investments Ltd. in London, who bid for Argentine bonds and is looking at Mol, the Hungarian energy group.
The turnaround may prove fragile, according to Sergey Dergachev, a senior money manager who helps oversee about $13 billion of assets at Union Investment Privatfonds GmbH in Frankfurt. Risks to China’s economic health, the direction of oil prices and the potential for a hawkish turn in Fed rhetoric “are ironically not on radar screens of investors,” he said.
The issues “that keep me awake at night, can change risk sentiment in emerging-market debt markets very quickly,” according to Dergachev, who bid for Argentina’s bonds.
For now, the window for sales is wide open. The extra yield investors demand to hold developing-country bonds rather than U.S. Treasuries fell to 389 on Tuesday, the lowest since November, according to JPMorgan indexes.
“The positive response to Argentina’s sale may be somewhat symbolic of improving sentiment towards emerging markets,” said Yacov Arnopolin, a New-York money manager at Goldman Sachs Asset Management. The biggest beneficiaries may be Argentina’s own provinces and companies, as the sovereign sale reopens their access to global investors, he said.