Outlook 2019: Corporate EM bond issuance to decline in year ahead; 2018 tally off 21%

By Rebecca Melvin

New York, Dec. 31 – Bond issuance from emerging markets in 2019 is expected to decline from levels in 2018 that were 21% below the prior year.

Issuance in 2018 totaled $430 billion in 754 deals priced in major currencies for the year through Dec. 21, according to Prospect News’ data.

The 2018 total represents a 21% decline in issuance from 2017 when $542 billion in 887 deals priced.

The single largest month of issuance in 2018 was January when $77.56 billion in 97 deals priced, which was 18% of the annual total. March and April were next highest with $52.77 billion in 88 deals and $75.72 billion in 108 deals, respectively.

December was the lowest volume month with only $9.5 billion of notes in 22 deals priced, most of which was from Asia. The broader EM primary market virtually shut down – along with other debt capital asset classes – amid market turbulence.

According to BofA Merrill Lynch Research, its new EM bond issuance estimate for 2019 is expected to be around $322 billion, with an increase in default rates to 2.5%. That comes after what it saw as a 32% decline in new issuance in 2018.

The BofA Merrill Lynch data differs from bond totals maintained by Prospect News.

The bank expects slightly lower issuance in Asia, with $206 billion, and slightly lower issuance from the Central & Eastern Middle East and Africa region, with just $61 billion, and Latin America, with $55 billion anticipated.

“We expect net supply to be positive in Asia with $54 billion due to Chinese issuers, but elsewhere net supply will be low, with $900 million for Latin America corporates, and $500 million for CEEMEA,” according to BofA Merrill Lynch’s corporate credit outlook report, 2019 – the year ahead: Hiking in EM – views from Baja to Beijing.

Through mid-December, there was $7.08 billion in 12 emerging markets deals for the month. This was due mostly to China debt but including $3 billion priced by Indonesia, compared to $17.1 billion in 36 deals for the same period last year, according to data compiled by Prospect News.

Last year’s tally for the first half of December was also dominated by issuers based in China but included a number of Latin America deals, which were lacking this year amid the market problems that beset EM debt.

Returns for emerging market debt are negative for the year. The market took a dive last spring in reaction to U.S. dollar strength. Currencies came under fire, especially those of Turkey and Argentina, and then uncertainty and concerns about slowing global growth took things a peg lower this fall.

China, Russia in focus

Looking ahead to 2019, David Woo, Bank of America’s head of global rates, FX and emerging markets fixed income, says “make volatility your best friend.”

The dollar will remain a strong performer, but the decoupling of the U.S. economy from other global economies that was a theme in 2018 isn’t expected to persist in 2019, Woo said at a recent press briefing.

“There will be recoupling as a result of the U.S. doing worse. EM will be the big winners if China and Russia do well in 2019,” Woo said.

Among other considerations is how Washington D.C.’s policies proceed in the aftermath of the U.S. midterm elections, in which the Republican Party lost control of the House of Representatives.

Gridlock was predicted to settle in with the result being that the U.S.-China trade war becomes more complicated, Woo said.

“There are a lot of uncertainties,” Woo said. The dollar took off in 2018 because of the decoupling story in which the trade war didn’t impact the U.S. economy. But moving ahead, it is more likely that there will be a recoupling with the ongoing trade war, he said.

Bank of America predicts that a prominent theme in 2019 will be U.S. dollar weakness and that U.S. GDP will run at about 2%.

Bank of America’s Ben Randol, senior G10 FX strategist, said, “A divided [U.S.] government raises uncertainty, and it is not likely to be benign.”

“The fundamental China and U.S. differences will be resolved, but things will get worse before they get better,” Randol, who also spoke at the briefing, said.

Holdover issuance on tap

NiQuan Energy Trinidad Ltd., a subsidiary of NiQuan Energy LLC, was a would-be issuer that has pushed its pricing of notes into 2019 due to market volatility.

NiQuan, a Trinidad and Tobago-based gas to liquids plant operator, is now expected to price $100 million to $150 million of notes in January.

But China issuance seems to always manage to trickle in. Fully one-quarter of EM debt issuance is China debt. Fantasia Holdings Group Co. Ltd., a high-yield property development credit based in Shenzhen, issued $130 million of 15% notes due 2021 in December, and Nanjing, China’s Redsun Properties Group Ltd. also priced a $200 million add-on to its 13½% senior notes due 2020.

China property credits remain on Bank of America’s recommended list for 2019, although it is urging investors stay defensive going into the new year as “things could get worse before they get better,” the bank wrote in a recent Asia outlook report.

The bank said it prefers investment-grade names over high yield and focus on short-dated carry opportunities including quality and short-dated high-yield property.

“We turn more constructive on HY as more supply materializes and trade tensions de-escalate,” Bank of America credit analysts wrote referring to the China-U.S. trade dispute.

Bank of America said that it is supportive of Asian credits, which have attractive valuation and solid fundamentals despite the expectation that defaults will pick up in 2019.

But a gradual recovery of China’s onshore credit market should help alleviate the offshore supply and refinancing risks for China corporates and help drive high-yield spreads tighter into the end of the year. It predicts an 80 basis point contraction in high-yield spread to 650 bps, while investment-grade was expected to remain little changed at 160 bps at the end of 2019.

Politics, oil and rates

The bank said that U.S. investment-grade space will be a big driver of Asian spread.

In Latin America, Paraguay and Uruguay are on the list for new issuance in 2019. But Mexico will likely be quiet as investors continue to evaluate the new administration of president Andres Manuel Lopez Obrador, who rode to victory in elections in 2018 on populist policies.

Emerging markets debt churned throughout the Dec. 17-21 week on lighter volume as EM portfolio managers reacted to another steep slide in oil prices and to the U.S. Federal Reserve’s rate increase and update of monetary policy. The interest rate rose 0.25% as expected, but the FOMC’s tone was not as dovish as the market had been expecting.

West Texas Intermediate crude oil prices fell 7.3% to $46.24 a barrel on the New York Mercantile Exchange on Dec. 18. The price of Brent oil closed down 5.6% to $56.26 on Tuesday. On Friday afternoon, WTI was $45.57 a barrel.

Oversupply worries persist despite the Organization of the Petroleum Exporting Countries’ and partners’ agreement earlier this month to reduce crude output by the bloc by a total of 1.2 million barrels a day in 2019. The deal initially bolstered crude prices, but the strength failed to carry through as investors remain dubious that the cut will impact supply significantly.

It was a punishing week for stocks. The Nasdaq Composite index fell into bear market territory, meaning it was down more than 20% from its peak, and trading at 6,391.25 on Dec. 21.

Given where markets are now and how quiet the primary market has become, “it’s hard to imagine that we’re going to come back in January and everyone is going to be in a good mood. It’s likely to be a slow start,” a New York-based market source said regarding emerging markets debt primary issuance.

Local-currency bonds eyed

Given market turbulence and the hurdles that have developed in U.S. dollar-denominated and euro-denominated issuance, the local-currency bond markets picked up the slack in 2018. That trend is likely to continue in 2019.

“You are probably going to be seeing a lot more Brazilian real-denominated issuance, for example,” a New York-based market source said.

This trend is positive, the source said, because it is always positive for financial markets to develop even if it means there might be less business for New York-based banks that originate and syndicate Latin America’s dollar-denominated Rule 144A deals.

© 2015 Prospect News.
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