Market analysis: Investor demand for emerging-market debt remains strong

With fresh sovereign curves established, will corporates and financials be a "field of dreams" for the Mena bond markets going forward? Or, will expectations of continued jumbo sovereign supply force smaller issuers to consider alternatives to the public bond market?

Kingdom Centre Tower in Riyadh. Saudi Arabia issued a $17.5bn landmark bond. Faisal Al Nasser / Reuters

Recently, Saudi Arabia's landmark US$17.5 billion sovereign bond received an enthusiastic welcome from international investors. By establishing a full curve in the US dollar bond markets, Saudi Arabia paved the way for the quasi-sovereign and private sectors to follow. Qatar, Oman, Bahrain, and other Middle East sovereigns have also executed successful benchmarks.
With fresh sovereign curves established, will corporates and financials continue to be a "field of dreams" for the MENA bond markets going forward? Or, will expectations of continued jumbo sovereign supply force some issuers to consider alternatives to the public bond market? We expect a healthy balance to continue.
Investor demand for emerging markets debt remains strong.
So far this year, debt capital market (DCM) issuance across Central/Eastern Europe, Middle East and Africa (CEEMEA) exceeds $145bn, according to BondRadar. This represents an increase of more than 60 per cent from 2015, when various negative factors weighed on the market.
By category, sovereign/supranationals are most active (58 per cent of total volume, from over 30 issuers) followed by corporates and banks (42 per cent of total volume, from over 60 issuers).
The diversity of corporate and financial issuance this year demonstrates that investors are buying individual credit stories. With issuance forecast to increase next year, ensuring smooth and attractive markets will require:
Engagement from sovereigns to "direct traffic"
Practice varies by country, but even informal coordination of issuance plans can be beneficial to certain issuers and markets. Being the fourth consecutive issuer from a given country or sector in a short space of time is never an ideal position.
Picking public issuance windows carefully
Particularly after periods of lower activity from a particular sector or credit, the "first mover advantage" remains a real phenomenon. Thus, the DCM banker's adage: "Be ready early."
Evaluating private placement markets
From the GCC to Asia, Germany, the US and beyond, investors have a specific appetite for conventional or Islamic transactions in a private placement format. Such transactions can be tailored to meet specific needs of each borrower but tend to offer smaller sizes than the public market.
Considering liability management
Proactive measures to "switch" investors out of maturing securities into new securities remains an attractive strategy for many issuers. Investors like to see proactive issuer engagement, and appreciate the opportunity to rollover good credits.
At the risk of overusing sports and film analogies, I believe we are "mid-innings" of the broad revival and further development of the CEEMEA bond markets following a dismal 2015.
As Deutsche Bank looks to the end of 2016 and into 2017, we remain optimistic that positive issuance conditions will continue, but we cannot rule out periods of disruption based on global events and other market factors. Considering such risks, and the widely held view that US interest rates will rise in 2017-2018, issuers would be well-advised to plan carefully for a long game ahead.
David Greenbaum is the head of corporate and financial debt origination for CEEMEA at Deutsche Bank
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