DCM bankers — especially in EM, where market access is intermittent for several borrowers — are well coached in telling issuers to take advantage of funding windows as soon as possible. “The most expensive funding is funding you cannot access”, is the oft-rehearsed motto. For a sell-side banker, of course, nothing is more costly than a client deciding it has gone off the bond market, or delaying until the window closes.
In the past year, the sales pitch has not always rung true. Those issuers who rushed to market in the early days of the pandemic, seeking to pounce on what many thought might be a narrow funding window, have since been shown — with the benefit of hindsight — to have moved prematurely.
Most strikingly, Colombia’s Ecopetrol paid 7% for 10 year funding in April 2020. Those bonds today yield 4%, despite a sharp deterioration in appetite for Colombian risk and a widening of US Treasury yields.
Again, as Treasury yields rose sharply in February and March, the talk was of the need to get ahead of even higher rates. Yet even though US inflation numbers have beaten expectations, Treasuries have regained lost ground. The 10 year is back below 1.6%, having peaked at more than 1.7% in early April.
You might therefore find it hard to blame issuers for taking a relaxed attitude to the latest signals that there is potential market disruption around the corner. This time, Fed governors are hinting that tapering of monetary stimulus is returning to the agenda.
But if funding markets remained wide open throughout the bulk of a global pandemic and recession, and are now bouncing back stronger after the first quarter rates sell-off, why should issuers think tapering would be any more than a hiccup? Negative new issue concessions for EM issuers Senegal, Abu Dhabi and Petrobras in the last two weeks certainly suggest it is not harming appetite today.
Indeed, EM followers are quick to point out that issuers are in far better shape for a potential Fed tapering than in 2013, when the merest hint of a possibility of a slowing of US monetary stimulus was enough to wreak havoc with currencies and bonds and leave developing economies and the EM fixed income asset class battered.
This optimistic view has solid foundations. Emerging markets are in a vastly different place to where they were in 2013. Central banks have racked up years of experience and are, according to experts, taking a more “proactive approach” to real interest rates. On average, emerging market countries are now running surpluses, as opposed to the deficits of 2013.
Moreover, EM currency valuations are close to historical lows, in both real and nominal terms, so the chance of a mass depreciation that will undermine fundamentals seems unlikely.
The Fed, too, has learnt valuable lessons about the consequences of carelessly chosen words for emerging economies.
And yet, the mantra of the DCM banker appears to be as powerful as ever, with issuers storming to market as if there were no tomorrow. Syndicate bankers are predicting up to 12 new EM issues this week alone. At least five issuers from CEEMEA have already announced deals, and another five from Latin America are on the way. Even Brazilian airline Azul — the first prospective triple-C rated Lat Am issuer since the pandemic started — is going to try its luck with a senior unsecured deal.
This is surely because, no matter how much more resilient EM economies look versus 2013, issuers know that the dollar bond market has, in the last analysis, been driven by the search for yield.
No matter how gently the Fed tries to pull off an immaculate transition towards normality, there is no getting away from the fact that less liquidity in the bond market means higher base rates. Even if investors decide they are so keen on EM that spreads remain stable — which would seem unlikely — this will, at the very least, mean higher all-in funding costs.
And there is another factor. In the era of abundant liquidity, investors have been fairly happy to overlook growing fiscal and political issues in EM. But as technicals become less favourable, might asset managers begin to pay more attention to the prospect of a divergent economic recovery from Covid-19, which would likely leave EM economies playing catch-up?
Sensible EM issuers are not hanging around to find out.