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Capital Markets Weekly: Emerging market supply reopens successfully after Russian default initially averted

23 March 2022 Brian Lawson

Emerging markets

Since the end of last week, Russia's bond spread has more than halved after it was reported to have met a USD117 million coupon payment in dollars, despite a prior statement it would make payments only in rubles. Improved market sentiment permitted emerging market supply to revive: Nigeria completed the first African sovereign sale in 2022, and Turkey placed five-year bonds, howbeit at levels well above those it paid in mid-February.

Russia's EMBI+ spread improved sharply to 2197 basis points at the close on 17 March, having closed last week (11March) at 5863 basis points over UST and peaked at 6215 on 9 March. The sharp improvement reflects media suggestions Russia met dollar coupon payments despite a prior statement that it would pay only in rubles, potentially avoiding starting technical default events with rating agencies.

Nigeria brought this year's first sub-Saharan sovereign supply. It sold USD1.25 billion of seven-year debt on 17 March, attracting USD4 billion of peak demand. The issue was initially offered at 8.75% guidance, which was tightened twice to the final level of 8.375%: the order book remained strong (at USD3.676 billion) despite the tightening, showing price insensitivity. According to the country's Debt Management Office, proceeds will "finance critical capital projects …to bridge the deficit in infrastructure" and boost the country's external reserves.

The deal came on the same day as Nigeria's Debt Management Office announced that the country's public sector debt rose to NGN39.556 trillion (USD95.779 billion) at end-2021 versus NGN32.915 trillion (USD86.392 billion) a year earlier. Patience Oniha, Director-General of the Debt Management Office (DMO), noted that the total public debt stock stood at 22.47% of GDP, versus Nigeria's limit of 40%.

Nigeria's pricing shows some deterioration within 2022, but on a limited scale, and with recent improvement. As of 30 December 2021, its outstanding 7.875% February 2032 and 7.375% September 2033 issues closed last year at yields of 8.001% and 7.899%. At the close of 14 March, the latest data point currently reported by Nigeria's DMO, the same issues had been trading at 8.739% and 8.627% respectively.

Turkey also sold five-year bonds, with initial price guidance of 8.875% for the sale. An initial Turkish-language statement by Turkey's Treasury announced that it had sold USD2 billion at 8.625%, reporting that the deal was three times subscribed. It reported that some 150 accounts had participated, with 27% sold in the Middle East, 25% to Turkish investors, with 23% and 18% taken by UK and US investors. The sale took place against the background of a recent increase in its inflation rate, which reached 54% in February, and its decision to leave its policy rate unchanged despite tightening actions by the US Federal Reserve and several regional peers. The high proportion sold in Turkey is attributed to demand from Turkish banks.

While its deal was adequately subscribed, its pricing represents a clear deterioration in cost levels versus the 7.25% it paid in February to raise USD3 billion of five-year Islamic debt, which attracted some USD10 billion in demand from over 200 investors. This is further indicated in the Treasury statement, which showed that the new funding had paid a spread of UST+645.1 basis points, versus a margin of 524 basis points over mid-swaps in February (howbeit using a different reference).

In the secondary market the picture is more encouraging, in that Turkey's EMBI+ index, the average trading margin on its outstanding dollar debt versus US Treasuries, closed on 17 March at 558 basis points, having been as wide as 695 basis points on 7 March, below the 578 basis points at which it ended 2021. Less positively, this indicates a sizeable new issue premium for the new deal, with a Bloomberg report suggesting that the initial price talk had represented a sizeable 80 basis point pickup at the time of launch to an outstanding deal six months shorter in maturity.


EM borrowers are also preparing for ESG issuance.

Panama's Undersecretary of Finance Jorge Almengor stated that Panama will seek Green Bond issuance within 2022 to fund future liability management exercises.

A Bloomberg report on 14 March also claimed that the Philippines has mandated banks to arrange a dollar denominated international bond, timing of which will be subject to market conditions: we have not seen any official confirmation to date. The report cited sources suggesting the country could issue up to USD7 billion in international markets this year. Finance Secretary Carlos Dominguez previously had advised on Bloomberg TV that it was aiming for the domestic market to meet 75% of its borrowing needs this year. On 17 February, however, he did confirm that a debut Green Bond was planned for this year, with a Reuters report on that day suggesting that its next dollar sale could use an ESG format, with it having pledged to set up a program last November.


While detail is still to be provided, there has been an encouraging development for Chinese firms listed on US markets and those seeking international share-raising. Xinhua agency reported on 16 March that the Financial Stability and Development Committee under China's State Council had reported "good communication" with US regulatory bodies and "positive progress" with the two sides reported to be working on a "concrete cooperation plan". It further stated that the Chinese government "will continue to support various enterprises to seek listings in the overseas markets". No further formal detail has been provided at this stage.

Our take

Overall, this week's developments appear risk positive. Without pre-judging developments relating to Russia's coupon payments, debt markets have clearly coped with last week's Federal Reserve policy rate increase without difficulty.

Nigeria's issue was the first African sovereign sale this year and appeared a clear success despite adverse domestic fiscal trends caused by the cost of energy subsidies, which have counterbalanced the fiscal windfall of higher energy prices. Turkey's ability to attract three times subscription for its deal is also a positive, as is its having now raised a total of USD5 billion internationally in 2022 at a sovereign level, but its pricing indicates a deterioration in its credit standing. Further worsening of new issue pricing would risk bringing its borrowing costs to levels that would be potentially unsustainable, and this requires close monitoring.

While details are still to be formulated, China's announcement appears to represent a policy easing in respect of provision of data to meet international - particularly US - disclosure requirements. Sources cited by the Financial Times suggested that the negotiations with US regulators could lead to some Chinese firms being permitted to meet US audit requirements, which previously had been precluded by Article 177 of China's revised securities law, which had banned Chinese firms from providing information to foreign regulators without prior clearance from the China Securities Regulatory Commission. In turn, the failure to meet US disclosure requirements had generated US legislation (the Holding Foreign Companies Accountable Act of 2020) and subsequent SEC recommendations to delist companies that fail to comply with US requirements within three years.

The issue has led to the cancellation of planned US and international share-raisings, notably affecting China's technology sector. On 10 March, the US SEC had listed five firms as candidates for delisting and raised concern that similar issues could affect many others, with the Financial Times suggesting as many as 270 Chinese firms could face eventual delisting. It is too early for us to assess the degree of compromise that will be reached, but the wording of the Chinese statement appears to show some easing in its prior stance. This represents a positive indicator for those firms already listed on US markets and would also appear to increase the likelihood of a future revival of international share issuance by major Chinese companies.

Posted 23 March 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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