Asia Leads Return of Emerging Markets to Sell Dollar Debt

(Bloomberg) -- The riskier parts of the developing world are again flirting with international debt markets -- and Asian companies are leading the charge.

Asia's riskier borrowers are once again selling offshore debt, paving the way for other emerging-market bond sellers amid optimism reopening economies will stoke global growth. While demand for higher quality bonds, including Chinese dollar debt, hit fresh highs last month, junk borrowers are also finding ways to sell.

It's a sign of differentiation among borrowers from the developing world as local Asian investors offer support to leveraged firms in the region, according to BNP Paribas Asset Management, which is bullish on some Asian markets and offshore China credit.

“In April, we saw Asia's high-yield market returning, whereas we haven't yet seen that in the Latam, Middle East or Africa complex,” according to Karan Talwar, senior investment specialist for emerging-market debt at BNP Paribas Asset Management in Hong Kong. These borrowers have been more successful because they're supported by local investor demand, he said. Asia's junk universe is dominated by Chinese borrowers who have flocked to offshore markets in recent years.

Emerging-nation companies and governments have raised more than $292 billion through dollar-denominated bond sales this year, data compiled by Bloomberg show. Issuance all but dried up in March as the threat of the coronavirus and weaker oil prices became clear.

While the amount of money raised from emerging-market dollar bond sales soared to a record for the first five months of a year, buoyed by blowout new issuance early in 2020, the number of sellers dropped to a four-year low, data show. That highlights how creditors are discriminating more between investment-grade and high-yield debt.

Demand for Risk

Investors have lapped up a handful of high-yield Chinese notes issued in the past two months. Property developers, which make up the bulk of the nation's riskier issuance, borrowed a record amount in the first quarter and are poised to return with an offering from Zhenro Properties Group Ltd. effectively re-opened that part of the market in May.

Orders for the $200 million bond surged to about seven times the issuance size and Asian investors made up 85% of final order books, according to a person familiar with the matter. Separately, just last week orders for another high-yield developer bond from Fantasia Holdings Group Co. reached $1.1 billion for a $300 million with 98% of interest from Asian buyers.

The return of European and Latin American issuance has been more hesitant, reflecting the fact that Asian economies hit earlier by the pandemic were able to began reopening sooner. Latin America is in the throes of its worst outbreaks, especially in nations such as Brazil, where leaders are avoiding strict nationwide lockdowns.

Even so, Brazil's state-run oil producer, Petrobras, sold $3.25 billion of bonds this week. It was the first Brazilian company to sell dollar bonds since before the pandemic. The sale may be a harbinger of more lower-rated companies returning to markets soon, according to Citigroup Global Markets strategists including Eric Ollom, Donato Guarino and Ayoti Mittra.

“EM new issuance since the Covid crisis has been predominantly IG, except for the odd sovereign and Asian corporate,” they wrote. “We find the market flush with liquidity and clearly looking at the future back-to-work narrative more than the ugly economic data confirming the depths of the contraction.”

That optimism extends to the high-yield sovereign market. Egypt raised $5 billion in a bond sale last week, its largest on record. The deal was more than four times subscribed, with total bids of $22 billion.

South Africa, Brazil and Ukraine may be among the lower-rated emerging nations to sell hard-currency bonds if risk appetite lingers, according to Goldman Sachs analyst Sara Grut. High-yield sales “could increase significantly if risk sentiment continues to improve,” she wrote in a note on Tuesday.

While premiums for emerging market borrowers remain elevated, they may exaggerate the risk of delinquencies, according to Talwar at BNP Paribas.

“While we do expect the severe market disruption to result in default rates rising from recent low levels, we do not expect EM corporate bond default rates to be as high as implied by current spread levels,” he said.

©2020 Bloomberg L.P.