Macro Analysis /

EM sovereign bond issuance falls to its lowest this year in April

  • EM hard currency sovereign bond issuance fell 37% in April to US$6.7bn, its lowest monthly amount this year

  • It brings total issuance YTD to US$42.8bn, just over half that in the same period last year

  • There were only four deals, the highlight undoubtedly being Angola, as market conditions continue to weigh on issuance

EM sovereign bond issuance falls to its lowest this year in April
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
5 May 2022
Published byTellimer Research

EM hard currency sovereign bond issuance fell 37% mom in April, to US$6.7bn, based on our calculations using data from Bond Radar, its lowest monthly amount this year, as the threat of higher global interest rates and the ongoing war in Ukraine continued to weigh on the primary market. Thus, the subdued start to the year continued.

Ten-year US bond yields approached 3% by the end of the month, after only breaching 2% just some six weeks before – and subsequently hit 3% in intra-day trading at the beginning of May. The Fed's FOMC, as expected, increased its policy rate by 50bps on 4 May, with more rate hikes to come.

EM hard currency sovereign bond issuance by month*

April's issuance, marking a 56% yoy decline, brings total issuance year to date to US$42.8bn. Cumulative issuance ytd is running at 45% below the first four months of last year.

Moreover, what little issuance we did see came over the first part of the month and there were only four deals (Angola, Croatia, Philippines and South Africa). The last deal was Croatia on 13 April. There was no issuance in the remaining two and half weeks of the month.

Within overall issuance in April, investment grade (IG) almost ground to a halt, accounting for just 8% of the total (comprising just one multi-tranche Japanese yen deal from the Philippines). High yield (HY) accounted for the bulk of issuance (71%), with crossover (a single Croatia EUR deal) accounting for the remaining 20%.

Year to date, IG still accounts for most issuance, at 56% of the total, with HY 41% and crossover 3%.

Within HY issuance, there were just two deals – South Africa and Angola. South Africa (Ba2/BB-/BB-) issued US$3bn in a dual-tranche offer for a ten-year and 30-year. The highlight of the month for frontier investors was however Angola's deal – until South Africa, it was at the time only the second Sub Sahara Africa issuance this year.

Angola (B3/B-/B-), benefiting from higher oil prices, came to the market for the first time in three years with a US$1.75bn ten-year bond. It also launched a cash tender offer for the US$1.5bn 2025s and US$1.75bn 2028s (in the event, it bought back US$636mn of the '25s, according to Bloomberg, leaving US$864mn outstanding of that issue). The '32s were issued at par with a coupon of 8.75% (spread 634.4bps vs mid swaps). IPT was 9%. The existing '29s were trading at around 8.25%, with the closest other comp Nigeria's '29s around 8.47%.

The deal saw a 15bps new issue premium according to Bond Radar (we wonder whether they had to pay up even more, given the flatness of the UST curve at the 7-10yr tenor). Demand was over US$4bn. However, whilst the deal may have seemed a trifle expensive at the time, and we wonder whether Angola could have waited (or needed to issue at all when it did), the bonds have since fallen six points, with the yield rising to 9.6%. Perhaps they were wise to go early after all!

These deals mean that there have now been five HY deals since Russia's invasion of Ukraine (in order of coming to market: Nigeria, Turkey, Egypt, Angola and South Africa).

However, challenging market conditions may continue to dent issuance plans for some going forward. Nigeria did say it plans to issue a second eurobond this year, possibly now this month. Kenya, on the other hand, said towards the end of April that it might cancel its plan to sell a US$1bn eurobond by the end of June. Meanwhile, El Salvador's bitcoin bond has still not materialised.

EM bonds have come under renewed pressure in recent weeks after a brief period of respite. The total return on the Bloomberg EM Aggregate Index is -9.6% since 18 February (ie before the Ukraine war) and -13.3% ytd (to cob 4 May). The yield has risen 135bps since the war, and 204bps ytd, to 6.3%, and rose 68bps just in April. The rise in the spread has, however, been more contained, rising just 18bp in April, 32bps since the war and 46bps ytd to now 343bps.

The HY constituent has fared similarly, albeit with modest outperformance, with a total return of -7.6% since 18 February (ie before the Ukraine war) and -10.3% ytd (to cob 4 May). The yield has risen 166bps since the war, and 229bps ytd, to 9.5%, and rose 77bps just in April. The spread has risen by 61bps since the war and 68bps ytd, to now 664bp, and rose 26bps in April.

As a result, the monthly return on the Bloomberg EM Aggregate Index was -4.3% in April (-4.1% on the HY constituent), marking four consecutive months of negative returns this year.

EM bond spreads (bps)