Macro Analysis /

Emerging Market sovereign bond issuance eases in May

  • EM hard currency sovereign bond issuance slipped to US$19bn in May from US$43bn in April

  • However, there was a rebound in HY issuance, with Egypt showing the door is open for even B-rated sovereigns

  • Large crisis-related funding needs suggests more issuance is on the way

Emerging Market sovereign bond issuance eases in May
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
1 June 2020
Published byTellimer Research

EM hard currency sovereign bond issuance eased back in the month of May after its April rebound. We estimate EM sovereign bond issuance was US$18.7bn last month, bringing total issuance YTD to US$102.7bn. But monthly issuance was well down on the US$43.5bn issuance in April, which marked a return after a two-month lull due to the impact of coronavirus. 

Figure 1: EM hard currency sovereign bond issuance YTD by month* (US$bn)

*We exclude Israel, Latvia, Lithuania and Slovenia from our definition of EM.
Source: Tellimer Research, Bond Radar. 

High yield (HY) issuance was stronger last month, compared to the previous month, although overall issuance was fairly evenly split between investment grade (IG) and HY, unlike April when IG issuance firmly led the way. HY issuance reached nearly US$10bn, consisting of four issuers (Bahrain, Egypt, North Macedonia and Serbia), accounting for 53% of the month's issuance, compared to 47% for IG. But IG still accounts for 76% of EM issuance YTD. 

Within HY, we saw issuance from further down the rating scale compared to April, although admittedly in a small number of countries (one or two issuers), with issuance from countries with B ratings, Bahrain (-/B+/BB-) and Egypt (B2/B/B+). These accompanied North Macedonia (-/BB-/BB+) and Serbia (Ba3/BB+/BB+). This contrasts with HY issuance in April which was concentrated in the BB rating bucket (and just two issuers – Paraguay and Guatemala). Indeed, the issuance highlight of the month was probably Egypt's US$5bn triple tranche issue, thereby accounting for half the month's HY issuance, and we think the first solidly B-rated sovereign to return to the market since Ghana in early February. Still, Egypt had to pay for this – 12yr at 7.625% and 30yr at 8.875%.

This supports what we said last month, that the market is open for (good quality) HY issuers – although whether Bahrain is a good quality issuer given its own credit concerns is moot. So far, six HY sovereigns have issued since the market reopened after March, although clearly that is only the tip of the iceberg among the total number of non-IG, and frontier, issuers. 

HY issuance was no doubt helped by the decline in overall EM spreads. The spread on the Bloomberg Barclays EM USD aggregate index fell by 171bp on the month, and has fallen by 272bp (40%) since its peak in March, to 448bp (Figure 2). The average EM nominal US$ yield on the same index is now c5%. Meanwhile, the spread on the EMBIGD fell by 90bp over the month from 610bp to 521bp, although it is still some 210bp wider than it was in mid-February just before Covid erupted on global markets. Hence, market access, for now at least, may still be out of reach for some of the weaker-quality HY names that had previously enjoyed it – and even relied on it, especially for those operating under the shadow of the G20 debt service suspension initiative (DSSI). 

Indeed, that the international bond market is, or could be, open to some HY issuers as a source of new money may be an important message to global policy makers and EM sovereign debt managers as they assess funding options and navigate their way through this crisis. Large crisis-related funding needs suggest more issuance is on the way.

Figure 2: Spreads and yields on the Bloomberg Barclays EM USD aggregate index (%)

Source: Tellimer Research, Bloomberg