NEW YORK, July 26 (IFR) – Emerging markets syndicate
officials are taking no chances with new deals by starting with
huge concessions even for the better-rated issuers in the asset
class.
Last week saw deals by several borrowers, including
investment-grade Korea Gas and Bahrain, put out healthy initial
levels, before the leads tightened price levels on the back of
strong order books to place successful transactions.
Ever since the new issue market reopened in early July after
the big sell-off, issuers have had to pay to entice investors.
The premium of at least 50bp on Indonesia’s US$1bn bond in
mid-July was the most striking example.
Those that pushed investors’ tolerance, such as America
Movil in the sterling market or Korea Finance Corporation in
euros, either saw their deal reduced in size or held back over
the past couple of weeks.
“Investors are asking for significant premia,” said one debt
capital markets banker in London. “On [a recent] roadshow,
investors were suggesting a 50bp-60bp new-issue premium.”
The banker added that investors need to cover themselves
against rates rises.
“How long does a 50bp premium cover against rising rates?
Probably six months. So that’s fair.”
Korea Gas, rated A1/A+/AA-, started with a 40bp new-issue
premium, while Bahrain, rated BBB/BBB, began with a 50bp-67bp
concession.
Both, though, were overshadowed by AngloGold Ashanti
, which began pricing for its seven-year non-call three
bond with arguably a 100bp concession. Initial price thoughts of
8.50-8.75% contrasted with a mid-7s level for the outstanding
5.375% 2020 notes.
The South African miner, which has been weighed down by
rising costs, labour disputes and falling commodity prices, was
recently downgraded by both Moody’s and Standard Poor’s.
SP’s move was particularly damaging as the downgrade saw
the rating fall into junk territory, at BB+. Moody’s could
follow suit at a later date, as the outlook on its Baa3 is
negative.
With AngloGold needing to raise funds to help refinance a
convertible bond due next May, the issuer had to offer
attractive terms to entice investors.
“It’s coming fairly cheap – we need to accept that,” said a
banker close to the deal, when it was announced.
But despite the usual gripes that all these deals started at
“crazy levels”, as one banker described the AngloGold guidance,
syndicate officials said the key point was that they got done
and often with the final pricing at much tighter levels. Korea
Gas printed with an 18bp concession while Bahrain tightened its
pricing by 30bp.
AngloGold was unable to compress its concession but the
company did at least raise US$1.25bn, which was much more than
its original target of US$750m-$1bn, at 8.50%, the tight end of
its initial price range.
“The chief executive of the company could either kick the
can [of refinancing the convertible] down the road and hope the
gold price rises significantly, the market improves and the
outlook for South Africa gets much better – and that’s a lot of
things to be hoping for – or take the risk off the table,” said
one banker close to the deal.
VOLATILITY RISK
Even Gazprom, arguably the best CEEMEA issuer, started with
a 50bp premium with a five-year euro deal that was tightened by
40bp during the execution process in the previous week, after
the order book peaked at more than 5.5bn euros.
But while the more conservative execution process may make
sense given the more sober market, traders warn that
overly-generous initial price levels can cause damage to an
issuer’s secondary curve.
“Bottom line it created huge volatility in secondary
bonds and remains the biggest risk for EM at present,”
said one trader regarding Gazprom’s guidance.
But one banker not involved in the deal had sympathy for the
leads.
“Harry Hindsight is the best syndicate manager in the
world.”
(This story will be published in the July 27 issue of
International Financing Review, a Thomson Reuters publication)
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