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Regional concerns could threaten the CEEMEA market's ability to match post-summer bond issuance levels of previous years, even though market conditions in general appear conducive for issuance which typically restarts in earnest in September.

Specific concerns in relation to the Sukuk market, Qatar and Russia could slow bond sales despite a narrowing of EM credit spreads over the last year and continuing investor demand for the product. In Euros, meanwhile, September 7 could be a key date as the ECB is expected to signal its QE tapering, which could also dampen issuance plans.

  • Sukuk Market
    • Moving into September, one unresolved issue within the CEEMEA primary remains the Dana Gas sukuk case, with the High Court in London scheduled to hold a full hearing on the Middle Eastern energy company's plan to restructure USD700mn of its Islamic bonds issued four years ago.
    • According to our records dating back to 2004, CEEMEA Sukuk issuance was running at record levels ytd, at USD18.15bn through to the end of May, though the market has since stalled, seemingly coinciding with Dana Gas' declaration that its Shariah-compliant bonds are unlawful.
    • We have taken note of at least six entities (sovereign, corporate and financial) across the Middle East and Turkey that are reportedly considering sukuk issuance, potentially in the near future.
    • The Islamic bond structure in question, the sukuk al-mudaraba, represents only a small portion of the market, which means any wider implications, regardless of the outcome, should prove limited.
  • Qatar
    • The Middle East may well dominate the CEEMEA primary into year-end if the rumour mill is anything to go by (Bahrain, Oman, Jordan to name but a few sovereigns understood to be in the frame) and within this region, Qatar could also be a key focus amid the ongoing diplomatic rift with its Arab peers.
    • With liquidity coming under pressure from the Saudi led boycott, Qatar has instructed banks to come to the international markets for funding, instead of relying on the government, which has been providing just enough foreign currency to compensate for the outflows that are at risk of worsening in the coming months.
    • One bank already said to be mulling a potential Eurobond sale is Qatar National Bank (QNB). The bank is also reportedly holding talks with investors in Taiwan about a private placement of Formosa bonds and considering private placements in other Asian markets.
  • Russia
    • The health of Russian private banks remains a major concern for investors and together with increased US sanctions could lead to reduced issuance out of the sovereign into year end.
    • It is Otkritie that has dominated the headlines, having suffered a sharp fall in liquidity in recent months with depositors withdrawing around 20% of its total assets in June and July, and with the deposit run continuing into August. This prompted the CBR to step in to save Otkritie from collapse using the newly created banking sector consolidation fund.
    • The CBR said a bail-in of senior bondholders is not being applied, but the position of holders of Otkritie's subordinated debt is far less clear.
    • This has led to some volatile price moves in Bank Otkritie's subordinated USD500mn April-2019 line, which initially received a boost on the bailout announcement, but has since slumped considerably back under 50 cents on the Dollar amidst uncertainty over the specifics of the intervention.

Possibly down, but certainly not out

On a more positive note, while this trio of regional developments threaten to impact some EM issuance prospects, a typically active forthcoming period for broader CEEMEA new bond issuance is nevertheless envisaged, particularly if recent history is anything to go by.

Excluding 2015, the month of September has seen (on average) USD14.84bn issued over the last 5 years, while our records show that October tends to be an even busier month for EM supply, and has in fact beaten September in four of the past five years in terms of issuance volumes, with 2013 being the notable exception (see chart below).

Source: Informa Financial Intelligence

This is attributed in no small part to a keenness of sovereigns to capitalise on any accommodating market conditions, not only to secure funding for the year but often look ahead to refinance paper maturing in 1-2 years. From CEE these typically include the likes of Latvia, Poland, Romania and Russia, while South Africa and Ghana have often represented African nations in the post summer period. Middle Eastern countries also appear fairly regularly in those months, in particular Oman, with the exception being in 2015 as the following chart shows.

Source: Informa Financial Intelligence

Make hay while the sun shines

External market conditions also appear supportive for any EM issuers currently monitoring the market. With Jackson Hole passing without major policy signals, and US President Trump still unable to achieve any of his election policy goals, UST yields remain under pressure. And as long as policy makers continue to tread carefully, we maintain a broadly constructive view on EM FX and rates, as supported by fundamentals and technicals. For more on this, please see - EM debt bulls should have nothing to fear from Jackson Hole.

For comparison we look at some key credit metrics now vs last September;

  • 10 year UST yield at 2.13%/ 1.57% on 1 September 2016
  • 10 year Bund yield at 0.38%/ -0.07% on 1 September 2016
  • USD Index at 92.550/ 95.653 on 1 September 2016 (but peaked at 103.020 in December 2016)
  • iTraxx Corp CEEMEA at 151.58/ 272.55 on 1 September 2016 (please see Graph below)
  • JPM EMBI Spread at 321.02/ 365.91 on 1 September 2016 (please see Graph below)

Source: Bloomberg

Finally, one other notable trend in recent years is that a busy post-summer for EM borrowers is by no means a prelude to a quiet run into year-end for primary issuance, as typically robust Q4 issuance volumes outlined in the following chart illustrate.

Source: Informa Financial Intelligence


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