By Carolyn Cui and Manju Dalal
The global bond boom has reached Tajikistan.
The central Asian country last month raised $500 million in its
first-ever international bond sale, paying just 7.125% in annual
interest on the debt after the U.S.-dollar offering drew a swarm of
American and European buyers. Bankers had earlier shopped the
10-year bonds from the former Soviet satellite with an 8% yield,
which was pulled down by strong investor demand.
Investors' thirst for income is enabling governments and
companies in some of the world's poorest countries to sell debt at
lower and lower interest rates. Greece, which was on the brink of
default a few years ago, issued new bonds this past summer, and the
country's National Bank launched a bond sale Tuesday, marking the
return of Greek banks to the credit markets since the country's
sovereign-debt crisis.
Speculative-grade bond issuance in the developing world has hit
a record $221 billion this year, according to data from J.P. Morgan
Chase & Co. and Dealogic, up 60% from the full-year total in
2016.
Buyers reason that the debt pays a healthy yield and carries few
immediate risks. The global economy appears robust and
emerging-market defaults are low. Bankers say they expect emerging
markets to sell tens of billions of dollars in new junk bonds by
year-end.
The euphoria is worrying some investors, who warn that frenzied
buying of risky assets sometimes presages market turning points.
The average yield on speculative-grade corporate bonds in emerging
markets dropped to 5.53% late last week, the lowest on record,
according to J.P. Morgan. Two years ago, that yield was over
9%.
"While I am not shouting the end is near, it is normally pretty
far down the line that emerging markets start to see this type of
euphoria," said Wilbur Matthews, principal at Vaquero Global
Investments LP, a firm that specializes in emerging markets. He
said he has been selling some riskier debt to buy higher-rated
bonds and securities that mature sooner.
Tajikistan's bonds were rated B- by S&P, six notches below
investment grade. The ratings firm estimated the country's GDP per
capita at $900, putting it among the lowest of the sovereign
nations it rates, but said it sees Tajikistan's growth prospects
improving gradually.
The sale followed the June bond-market debut of the Maldives, a
tiny nation in the Indian Ocean that raised $200 million in a sale
of five-year bonds with a 7% coupon.
"Investors are very bullish on bonds from emerging markets and
very keen to diversify into new names," said Peter Charles, a
Citibank managing director who handled the Tajikistan bond sale.
The country plans to use some of the proceeds to finance a power
plant project.
Some passed on the opportunity. Samy Muaddi, who manages a
portfolio of emerging-market bonds at T. Rowe Price Group, said he
didn't buy the Tajikistan debt because he lacked information about
the country's repaying history and financial strength. "We are
seeing a lot of aggressively priced deals, as many new entrants are
coming to the market with less-established track records," he
added. T. Rowe has about $16 billion in emerging-market debt.
Companies that previously struggled to raise money in the credit
markets had no trouble doing so recently. Geo Energy Resources, an
Indonesian coal-mining group, canceled a $300 million bond sale in
July when investors were demanding a yield of close to 9%. In late
September, the company returned to the markets and sold the bonds
with an 8.3% yield.
Even issuers with a history of defaults have been able to find
buyers for their debt. Argentina in June sold 100-year bonds, even
though the South American nation has defaulted multiple times over
the past few decades.
"We're at a part of the credit cycle globally that's really
benign. Risk-taking is really high," said Jay Wintrob, CEO of
Oaktree Capital Management, during a recent visit to Hong Kong. Los
Angeles-based Oaktree has $99 billion under management in corporate
debt and other investments.
Prices of emerging-market junk bonds have gained sharply this
year, pushing their "spreads," or the additional yield that
investors demand over interest-rate benchmarks, to multiyear lows.
That spread over U.S. Treasurys was just 3.48 percentage points at
the end of last week, the tightest level in 10 years, according to
J.P. Morgan. A year ago, the spread was 5.3 percentage points.
Buyers of such bonds have been collecting hefty returns. A J.P.
Morgan index that tracks high-yield corporate bonds in the emerging
markets has risen 9.2% this year through September, significantly
outperforming U.S. junk bonds, which have returned 6.7% over the
same period.
There are fundamental reasons why global investors are rushing
into riskier emerging-market debt. Many companies are growing,
their balance sheets are improving, and default rates are at
multiyear lows, said Fraser Lundie, a portfolio manager and co-head
of credit at Hermes Investment Management in London, which has
about $39 billion under management. Calmer energy and commodity
markets also have reduced volatility in Asian companies'
earnings.
Money continues to flow in. The Institute of International
Finance said in a recent report that emerging-market bond funds are
set to attract a net inflow of $242 billion in 2017, up from $102
billion last year.
But buyers of bonds issued by low-rated companies and countries
in the emerging world could be exposed to multiple risks should
markets turn, investors say.
In previous times of market stress and economic weakness, junk
bonds and emerging-market debt were among the asset classes that
suffered sharp price declines as investors dumped riskier holdings
for safer ones. The recent tightening in spreads raises questions
about whether investors are getting adequately paid for the risk
they are taking on. A faster-than-expected interest-rate hike by
the Federal Reserve could also hurt bonds broadly, because bond
prices fall when rates and yields rise.
Polina Kurdyavko, co-head of emerging-market debt at BlueBay
Asset Management, a fixed-income firm with $57 billion of assets
under management, said she isn't worried yet. Junk bond issuance,
which makes up less than half of overall emerging-market debt
supply, has so far been increasing proportionally to the broader
sector.
"I'll start worrying when high yield dominates new bond issuance
in emerging markets," she said.
--Steven Russolillo contributed to this article.
(END) Dow Jones Newswires
October 11, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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