Outlook 2015: EM sovereign issuance to dip, corporates to stay flat; Asia local-currency deals eyed

By Christine Van Dusen

Atlanta, Jan. 2 – Issuance from emerging markets sovereigns is expected to decline in 2015 while corporate issuance will stay flat versus 2014’s levels as lower commodity prices and geopolitical risks hurt some emerging market economies, market sources said.

Sovereign issuance from emerging markets will dip to $69.8 billion after a record-setting level of $91.5 billion in 2014 as coupon and maturity cash flows increase and principal repayments decrease. Most of the issuance is expected to be concentrated on large block issues from places like Mexico, Turkey and Poland, according to a report from J.P. Morgan Securities LLC.

And while hard-currency supply will decrease in the new year, local-currency issues will increase.

“We forecast an increase of 17% in total gross issuance of government debt in local currency for 2015, driven mostly by Asia [without China] and India and Latin America,” JPMorgan said.

Corporate bond issuance is expected to total $357 billion in 2015, in line with the $360 billion forecast for 2014, and Asian companies will hit a new issuance record, the report said.

“The pick-up in Asia supply is mainly driven by an increase in investment-grade financials and corporates, with a continued rise in supply from Chinese issuers that are likely to contribute to over half of the region’s issuance,” JPMorgan said.

Supply expected from India

Issuers from India are also forecast to make a big contribution in 2015 as its economy grows in the new year while many others in the emerging markets universe shrink, according to a report from the BlackRock Investment Institute.

Infrastructure development will pick up and funding needs will increase for Indian issuers in 2015, a trader said. And the government is making it easier for foreign investors to purchase government bonds, raising the limit to $25 billion in 2015 from $5 billion this year.

Europe’s issuance to decline

Supply from emerging Europe will most likely decline to $23 billion in 2015, hurt by the economic picture in Russia, JPMorgan said.

It’s increasingly unlikely that the Czech Republic will issue bonds in 2015, given that the sovereign is looking to finance its deficit with reserves, a trader said. And Hungary could continue to keep issuance low as the sovereign attempts to reign in its debt numbers.

But Croatia, which in 2014 did its largest issue of bonds, is expected to bring new deals in the new year. The proceeds from the new issues will be used to manage debt and the sovereign’s budget deficit, a trader said.

Akbank in, Isbank out

Taking a closer look at Turkey, it’s expected that AkBank TAS will issue new notes during 2015 and Turkiye Is Bankasi AS (Isbank) will not, given that Isbank has equity investments in other companies that could be divested if capital is needed.

“Although Isbank will consider Tier 1 or Tier 2 debt in the future, capital is currently not a concern for the bank,” a London-based trader said. “We think Isbank spreads have been hindered by issuance concerns in the past, but given that we think issuance is unlikely by the bank, we think Isbank spreads could tighten.”

Commodity companies to issue

In 2015, issuance from commodities-focused companies could rise as sovereigns like Brazil seek to raise rates to defend their currencies.

“Still others, such as Mexico and China, stand to gain from U.S. economic momentum,” the BlackRock report said.

The market could see more issuance from companies that cater to the middle class, while capital equipment providers and resource industries may not see enough growth, according to the report.

Deals ahead for African names

Africa is expected to become a more popular region for bond issuance in 2015. The new year could see Kenya, Nigeria and South Africa printing new deals, a trader said.

Meanwhile, corporate issuance from the Middle East is expected to be flat at $40 billion, JPMorgan said.

Sukuks to gain steam

Islamic bonds should gain in popularity during 2015, following a solid year that saw as much as $17.3 billion in international sukuk issuance, an increase from 2013, a London-based trader said.

Now that sovereigns like Hong Kong, Turkey and South Africa have entered the sukuk market, it’s likely that corporates in those countries will follow, he said.

LatAm supply to dip

Latin America bond issuance should dip by $10 billion to $95 billion in 2015, hurt by the corruption scandal in Brazil, JPMorgan said.

Brazil-based Petroleo Brasileiro SA (Petrobras) – which typically sells new bonds during the first quarter of the year – is expected to wait until at least the middle of 2015 to do a new deal, a trader said.

The company delayed the release of its third-quarter earnings as a result of a money-laundering and bribery scandal, which led to indictments against at least two Petrobras executives and several politicians. Petrobras isn’t likely to issue any new debt until the audited figures are published.

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