Outlook 2010: New issues flooded market with groundbreaking deals until Dubai turned the tide

By Christine Van Dusen

Atlanta, Dec. 31 - Supply - or, perhaps, oversupply - was the buzzword for emerging markets in 2009 as the pace of issuance sped up through the year, barely giving investors time to breathe, until coming to a nearly screeching halt in late November with the news that Dubai World would seek to freeze its debt and potentially open a new chapter in the global economic crisis.

The amount of issuance that came out in 2009 "surprised everybody," an emerging markets strategist said. "At the very beginning of the year expectations for issuance were extremely low."

In January and February, "things looked really dire," a London-based market source said. "But they picked up. Credits that couldn't borrow did borrow."

And suddenly the amount of issuance was exceeding all expectations, the strategist said. "Nobody thought there would be more than $100 billion of issuance and certainly not more than the $200 billion we've seen."

The market "tightened and rallied, and there was a lot of issuance there for a while," the London source said. "As a consequence of very, very low interest rates from central banks, there was cash that needed to find a home."

'Groundbreaking' deals

The year saw "groundbreaking deals," the source said, from the likes of Argentina's Arcos Dorados BV and its $450 million 7½% 10-year senior notes priced at 99.136 to yield 7 5/8% and Mexico's Cemex Finance and its $1.25 billion 9½% notes due December 2016 at par to yield Treasuries plus 660.3 basis points and €350 million 9 5/8% notes due December 2017 at par.

The Middle East was a strong region, too, and saw record issuance; "I've never seen anything like it," he said. "That was capped off with Qatar at $7 billion. That was a huge deal."

The deal included $3.5 billion senior fixed-rate notes due Jan. 20, 2015 priced at Treasuries plus 185 bps; $2.5 billion due Jan. 20, 2020 priced at Treasuries plus 195 bps; and $1 billion due Jan. 20, 2040 at Treasuries plus 215 bps.

The issue came to market via Barclays, Credit Suisse, Goldman Sachs, JPMorgan and Qatar's QNB.

"The five-year came at Treasuries plus 340 [bps], which is pretty groundbreaking," the London-based source said. "That really set the ball rolling."

Eastern Europe, for example, had a lot of credits that were able to come back to the market once stability returned, the source said, pointing to issuers like Croatia - with its $1.5 billion 6¾% 10-year global notes that priced at 98.16 to yield 7% - that came forward in 2009.

On the corporate side, activity had been "constrained by the low appetite for corporate risk in the first half of the year," the strategist said. But things picked up in the second half of the year. "We saw a flood of new issuance from corporate."

Dubai bombshell

Then came word on Nov. 25 that Dubai World would need to restructure as much as $59 billion in debt.

"Things were coming along swimmingly heading into year-end, and then we were hit with this bombshell disaster," the London-based source said.

The news sent shockwaves through the markets, leading some issuers to hold back deals and investors to hold back cash while they waited for the dust to settle for the sovereign's development arm.

Soon after, Dubai World reduced the freeze amount to $26 billion. This led to a pickup in the primary and a sense of relief among investors, with cash flows into emerging market bond funds improving as a result.

That's when Croatia-based consumer food products company Agrokor DD came to market with a €400 million issue of 10% notes due 2016 to yield 10 5/8%.

Most fears about Dubai World were calmed by late December, when the company's Nakheel PJSC bond was repaid after Abu Dhabi ponied up a $10 billion loan.

"We saw a rally," a market source said, "based on the fact that the Dubai situation was contained."

Some nervousness returned on Dec. 21 after Dubai World met with creditors to determine how to move forward with a debt freeze but did not reach a standstill agreement. Later that same day, the company said it would need more time to present a good standstill plan.

As a result, new issuance didn't spike again at that point. Contributing to the problem was the close proximity to the year-end holidays.

But market sources still viewed 2009 as ending on a "very good tone, and we didn't see that as much last year," a New York-based market source said.

The year saw a "diverse array of issuers, both sovereigns and corporates - the whole gamut," the source said. "But liquidity remains a key issue. Where we have active secondary participation comes down to deal sizes reflecting what is a liquid sort of bond."

Secondary more competitive

In the secondary in 2009, "banks and investors had a much harder time squeezing profits out of the markets," the strategist said. "The spreads have, of bid-ask, narrowed since the first and second quarters. That was a profitable time, and encouraged a lot of banks and investment banks to come into the market. Their appetite for commitment to the market began to dwindle as those profits became a lot harder to come by."

Most of the investors in 2009 were buy-hold, he said. "Hedge funds were being squeezed by an inability to leverage, so there was reduced demand for the traditional flippers in the primary market. They could basically borrow less and buy fewer issues that they could flip later on," he said.

Pricing during the first half of the year came "with such a new issue premium and generous spread," the London-based source said. "The earlier the deal came, the bigger the premium was."

Overall, 2009 was one big, long rally from mid-March all the way through October, and "it was a gravy train," a market source said. "Everything was rallying. People were oblivious to any bad news or stories out there. It was all water off a duck's back.

"But the combination of people closing the books for the year with one eye on next year means they're not putting much risk on the board. They're sitting back and looking at their positions and risk. They've been sitting on this gravy train too long, and that's given rise to the volatility we've seen."

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