Outlook 2010: Sovereigns to start year strong; Dubai may stay a concern; secondary seen 'choppy'

By Christine Van Dusen

Atlanta, Dec. 31 - Emerging markets in 2010 are expected to re-energize on the primary side with a flood of new issuance from sovereign and corporate borrowers.

Meanwhile, the secondary may stay choppy as investors - still mildly shell-shocked by the late-2009 troubles of Dubai World - keep a close eye on risk, sources said.

"We're going to see sovereign issuance at the start of the year," a market source said. "And we can look to see some names that haven't been in the market for some time."

The year 2010 will include "interesting new names in the market, or names that have been out of the market a long time," the source said. "We didn't see that much debut issuance in 2009. That was a trend in 2006, 2007, 2008 but was somewhat absent from the party in 2009. That goes down to liquidity and becoming comfortable with credits.

"I would think that the conditions are good and getting better."

New sovereign names

Expect to see issues from Brazil and possibly Colombia early in the new year and perhaps the Philippines, the source said.

"Sovereign issuers need money," the source said. "They always come in January. And they need more money this year than last year."

An emerging markets strategist said he expects to see "some exotic names" in 2010.

"Iran always says it is going to be issuing. We know Kenya is attempting to place a new bond," he said. "Azerbaijan, Albania - they claim to be issuing paper."

Still, the overall amount of sovereign issuance might not reach the dramatic levels seen in 2009, he said. Emerging market sovereigns are "all attempting to further develop a domestic debt capital base and alternative sources of financing other than syndicated loans and bond markets," he said. "So international bond markets are important."

But "we're still going to see countries and corporates looking to opportunistically borrow," the London-based source said. "Qatar, in 2009, was pre-funding using the window that was there. That sort of thing will go on in 2010, too."

Other possible names for 2010 include Mexico, Brazil, Turkey and Russia, a London-based source said. Some small deals could come from Russia, Kazakhstan and Ukraine. Poland and Hungary may try to do something in 2010, too.

Argentina could be a market that opens up next, the strategist said. Venezuela, which had its share of troubles in 2009 after president Hugo Chavez threatened to privatize more banks, could see increased focus too. And China is worth keeping an eye on.

"We may see almost monthly issues from the sovereigns, and that might weigh on the market a bit," the strategist said.

Corporates to follow suit

All of that, a market source said, "should flow down to the corporates that need pre-funding."

The strategist believes the tide of new corporate issuance that began in the second half of 2009 should continue in 2010.

"Going forward, it appears that the issuance market is going to remain open for emerging market corporates," he said. "The future is with them."

On that side, "we'll probably continue to see issuance from emerging market banks. They were a large percentage of issuance in 2009 - more than 20%," the strategist said. "That's likely to continue to be the case."

Corporate names are hard to pin down for 2010, the London-based source said. "A lot of corporates will need some stability with the Nakheel situation before they can think about coming to market."

Almost no issuer could come as a surprise to the market, he said. "Nothing can surprise the market after what it went through in 2009."

Concerns with Fed, Dubai

One big concern in 2010 will be timing from the Federal Reserve Bank, the strategist said. It's been predicted that the Federal Funds rate will be raised to 2% by the end of the year, so "debt capital markets are going to be very sensitive to the timing issue," he said. "You could see a serious short-term market tumble, and probably a buying opportunity.

"The Fed won't be raising rates by huge quantities and it certainly won't deteriorate the carry trade," he said. "But that will definitely be one of the major issues going forward in 2010."

Though Dubai is in the process of working out a restructuring plan for at least $20 billion of its debt - and investors seem to have recovered from the shell-shock - the sovereign could continue to be of some concern in 2010.

Calling the Dubai situation a "little sleeper," the strategist said "it could be an issue where there may be some contingency liabilities that pop up for a number of banks and credits that disrupts the debt capital markets."

Secondary 'choppy' in 2010

On the secondary side, 2009 saw an increase in market dealers as banks and investment banks attempted to become part of what was a profitable time.

But those profits soon became more difficult to access - a trend that is expected to continue in 2010.

"The fact is that, going forward, it's going to be harder to make profits in the secondary markets. That market will narrow and grow smaller," a market source said. "Banks that are unable to establish a lead position will probably fall by the wayside. That will be the story for 2010."

Trading in 2010 will again be "very choppy," the London-based source said. "There are a lot more dealers out there now able to price than there were six or eight months ago. It's a lot more competitive. But we also don't have Bear Stearns or Lehman anymore. Still, there are going to be a lot more dealers out there trying to take business. So there will be a lot more bonds to trade."

But of those deals, "there won't be so many free lunches out there," he said. "There are enough clouds out there to dent the market at any point in time. We've seen that in the last two or three weeks [of December]. It was a little bit scary and liquidity dried up a lot.

"There are enough clouds on the horizon to make next year very, very choppy. There will be good spells and bad spells, and you'll have to keep your wits."

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