Outlook 2014: Sovereign issuance will tick up, corporate will decline; peripheral sovereigns eyed

By Christine Van Dusen

Atlanta, Dec. 31 - Emerging market sovereigns will be up and corporates will be down - in terms of issuance, that is - in 2014, with countries issuing about 20% more debt and companies bringing to market about 12% less, market sources said.

The driver of this trend will be financing needs; they're expected to be flat for sovereigns but lower by 33% for corporates, according to a report from JPMorgan.

This will come against the backdrop of increased pressure on the entire asset class, which continues to face subpar growth prospects, a heavy election calendar and vulnerability for some sovereigns as they grapple with unfavorable capital dynamics.

The previous year was stressful for emerging markets bonds, a trader said. And while it cemented the asset class as more mainstream, there was still some concern related to EM's strength in attracting investor dollars - emerging markets bond funds ended the year having lost about $12.4 billion, according to a report from data-tracker EPFR Global.

Add to that the volatility caused by the U.S. Federal Reserve's will-they-or-won't-they saga related to tapering of quantitative easing, which now is expected to begin soon, and EM faces a challenging year in 2014.

"It's not going to be plain sailing," a London-based trader said. "But you cannot ignore this asset class anymore. Some of these economies are goliaths. Investor participation in this asset class is here to stay, and emerging markets will continue to issue debt."

Sovereigns in focus

Sovereign new issuance for 2014 is expected to reach about $85.5 billion, according to a report from JPMorgan, with seven main issuers expected to account for half - Mexico, Indonesia, Russia, Turkey, Poland, Romania and Hungary.

"Latin America will continue its trend of negative net issuance, forecast at negative $2.1 billion, balanced by emerging Europe, where we forecast $2.2 [billion] of net issuance," JPMorgan said.

And Asian issuance is expected to total about $340 billion, less than was seen in 2013, according to a report from BofA Merrill Lynch.

Poland, Slovakia deals ahead

Poland and Slovakia could tap the markets in 2014, according to a report from Erste Group Research. They'd follow other sovereigns from the region, which priced deals in November, when yields began to decline and ahead of any tapering of quantitative easing.

"This was quite important for non-investment grade countries like Croatia, Hungary and Serbia, which are also facing the highest gross financing needs among Central and emerging European countries next year," the report said.

Poland and Slovakia are waiting until 2014 because "both countries are rich in cash and their local debt brake rules prevent them from hoarding too much cash at the year-end," Erste Group said. "In fact, both countries, and Hungary as well, are expected to reduce their reserves in order to comply with the debt brake rule. That is why we expect Poland and Slovakia to tap foreign markets and re-buffer only at the beginning of next year."

Frontier markets eyed

Investors should also expect to see an increase in issuance from frontier markets, following the success of such deals in 2013 from names like Armenia, Paraguay and Tanzania. These kinds of issues appeal to yield-hungry investors, a London-based trader said, and could total about $11.3 billion of total sovereign issuance in the new year.

"So I think we will see more deals out of Africa," he said.

In 2013, there was a surge of issuance from Peru, with 17 issuers - 12 of them first-timers - hitting the market for deals totaling $6 billion, market sources said.

Corporate issuance to fall

On the corporate front, issuance is expected to total about $294 billion in 2014, down from 2013's record $335 billion, the JPMorgan report said.

Asia, which in previous years was the top region for corporate issuance, will see a decline to $107 billion in 2014 from $128 billion in 2013 as most corporates "front-loaded their financing requirements in 2013 and should be less active in the primary market," the report said.

Latin America corporate issuance also is expected to decline in 2014, moving to $75 billion from $95 billion following the frequency and size of the deals seen in 2013.

Expo 2020 boosts region

The primary market also could see an influx of new deals in 2014 from the Middle East, as corporates gear up for Expo 2020, a fair that will be hosted by Dubai.

Already several issuers have queued up deals that would fund infrastructure improvements, a trader said. And companies that get contracts and have bonds already in the market saw those bonds trade well at the end of 2013.

For example, Emaar Properties' 6.4% bonds due in 2019 have traded 45 bps tighter since the Dubai-based property developer signed a memorandum of understanding to develop an urban center at the expo site.

But part of the reason the issue did well was because of a lack of similar supply in the market, the trader said. That could change if the market is flooded with Middle Eastern bonds.

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