Outlook 2012: EM deal pipeline will open slowly in 2012 amid global economic, political turmoil

By Christine Van Dusen

Atlanta, Dec. 30 - Economic uncertainty throughout Europe, turmoil in the Middle East, concern about the United States' financial picture and its trickle-down effects - sound familiar? Get used to it. These themes from 2011 will continue to serve as the complicated and volatile backdrop for emerging markets debt issuance in 2012.

"It's not going to get any easier, and I think we're going to see more of what we've already seen," a trader said. "Dealing desks are continuing to be cut back and we're going to see that European banks' lending to emerging markets is going to be diminished.

"Liquidity is, again, not going to be what it was in the past, as a function of the fact that there won't be as many market-makers around. And the whole European Union situation is still far from clear."

The first few months of 2012 are expected to be "rough" for the EM debt primary market, said Nick Chamie, head of emerging markets research for RBC Capital Markets.

"It will take time for the volatility to dissipate, if we even get a reasonable solution out of Europe," he said. "The economic data will continue to deteriorate and risk aversion will remain high, and appetite to take up new issues in the market will remain relatively diminished. So we expect that 2012 will not start with a big bang, in terms of new issues."

The economic picture won't be the only thing that slows issuance at the start of the year, he said.

"There's a large amount of pent-up demand to bring new issues to the market on the part of United States and European issuers. Most of them have been locked out of the market for weeks and months," he said. "So EM could be crowded out of the market for quite some time."

$185 billion issuance tallied

Overall in 2011, emerging markets corporates issued more than $186 billion of bonds.

"It's been an amazing year of E.U. headlines, summits, meetings, calls and rumors," a trader said. "There were pockets where no issuance was possible. I would've thought there'd be more supply than there actually was. But the investor community was not willing to take down risk.

"It's been a jittery, nervous and flaky year."

For 2012, EM issuers are expected to bring to the market between $78 billion and $185 billion of issuance, with Asia issuing about $7 billion, emerging Europe $9 billion, Latin America $50 billion and Middle East and Africa about $11 billion, according to a report from JPMorgan.

"We expect EM corporate issuers to remain active in primary markets throughout 2012," the report said. "By market segment, our 2012 forecasts see quasi-sovereign issuers dominating supply, representing 44% of the total."

Sovereigns will take lead

Indeed, sovereigns and quasi-sovereigns are expected to take the lead when EM issuance does resume in 2012, Chamie said.

"EM issuers will face a scarcity in the first part of the year, and corporates will be last in the pecking order," he said. "When the new issue pipeline eventually materializes and issuance comes to market, we expect that Asia and Latin America will take the lead there. It's difficult for Central and Eastern Europe to do so with the proximity to the euro zone and the way they're getting sucked down into Europe's recession."

Added a trader, "It still remains a very fickle environment. And it's going to be more of the same."

EM economies growing

What will help emerging markets issuers bring deals to market is that their economies are expected to grow at a 4.6% rate, versus 0.9% for developed markets in 2012, according to another report from JPMorgan. In 2011, emerging markets grew by 5.6% while developed markets grew by 1.4%.

Emerging markets are also in better shape given that their debt and fiscal ratios are much lower than those seen in developed markets, the report said.

EM fixed income is expected to draw $40 billion in dedicated inflows for 2012, the bank said.

"The whole argument that EM countries are in much better shape still holds true, but to think that they're going to be completely immune from what is going on in Europe is comical," a trader said. "These sorts of themes are going to continue."

Angola, Dubai deals possible

Accounts are long on cash for 2012, a London-based trader said.

"So if we can create some good news, the potential for a huge rally is clearly possible," he said.

Deals are likely to emerge from Angola, Zambia and possibly Azerbaijan, he said.

"We'll also see still more sukuks," he said.

Another trader will be on the lookout for deals from Dubai, including Dubai Holdings.

"There will clearly be a lot of loans needing to be rolled over as well, and with the European banks reportedly struggling with liquidity this will be a very interesting 12 months," a trader said. "I tend to think Dubai will continue its muddle-through, however I'm not ruling out some strange headlines and misunderstood situations as the year unfolds."

Russian Railways, VEB on deck

Another trader expects to see OAO Russian Railways Co. bring to the market its long-awaited dollar-denominated bond offering of up to $1 billion via Royal Bank of Scotland and VTB Capital, following the company's roadshow in mid-December.

Also from Russia, VEB Finance plc is expected to price in 2012 its planned dollar-denominated benchmark-sized notes due December 2016, which were delayed due to market conditions.

The issuer had set price talk for the deal at the 5 5/8% area.

"They're ready to strike," a trader said. "Absolute rates are still very appealing for these guys."

BNP Paribas, JPMorgan, Morgan Stanley and RBS are the bookrunners for the Rule 144A and Regulation S transaction.

The notes are guaranteed by Vnesheconombank, the Moscow-based Bank for Development and Foreign Affairs.

Yields are appealing

If the markets rally, overall supply will get a big boost.

"While spreads may be wider, the all-in yields are still probably pretty appealing to corporates and issuers," a trader said.

Said another trader, "I think the market is still there. It's not like the completely-shut-down period of 2008 and 2009. So I think deals will continue to get done.

"It's not going to be a layup like in 2010, when you could come to the market and it was a free-for-all. It's going to be a lot more selective, a lot more focused, and a lot more due diligence will be done."

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