Capital market conditions will remain challenging


Bond market conditions are deteriorating

After unfavorable US inflation data, financial markets are now being described as discounting a full one percentage point hike in the US policy rate at the next FOMC meeting (although S&P Global continues to attribute a higher probability at a 75 basis point increase). High inflation elsewhere similarly encourages markets to expect faster and larger rate hikes in other major economies, in turn prompting central banks elsewhere to raise rates to stave off capital outflows. and currency weakness.

Several indicators showing market deterioration

According to a July 10 Financial Times report using JPMorgan calculations and EPFR data, investors withdrew about $50 billion from emerging market bond funds in 2022, reversing the inflow for the full year in 2021. The data presented shows that this performance is the worst in 17 years. The same report notes that the emerging market dollar sovereign bond benchmark, the JPMorgan EMBI Global Diversified Index, fell 18.6% in 2022, its worst performance since 1994.

SIFMA data for the first half of 2022 (to date) recorded a 29.3% year-over-year decline in total debt securities issuance in US markets. The steepest declines were in mortgage and asset-related securities, which fell 46% and 41.3%, while sales of corporate debt securities fell by $1,139.4 billion. in the first half of 2021 to $839.6 billion, a decrease of 26.3%.

A July 2 Financial Times article using Ice Data claimed that the volume of European corporate bonds with over-leverage – defined by a ten percentage point yield relative to government benchmarks – fell by 1.3% components of the ICE index of European quality bond sub-investments at the end of 2021 to 8.8% of the index at the end of June. In volume, the population in distress has increased from 6 billion euros at the end of 2021 to 40 billion euros. The report aligns with concerns raised by S&P Global, which recently warned of an “increasingly murky outlook” for European corporate credit quality.

There are some positive developments in emerging markets

Oman announced on July 8 that it would repay OMR 512 million ($1.3 billion) in loans in view of rising oil revenues, according to the Oman News Agency. In last month’s $1.75 billion tender for existing dollar debt, the country opted to buy back $701 million. The agency reported on July 7 that in the five months to the end of May, state revenues increased by 49.9% compared to the same period in 2021 “due to a rising oil prices…as well as oil production growth.” Overall state finances recorded a surplus of OMR 631 million against a deficit of OMR 890 million in the same period of 2021. The Agency said the windfall will be used to “help support high-priority development projects” and “reduce overall debt”.

Bermuda (rated A+ by S&P) successfully advanced a funding and liability management exercise. It announced a July 11 cash tender for $756 million of existing bonds due January 3, 2023 and February 6, 2024, alongside the sale of a $500 million new issue at a price of a spread of 210 basis points over US Treasuries. The new 10-year issue was priced with a coupon of 5% and an issue price of 99.348%.

By comparison, on August 20, 2020, Bermuda had gained some $10 billion in demand for a bundle of 10- and 30-year debt, with the 10-year portion priced at a spread of 175 basis points, with a coupon of 2.375% (the 30-year bond carried a coupon of 3.375%). This envelope was also linked to the purchase of existing debt and the repayment of short-term local bank credit lines.

A report by the Gleaner newspaper also claims that a $200 million bond issue for Antigua and Barbuda is “back on track”. In a parliamentary statement, Prime Minister Gaston Brown said a “new subscriber” is lining up to buy the show in the coming weeks, after it was pulled earlier this year (February). He said the earlier deal had also been fully hedged, but was withdrawn when the buyer was looking for a much higher return. Specifically, according to Antigua Newsroom, the deal was initially set at “approximately 6% effective return”, but the investor later changed the return requirements and sought returns “in excess of 9%”, which the government deemed “too expensive”. “. The reference to a single buyer for Antigua implies that the transaction is a private placement. Given the market trends between February and today, it is highly unlikely that the level of cost initially declared will be matched: the success of the government in managing the deal will be indicated by the extent to which it is able to reduce the cost of the “about 10% cent” return previously demanded, and whether the deal closes for the same size.

Slovenian bank Nova Ljubljanska also raised €300 million, paying 6% on July 12 for a three-year, €300 million contract, repayable after two years. The problem was announced on July 7. The bank had three prior issues outstanding, all in the form of subordinated debt.

Our point of view

In general, rising benchmark rates and exits from the riskiest asset classes lead to widening credit spreads in many emerging markets, reducing the ability of borrowers to raise new debt in the capital market. at sustainable cost levels.

For example, Turkey’s EMBI+ bond spread index rose from a 2022 low of 493 basis points against US Treasuries on April 22 to a one-year high of 789 basis points. July 13. On the same day, Egypt’s EMBI+ spread stood at 1212 basis points, compared to 654 on January 5. Such a deterioration implies that new dollar borrowing for both countries would need double-digit coupons, which would call into question the sustainability of such financing. Like Kenya, which recently canceled a planned $1 billion international bond sale to seek bank borrowing, Nigeria now looks unlikely to return to dollar markets in the short term, with its outstanding yield curve trading above 11% and higher for longer-term debt. Greater recourse to short-term bank financing, official bilateral and supranational loans seems likely for several countries: for Turkey, for example, GCC financing now appears to be a high priority. The risk of broader debt distress appears to have increased and faces the likelihood of further deterioration. This, in turn, increases the number and range of countries likely to need IMF support, with Ghana reversing its previous stance of rejecting IMF assistance (in a context where its outstanding debt international trades at yields of around 20%).

Financial stress is more disguised elsewhere. Despite increased and very heavy indebtedness, Italian debt recovered over the past month after the European Central Bank indicated that it would design a new support mechanism for peripheral eurozone debt once its program broader asset purchase would begin to unwind. Nevertheless, its need to intervene leads us to conclude that Italy would have great difficulty in borrowing on a stand-alone basis without the help of the ECB market, a problem that is likely to spread more widely in the most weak.

With inflation at new highs and benchmark rates currently only expected to rise further, difficult market conditions will likely present serious challenges for a growing range of borrowers in 2022.

Posted on July 15, 2022 by Brian LawsonSenior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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