Outlook 2020

2020 G3 DCM: Frontier markets revving up

It could be one of the most exciting years ever for Asian frontier market issuance as Indochina gets into first gear.
It never quite materialised in 2019, but 2020 is shaping up to the year when issuance from Asia’s frontier markets starts to accelerate and range over a much wider geographical area.
The part of the region that banks and investors are most excited about is Indochina. Vietnam may finally start living up to its promise, while a debut dollar-denominated bond from Laos is on the cards and potentially a second international corporate bond offering from Cambodia.
All three countries are likely to be well-received particularly by investors concerned that there is no more room for spread performance among Asian frontier market stalwarts Mongolia and Pakistan. Both have tightened dramatically over the course of the year as they work their way through their latest IMF programmes.
As Derek Armstrong, head of Asia Pacific debt capital markets at Credit Suisse, explains, “Secondary market spreads have had a strong year. That’s not surprising given that frontier markets tend to trade as a more exaggerated version of the broader bond markets, which have also had a very good year.” 
Credit Suisse has an exceptionally strong frontier market’s franchise and Armstrong is understandably very positive about the year ahead. Where 2019 is concerned, he reflects that “primary market issuance didn’t quite develop the way many market participants thought it would. But I think we’ll see that start to change in the coming year. The breadth of issuers that might tap the market in 2020 is very striking and could generate quite a lot of excitement.”
Ernst Grabowski, head of Asia Pacific debt syndicate at Morgan Stanley, is another enthusiast. “This is one of my stronger calls in 2020,” he said. “I think we could see issuance levels double and start to see more corporate issuers come to the market.”
One country, which should have a much stronger international presence than it does at this stage of its economic development, is Ba3/BB/BB-rated Vietnam. 
The sovereign has two $1 billion bonds outstanding, which it issued back in 2010 and 2014. The former falls due in January and the latter in 2024. 
Market participants have been waiting for it to issue a new international bond for some time. Principally, this would help to provide a credible pricing benchmark for the numerous corporate issuers which would like to tap the international bond market but are unhappy at the prospective spread they would have to pay over the sovereign’s current trading levels.
The sovereign’s 4.8% November 2025 deal is currently yielding around 2.82%. But the reality for most prospective issuers is at least double that level and that’s before the costs of swapping back to the Vietnamese dong are taken into consideration.
Borrowers are understandably wary about foreign exchange risk given the currency’s track record of depreciation and are also aware that the swap market has not really developed beyond short tenors.
As one banker told FinanceAsia, “A lot of companies benchmarked themselves against the sovereign, then pulled back when they realised they’d have to pay a big premium because it no longer represents market pricing. Someone needs to set a benchmark for the country, but there’s some reluctance to be the first.”
There has, however, been one corporate bond from Vietnam during 2019: a $678.5 million 5.125% 2029 project bond by Mong Duong Finance. That provides a proxy, but a partial one since it has two international sponsors: America’s AES Corp and China Investment Corp (CIC).
Things have not been helped by Moody’s decision to put the country’s Ba3 rating on review for downgrade in October after it became aware of delayed payments on a sovereign obligation.
The ratings agency’s rationale will surprise few financial market players who have had to deal with the bureaucracy and hesitation which frequently seems to characterise government decision-making. 
In its statement, Moody’s cited institutional weaknesses that “seem to reflect deficient coordination and planning among various arms of the government, with a degree of opacity around the decisions and actions needed to meet some of the government's obligations; and complex bureaucratic processes that can obstruct the smooth and timely payment of government obligations.”
The excitement that surrounds Vietnam centres on its vibrant private sector. Many of its leading groups have listed on the stock market in the past few years, reassuring investors about their transparency, governance and growth prospects. 
Jason Elder, a partner of Mayer Brown, has previously acted for the Vietnamese government. The Hong Kong-based lawyer says, “There should be a lot more activity out of Vietnam, which has everything going for it.
“It has a good story to tell because of the country’s strong macro backdrop underpinned by its young population and the benefits it has been reaping from Sino-US trade tensions,” he commented. “Lots of investors also want to diversify away from China and Indonesia so I wouldn’t be surprised if the sovereign or a leading corporate brings a new benchmark bond that helps to reset the country’s yield curve." 
What do the investment banking community think?
Amit Sheopuri, co-head of Asia Pacific debt capital markets at Citi, acknowledges that “issuance has taken longer to get off the ground than many predicted.” 
He also describes the ratings action as, “a bit of a shame as investors had really started to focus on all the positive aspects of the Sino-US trade war on Vietnam. But the broader view about the country and its credits is very positive and there are issuers lined up for 2020,” he added.
Credit Suisse’s Armstrong also underlines how “spreads have compressed to very tight levels due to the lack of supply.” But he adds that “we expect issuance to start picking up in 2020 and it would be good to see some new names from the private sector.”
Augusto King, head of Asian debt capital markets at MUFG, also says that “it would be fantastic if there was more issuance from Vietnam. There’s been a lot of talk and there remains a lot of hope. But the onshore market does offer attractive funding and there have been a couple of instances where potential bank issuers have decided to tap domestic liquidity instead."
One notable exception during 2019 was VP Bank, which raised $300 million in August via a 6.25% three-year deal, which is currently trading around the 5.8% level. It marked the first drawdown from an EMTN programme out of the country. 
If Vietnamese issuers can get themselves comfortable with international pricing levels, bankers believe they will be well-received. As one put it: “Who would you rather have paying the same amount: a national champion from Vietnam or the 24th largest property developer from China?”
For many Hong Kong and Chinese private banking investors, the answer is probably still China given their knowledge and familiarity with the real estate sector. But the same is not true of other big private bank centres around the region, notably Singapore, which has strong links with Vietnam. 
The next deal to materialise may come from Saigon-Hanoi Commercial Bank, which conducted roadshows via Citi and HSBC in December. Prior to that, SeABank mandated JP Morgan for a deal back in October. 
Vietnam’s close neighbours are also likely to become more active next year as both Laos and Cambodia strive to build out domestic debt markets and forge international benchmarks. 
The Lao government is set to come first after deciding to diversify away from Thailand, where it has issued seven times in recent years. Credit Suisse, JP Morgan and Standard Chartered have been mandated for a deal.
Local specialists also say that Cambodian gaming operator, NagaCorp, may also return to the international dollar markets to fund its $3.5 billion Naga 3 expansion. Its existing 9.375% May 2021 bond has traded well, up nearly seven points since its launch in May 2018.
Another country whose bonds have traded very well is B3/B-/B- rated Pakistan thanks to the ongoing success of its latest IMF programmes. Its $1.5 billion 6.875% November 2027 bond has risen 13 points over the course of the year to a yield around the 6.36% mark in mid-December. 
Past experience, however, suggests there is little scope for much further. 
JP Morgan classifies it as underweight, having changed its stance mid-year. The US investment bank notes that most foreign interest has been directed towards domestic Treasury bills, with $1 billion of inflows over the past three months.
Nomura also says that there is scope for underperformance given that “some of the economic targets set by the IMF are ambitious – in fact, the government recently sent a request to the IMF to lower the 2020 financial year tax collection target, which was described as “unrealistic” by many economists, but this was rejected by the IMF.”
It concludes that “valuations have already largely priced in the IMF programme and large execution risks remain”. But it concludes that the “halo” of an IMF programme should continue to anchor valuations and is, therefore, neutral in its outlook. 
Asia’s northernmost frontier market is also under an IMF programme. This is the main reason why it has been unable to take advantage of current US treasury yields to extend its maturity curve as it is prohibited from raising incremental debt.
The B3/B/B rated sovereign’s longest-dated international bond is its 8.75% March 2024 paper. Lack of supply has also helped this to tighten seven points over the course of the year to trade around the 113.06% mark equating to a 5.26% yield in mid-December.
Mongolia is not facing any redemption risk in 2020, but it does have $630 million falling due in April 2021 and $1 billion in December 2022.
Mayer Brown’s Elder says that “issuance will continue to remain subdued while the government works through its IMF programme. But it has done a very good job of communicating with the IMF and the supranational’s progress reports have been very positive and encouraging.”
Credit analysts are more cautious given the sovereign’s outperformance to-date.
JP Morgan and Nomura are both underweight. Nomura says that “economic growth is expected to cool next year on the back of slower growth in China, Mongolia’s largest export market, and the resultant weaker demand for coal, its key commodity export.”
Key will be what happens following parliamentary elections in June and whether the new government decides to continue with the IMF programme. 
The one exception to Asian frontier market performance in 2019 has been Sri Lanka. This was not very surprising given the terrorist attacks the country suffered at Easter and then the political volatility the country experienced in the run-up to November’s presidential elections.
The central bank, however, was credited for easing the country’s short-term re-financing burden by raising a total of $4.5 billion over the course of the year. SriLankan Airlines also printed $175 million. 
In mid-December, the sovereign’s $1 billion 6.85% 2024 deal from March was trading at 100.51% to yield 6.7%. 
Credit analysts believe that Sri Lanka may perform in 2020 given a reduction in near-term re-financing risks. Both Nomura and JP Morgan overweight the B1/B/B rated sovereign. 
The Japanese securities house said that the “negatives are already largely priced into current valuations, which we view as attractive. Hence, we would overweight the longer-dated Sri Lankan bonds, albeit acknowledging that they will likely remain volatile amid continued headline noise.”
JP Morgan notes a bull steepening in the curve “on easing immediate repayment risks, though medium-term vulnerability remains high.”
The sovereign is unlikely to make an appearance early in the year given that there will be parliamentary elections, possibly as early as March. All eyes will then be on the new administration to see what impact its GDP-boosting spending has on the country’s balance of payments and debt.
¬ Haymarket Media Limited. All rights reserved.
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