Increased issuance from eastern European banks has provided investors with an opportunity to find va...
Increased issuance from eastern European banks has provided investors with an opportunity to find value within the bond markets, at a time when investment grade corporate debt is seen by many as overvalued.
Five years ago, the biggest eastern European banks were state owned and a number of the issuers we see today did not even exist. Looking back only three years, many of these financial institutions were still too small and had no access to international bond markets for funding.
So what has changed? Following a rise in economic growth, private wealth and political stability, banks in countries like Russia, Kazakhstan and the Ukraine have had to respond to growing borrowing needs amid a rapid increase in the appetite for consumer debt. These funding needs could not be met by the local savings banks and so companies turned to the bond markets for additional financing.
Recent research conducted by UBS shows that issuance from emerging Eastern Europe, the Middle East and Africa rose to almost $27bn in 2006 – a third more than in 2005.
The analysis also indicates that for the first 11 months of last year, around 80% of new issuance came from banks in Russia and Kazakhstan.
As the size of the emerging debt market has increased, many issuers have entered the investment grade universe, offering higher yields than comparable European bank paper. With a dramatic improvement in efficiency and profitability, many of the emerging banks have become the target of large western companies looking to gain a foothold in Eastern Europe. This in turn has improved their credit profile and led to strong demand from investment managers looking to capture these securities within their portfolio.
Over the past few years there has been a dramatic improvement in the sovereign rating of many of the emerging market nation states. In late 1998, Russia defaulted on its debt. The government declared a moratorium on future debt repayments and there was no issuance from banks for a period of five years. However, following a period of strong economic recovery and financial stability, its sovereign debt touched investment grade in 2003.
This represents significant opportunities for ratings to be pulled upwards, generating both invaluable percentage points worth of tightening for issuers as well as profits for bond investors.