Recent low issue prices of bonds from new, frontier credits have surprised many long-standing fixed-income bankers and investors, who are pondering why demand has been so strong despite the obvious risks associated with some of these transactions. Some are now asking: if fundamentals do not reflect the risk-reward relationship, is the once-marginal bookbuilding issue of technical, index-driven demand perhaps responsible for some of the over-subscription? And, if so, could investor behaviour be about to lead to even greater technical-demand issues as investors look away from traditional market-capitalization-based indices towards other, less liquid, bond indices?
"Did you read the list of disclaimers in the Bolivia prospectus?" asks one senior Latin America DCM banker. "It reads like a list of possible horror stories, and yet they priced at 5% [actually 4.875%]." It’s not just the pricing level of new Latin American frontiers such as Bolivia and Paraguay that have had some scratching their heads, deals such as those for Nigeria and Romania all priced more strongly than expected. Being frontiers they carry idiosyncratic risk – and therefore differ widely – and in some cases arguments can be made that risks are being properly priced. But there remains an open question about whether or not inclusion in the leading bond indices is generating zombie demand – investors subscribing to new issues simply to own the index – an activity that distorts bond yields.
