Outside Russia, debt bankers in central and eastern Europe are understandably eager for regional governments to take advantage of returning investor appetite, following supportive news on US monetary policy last month.
In the last three months of the year, CEE sovereign issuance might total as much as $20 billion, bankers say – more than double the levels in the second and third quarters – while borrowing by sovereigns will likely make up at least 50% of overall issuance from the region.
With Russia and Romania selling Eurobonds in September, topping the list of potential issuers now are Turkey and Hungary, both of which were widely tipped to tap the market for substantial chunks of funding in October.
In late September, Turkey was in investor meetings across the Middle East and Asia to market its sukuk. Its first Islamic deal, a $1.5 billion five-year sold in September last year, attracted such strong demand that the deal priced to yield less than the borrower’s conventional bonds.
Hungary, meanwhile, was widely expected to announce mandates on a deal following the registration of a $5 billion issuance programme with the SEC on September 18 and the sale of a €400 million dual-tranche bond by the country’s state-owned Export Import Bank a week later.
The latter has previously been used as a pathfinder for sovereign issues, most recently in December last year. On that occasion Hungary’s Debt Management Agency (AKK) followed a deal from Export Import Bank with a $3.25 billion bond issue.
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Upcoming parliamentary polls in Hungary and the announcement last month by prime minister Viktor Orban of plans to renationalize the country’s utilities have prompted speculation the government might seek a similar amount soon. "Orban has a clear strategy for the utilities and he will need cash for that, as well as for building a war chest ahead of elections in the spring," says Timothy Ash, head of emerging market research at Standard Bank.
Other CEE sovereigns with funding left to do in 2013 include Poland, Romania, Latvia and Lithuania. Bankers further note that the stabilization of yields since the start of September – and particularly in the wake of the Federal Reserve’s postponement of its tapering plans – could encourage policymakers to start raising funds for their 2014 budgets.
"Rates are still very low by historical standards and the Fed’s latest decision has definitely resulted in the best issuance window we have seen since earlier this year, so I think a lot of sovereigns may be considering prefunding," says Maryam Khosrowshahi, head of public sector coverage for CEEMEA at Deutsche Bank.
Potential candidates in this regard include Poland – a notably opportunistic borrower that funded around 30% of its 2013 requirements at the back end of 2012 – but also the Baltic states.
Danny Goldblum, head of the CEE solutions group at HSBC, says the UK bank is recommending sovereign borrowers to tap the market sooner rather than later.
"There’s still a lot of uncertainty out there, and in a month or so we’ll be approaching both year-end and the next Fed meeting," he says. "If issuers need funding and are ready to come to market, we’re telling them to take advantage of the current window before it shuts."
Some bankers, however, warn that although market conditions favour early issuance by higher-quality CEE sovereign borrowers, weaker names might struggle to find demand following dramatic outflows from emerging market funds over the summer.
"The dynamic between investors and issuers is more balanced now than it was at the start of the year," says John Wright, emerging markets syndicate banker at Barclays. "Even for strong names, buyers are more sensitive on price, and with the amount of supply we’re seeing, they can also afford to be very selective."
That might rule out Serbia, which has been eyeing a follow-up to its $1.5 billion issue in February for several months, but will likely have to approach the IMF instead, after overshooting on budget targets again in August.
Bankers also question whether Ukraine, the CEE economy most urgently in need of hard-currency funding, could get a deal done. Moody’s decision to downgrade the sovereign to Caa1 on September 20 prompted yields on 10-year Ukrainian bonds to spike above 10%.
Even if Ukrainian policymakers were prepared to fund at that level, getting market access would be challenging, say bankers. "There comes a point where upping the yield doesn’t solve any problems in terms of generating extra appetite," one notes.
Khosrowshahi, however, notes that the success of Armenia’s inaugural dollar deal could encourage other sovereigns with no presence in the international capital markets to explore the option. Priced on September 20, the double-B rated borrower’s $700 million seven-year debut issue attracted more than $2.7 billion of demand.
"A successful deal like Armenia provides other debut sovereign issuers with the comfort that the international markets can also be explored as a new or additional source of financing, enabling to lock in still very attractive rates," she says.
