Debt Market conditions improve towards year-end

In recent weeks, emerging market and high yield bond markets have improved, indicated by both aggregate and issuer-specific developments.

There has been a general improvement in risk appetite during the last month, based on expectations of a less severe upward trajectory for policy rates and slower inflation. For riskier debt, this is clearly indicated by two aggregate measures:

1. The latest Institute for International Finance portfolio flows data show a sharp acceleration of portfolio inflows to emerging market securities. These reached USD37.4 bn in November with equity and debt flows of USD23.0 billion and USD14.4 billion respectively, the highest net inflow in 2022 and the strongest positive flow since April 2021. As comparison points, they had totaled USD9.2 billion and -USD2.9 billion in October and September.
2. The ICE BoA High Yield Index, published by the St. Louis Federal Reserve, has fallen from an average yield peal of 9.5% in mid-October to 8.30% on 13 December.

In turn, this has been reflected by cheaper issuance and more receptive markets for riskier debt.

Turkey took advantage of improving market conditions with a USD2 billion tap of its USD1.5 billion 9.875% January 2028 issue on improved pricing. The deal was sold initially on 7 November at a 10% yield with USD 4.5 billion of demand but left the country with a USD2 billion shortfall versus its 2022 international borrowing goal of raising USD11 billion. The new tranche at the start of December was able to cover this gas while being priced a full percentage point tighter at 9% yield. Turkey's Finance Ministry statement on 2 December reported that the new issue was over 2.5 times covered from 150 accounts, with 55% placed in the Middle East, and with 22% and 13% taken by UK and US buyers.

The Finance Ministry statement clarifies the dynamics behind recent improvement in Turkey's trading levels. The original tranche of the bond was sold at a spread of 561.4 basis points over US Treasuries, while the tap was completed at a 529.6 basis point spread, with the remaining yield compression due to improvement in the reference rate for pricing. 10-year UST yields declined from 4.22% on 7 November to 3.68% on 1 December according to St. Louis Fed data. As a further reference point, Turkey's USD2 billion five-year conventional bond, sold at an 8.625% yield on 24 March, was priced at a 645-basis point spread over comparable Treasuries.

There has also been a revival in European high yield bond issuance. Debt management firm Intrum sold EUR450 million of long five-year bonds at a 9.25% coupon and discounted issue price of 97.02%. In its statement the firm reported that the issue is to "manage our debt maturities": some of the proceeds will be used to refinance the company's 3.125% 2024 issue. In parallel UK gaming company 888 Holdings marketed EUR200 million of senior secured fixed and floating rate debt due in 2027 and 2028, going on to complete an increased offering worth EUR332 million. Lastly, House of HR, a Brussels based human resources company, was able to revive its planned LBO refinancing. Initially launched in late September, the proposed EUR425 million deal was withdrawn in early October due to a lack of demand and volatile market conditions. After announcing a EUR300 million re-launch at indicative pricing of 10.75-11% area, the issue was upsized to EUR410 million and priced with a 9% coupon and 92.826% issue price.

As a further positive indicator of post-Thanksgiving demand, in the USA, energy services company Chart Industries sold USD1.97 billion of 2030 and 2031 debt. The 2030 bond is secured and bears a 7.5% coupon and 98.66% issue price: the remainder is unsecured with a 9.5% coupon and 97.949% issue price. Proceeds are to fund the company's recent acquisition of Howden.

While at the opposite end of the credit spectrum, the European Commission also was able to issue on a relatively large scale for December. It placed a EUR6.548 billion 15-year deal for its SURE (Support to mitigate Unemployment Risks in an Emergency) program alongside a EUR500 million tap of its macro-financial assistance program. The new 15-year bond gained over EUR25 billion in demand and was priced at 2.767%, 21 basis points over mid-swaps (and 86.8 bps over Bunds). The 30-year tap was far more heavily oversubscribed with over EUR10 billion of demand. It was priced at 2.554%, 66 bps over mid-swaps and 97.5 over Bunds.

the European Commission led issuance with a EUR6.548 billion 15-year deal for its SURE (Support to mitigate Unemployment Risks in an Emergency) program alongside a EUR500 million tap of its macro-financial assistance program. The issuance funded SUPRE program outlays in nine countries, bringing SURE outlays to EUR98.4 billion within an envisaged maximum of EUR100 billion: no further SURE borrowing is now planned. It also completed the EUR7.2 billion in support for Ukraine in 2022 under MFA: EUR18 billion of finance has been proposed for 2023.

The new 15-year bond gained over EUR25 billion in demand and was priced at 2.767%, 21 basis points over mid-swaps (and 86.8 bps over Bunds). The 30-year tap was far more heavily oversubscribed with over EUR10 billion of demand. It was priced at 2.554%, 66 bps over mid-swaps and 97.5 over Bunds.

Demand for the 15-year bond was led by bank treasuries and fund managers with 45.1% and 29.1% of allocations: by geography, Germany, Benelux, and France were most prominent with 21.5%, 18.9% and 18% respectively. In the 30-year portion, bank treasuries and fund managers took 36% and 28.5%, again leading allocations, with Southern Europe, Germany and France leading the geographic breakdown with 18.4%, 16.4% and 15.3%. The EU's funding program for 2023 will be announced later in December.

Our take

Bond market sentiment is being boosted by various indicators that suggest economic slowdown and some abatement in inflation. In turn, this is expected to reduce the need for policy rate tightening and to permit this to follow a slower and potentially less severe trajectory.

In turn, this helps to revive demand for riskier asset classes. The IIF data for EM portfolio inflows are the strongest for 18 months and compare sharply with the five months of consecutive outflows recorded earlier in 2022. This has provided a materially better base for EM debt, particularly shown by Turkey's successful sale, and has allowed several "hung" high yield financings to proceed successfully.

As a caveat: while some countries - like Turkey and potentially Kenya, whose dollar yield curve has at least partially returned to single digit yields - are enjoying better conditions for issuance, this certainly does not imply the end of debt distress. Currently, this is particularly the case for Ghana, currently attempting to restructure its domestic liabilities through a voluntary debt exchange for bonds with reduced coupons and a grace period. Ghana has still to start negotiations with its international bondholders, before accessing its planned IMF facility, having indicated that it will seek a 30% capital haircut (the domestic restructuring does not reduce the nominal value of its liabilities but seeks a substantial cut in debt service burdens). Nevertheless, other stressed countries such as Egypt, Tunisia and Pakistan do appear to be making progress in accessing external support including IMF loans without needing to undergo debt restructuring.

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.