Sovereign borrowers with low credit ratings are back in bond markets.
In fact, emerging-market sovereigns have sold more hard-currency bonds in the first quarter of this year than any first-quarter on record, according to a JPMorgan note this week.
Côte d’Ivoire, for example, issued bonds in January for the first time in seven years; it also had some of its debt payments suspended between May 2020 and December 2021 to deal with Covid-19 costs. And despite that putative restructuring, the bond sale was three times oversubscribed, said JPM.
A trio of countries rated lower than Côte d’Ivoire’s BB-minus (three tiers below investment grade) — Bahrain, Benin and Kenya (all four or five tiers below IG) — have also issued debt.
This reopening of markets could provide a much-needed avenue for liquidity for lower-rated sovereign debt: “Hope for market refinancing could considerably improve the prospects of a host of mostly B-rated sovereigns which could eventually struggle to get through maturity walls,” wrote JPMorgan’s EM sovereign-debt strategist.
On the other hand, even risk-free global rates are high. So the private-sector bondholders who came to a JPMorgan roundtable earlier this year are starting to worry that this latest round of high-coupon borrowing could lead to more restructurings:
Concerns are mounting that this return to market is simply a red flag that will eventually lead to even more sovereign debt restructuring. All-in yields remain very high for many—above the psychologically relevant 10% threshold. Until the recent Kenya deal, the “green-shoot” issuance observed to date has come from credits that have long traded well below the average yields of the B-rated bucket of the [JPMorgan dollar EM bond index] (9.38% on average YTD). But the majority of lower-rated sovereigns, many of which are included in the SSA segment, continue to trade with yields around or north of 10%—a level not unheard of historically for EM issuance, but not regularly seen in terms of primary issuance coupons in more than 20 years . . .
Some have voiced concerns that issuing above 10% is a red flag that simply is a precursor for future debt distress. Coming off of the Great Moderation and a zero-yield world, issuing at 10% coupons appears unsustainable. Indeed, over the last twenty years, issuing above 10% has certainly been rare with issuance of only 14 bonds by 8 distinct issuers. Of these, 6 bonds from 3 distinct issuers (Venezuela, Ghana and Lebanon) have defaulted—a startlingly high percentage. However, in the prior decade of 1995-2004, when 10Y US treasury yields averaged over 5%, we count 120 bonds, from 18 distinct sovereigns, issued at over 10% coupons. Of these bonds, 20% defaulted, all of which came from a familiar set of names—Argentina, Ecuador and Venezuela. Hence, 15 of the 18 sovereigns that issued above 10% between 1995 and 2004 avoided default, managing to either refinance or pay off these bonds at maturity.
Sovereign-debt markets are wild.
The default history that JPMorgan cites above certainly isn’t encouraging, and it does make sense that absolute yields would matter for EM countries borrowing in hard non-local currencies like the dollar or euro.
Still, using an absolute number like 10 per cent to signal that it’s time to worry/celebrate feels a bit retro in a Dow 10,000 way, doesn’t it? Even junk-rated companies, which aren’t considered the safest borrowers, aren’t considered to be distressed until their yields reach 10 percentage points above the risk-free benchmark .
And the bank points out that more than one-fourth of sovereigns that issued bonds above 10 per cent between 1995 and 2004 (the last time rates were this high) now have investment-grade ratings:
Some simplification can be forgiven from EM sovereign debt investors, however. Unlike US junk-bond investors, they have to navigate messy supranational debt-restructuring regimes with multiple governments (some who are friendly to their interests, and others who are much less so).
Zambia, for example, has spent years working towards a deal to restructure its debt , as former Alphavillain Joseph Cotterill covered for MainFT. Those negotiations just recently reached the finish line, JPMorgan points out.
The bank takes an optimistic view, and wrote that “2024 may finally be the year that proves that an exit path to prolonged sovereign defaults indeed exists,” thanks to Zambia’s deal, along with reports that Ghana and Sri Lanka are making progress with private creditors.
Still, Zambia’s president called the lengthy process an “indictment” of the so-called common framework that G-20 countries had hoped would expedite sovereign-debt restructurings.
And negotiations will probably still be “guided by contextual, case-by-case considerations”, says JPMorgan, meaning they’ll continue to be idiosyncratic and complex (read: long). But hey, at least agreements are possible . . . ?
There’s lots more to be unpacked about the details of Zambia’s deal, but the broader point is that deals can be reached, and the market is back open for business, albeit at yields above 10 per cent.
Sovereign borrowers are getting extra support from the IMF as well. It has increased normal borrowing limits for lower-middle-income countries and other sovereigns, so it’s got plenty of undrawn loans until the end of this year at least:
Again, there are lots more niche sovereign-debt contractual provisions to be unpacked, and very sharp thinkers working on problems involved with restructuring .
The good news is that we’ll all get to nerd out even more about bond-contract quirks, because the market is back open for lower-rated emerging market borrowers.