“Driving the demand for this debt are the easy-money policies of the world’s major central banks, which has depressed yields on debt of wealthy nations…Many money managers consider Ecuador (who defaulted on $3.2 billion in 2008) and Kenya (their first-ever international bonds) to be “frontier” markets, a loosely defined term used to refer to countries that are a step below emerging markets…”. Wall Street Journal

CREDIT MARKETS

Ecuador, Kenya Government Bonds Entice Yield Hunters

Bankers Note the Deal Attracted $8 Billion in Bids

By

JOSIE COX and

DANIEL HUANG

Updated June 17, 2014 7:02 p.m. ET

Kenya’s $2 billion debt offer drew $8 billion worth of orders. The Parliament building in Nairobi.Agence France-Presse/Getty Images

In the race for bigger returns, investors are clamoring for debt issued by countries with less-than-stellar credit ratings.

Ecuador sold $2 billion worth of 10-year bonds Tuesday, marking a return to international capital markets after defaulting in 2008. That deal came on the heels of Kenya’s first-ever international-bond sale, which attracted $8 billion worth of orders for two chunks of bonds totaling $2 billion. The Kenya deal was the largest-ever debt sale by an African country.

These two deals, which carry junk ratings, are the latest in a string of bond sales by countries off the beaten track. Many investors now are embracing issuers—and the hefty interest payments on their bonds—that have been shut out of global credit markets until lately. Driving the demand for this debt are the easy-money policies of the world’s major central banks, which has depressed yields on debt of wealthy nations.

Many money managers consider Ecuador and Kenya to be “frontier” markets, a loosely defined term used to refer to countries that are a step below emerging markets but often have better growth prospects. Frontier stocks and bonds have logged better performance than their emerging-market counterparts in recent months, and have attracted increasing amounts of cash from investors. As well, Cyprus is gearing up for its first public bond sale since receiving a bailout a year ago.

“There’s a hunt for yield now because of an improving global economy and lower yields in Europe, Japan and the U.S.,” said Doug Cote, chief market strategist at Voya Investment Management, which has $213 billion under management. Mr. Cote said the terms of the Ecuador bond sale were attractive, but declined to say whether his firm participated in the country’s bond sale.

Ecuador’s bond deal was bigger than expected—President Rafael Correa in April said he was anticipating a $700 million deal—and the final yield of 7.95% was below bankers’ initial guidance, indicating strong appetite from fund managers.

That compares with a yield of 2.653% on the 10-year U.S. Treasury note on Tuesday. Treasury yields, which were widely expected to continue climbing past 3% this year, have stayed at historically low levels amid sluggish economic growth in the U.S. and political instability in Eastern Europe and the Middle East.

Ecuador also saw lower borrowing costs compared with its last dollar-denominated bond issued in December 2005. At that time, $650 million worth of 10-year bonds were priced to yield 10.75%.

In 2008, the South American country defaulted on $3.2 billion in debt. Mr. Correa at the time called the debt “illegal” and “illegitimate.”

“Ecuador is doing things in a more orthodox way than before,” said Eduardo Checa, executive director at Analytica Securities, an Ecuadorean investment firm. Paving the way for Tuesday’s bond sale was a recent deal with some holders of the defaulted bonds, Mr. Checa said.

Proceeds from the latest deal will be used to fund transportation and infrastructure projects, according to government officials. Even though Ecuador made the decision to default in the depths of the financial crisis, analysts said the decision was more political than economic.

To be sure, not all investors are enamored with frontier-market debt. Bond yields are higher because money managers demand compensation for the risk that they won’t be repaid. In countries with poor track records in the bond market, a sharp slowdown in economic growth or shifting political winds could leave bondholders vulnerable, analysts say.

Still, this risk isn’t enough to keep some investors away. Kenya’s first-ever international bonds rose on their first full day of trading. Kenya’s five-year bonds were sold to yield 5.875%, while the 10-year bond priced at 6.875%. By Tuesday, the yields had each fallen by 0.1 percentage point. Bond yields fall when prices rise.

Bankers said the strong performance was due to the stuffed order book; the deals attracted $8.2 billion in bids.

“Investors continue to look for yield but are also able to look through the headlines to focus on the positive underlying credit stories of potential African issuers,” said John Wright, an emerging-markets banker at Barclays, one of the banks hired to sell the Kenyan bonds.

News from Kenya in recent days has been grim: Since Sunday evening, more than 50 people have been killed in a coastal area popular with local tourists, and local media reported claims of responsibility from al-Shabaab, a Somali militant group the Kenyan government has struggled to contain.

Investors, however, appeared to have factored in the risks of unrest, bankers said. The success of other African sovereign-bond deals in recent months, from the likes of South Africa and Zambia, likely also piqued investors’ interest, they said.

Write to Josie Cox at josie.cox@wsj.com
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Posted on June 18, 2014, in Postings. Bookmark the permalink. Leave a comment.

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