Emerging market debt with silver pedigree
Guarantees on emerging market debt need to be silver-plated these days after the defaults of Ukraine’s state energy firm Naftogaz and Kazakhstan’s BTA bank in recent years show implied guarantees are not worth the paper that they weren’t even written on.
Tunisia must have taken that to heart as it issued a dollar bond this month guaranteed by the United States, still rated AAA by two major ratings agencies.
Tunisia was planning to launch a Eurobond before the Arab Spring uprisings last year, but the bond was shelved and investors remain cautious about the country’s economic outlook. The country’s central bank governor was sacked a few weeks ago and its finance minister quit last week.
The U.S.-guaranteed bond had a coupon of 1.686 percent, compared with yields on Tunisian debt of around 6 percent, and was the lowest coupon on any bond issued by the country, according to Natixis, one of the lead managers of the bond.
The $485 million bond was oversubscribed and attracted investors from outside the usual emerging market universe, according to Nabil Menai, global head of emerging market debt origination at Natixis:
We had 3-4 pension funds who can only invest in AAA, you will never see them on an emerging market bond.
The bond offered a pick-up over U.S Treasuries of 70 basis points, appealing to investors in a developed world of increasingly negative returns.
Others have also waded into the space, with Mexican state oil firm Pemex issuing three bonds this year guaranteed by U.S. Ex-Im Bank, also rated AAA/AA+.
But some investors say emerging market borrowers face problems in the future if they always require better credits to hold their hands.
Daniel Broby, chief investment officer of fund manager Silk Invest, told Reuters a few months ago:
It may be seen as a cheap source of aid in the short run but it debases the sovereign status of the guarantor in the long run. Imagine a world 10 years down the line, where the U.S. has guaranteed every restructured nation’s bond.