The buybacks are good news for bondholders. Bond prices have fallen
as investors have fled the sector -- some $32.6 billion exited EM
bond funds in 2015, according to EPFR Global -- and yield spreads on
EM corporate bonds have ballooned by 100 basis points in the past
"In periods of volatility and market dislocation it provides a
welcome bid for the bonds, and helps set a floor for pricing," T
Rowe Price EM corporate bond fund manager Samy Muaddi said.
Buybacks are also popular with companies, who see an opportunity to
reduce their hard currency debt on the cheap. Servicing this debt
has become more expensive following a sharp depreciation in many
But in a market where new debt issuance has shrunk to multi-year
lows, the trend also risks depleting an already limited pool of
assets, some investors warn.
Bond buybacks by EM corporates rose to $22 billion in 2015 from $12
billion in 2014, according to JPMorgan, with companies as diverse as
Brazilian and Russian banks, Indonesian real estate firms and
Chinese coal miners all tendering for debt.
This year investors expect to see more activity from
"quasi-sovereign" state-owned companies, following buybacks by
Kazakhstan's Kazmunaigaz (KMG) and Azerbaijan's state oil company
Both those tenders had government support, despite the strains
placed on the two countries' public finances by low oil prices. That
had led to a period of underperformance for quasi-sovereigns,
especially in the energy complex.
The premium offered by KMG's $3.4 billion jumbo buyback in November
provided an immediate boost to its bond prices, worth around 10
points on some issues, and has raised hopes among investors that
other quasi-sovereigns might follow suit.
"For companies to be able to reduce their debt through the support
of the government is a positive thing. It's one of the reasons we
think quasis in the energy space are an attractive place to be,"
said Shamaila Khan, an EM corporate bond fund manager at Alliance
The price of KMG's 2043 dollar-denominated Eurobond leapt from
around $74 before the tender was announced to almost $88 afterwards.
[to top of second column]
"The price that KMG paid for its debt is what really got people
excited -- that gave a significant kicker to many funds that were
invested," said Aaron Grehan, deputy head of EM debt at Aviva
Investors. He was holding KMG bonds and decided to sell the majority
of his holdings back to the company.
But T Rowe's Muaddi held on to his KMG bonds, taking the view that
there was still value in them.
This illustrates the fund manager's dilemma.
Companies with the ability to undertake a big buyback tend to have
strong balance sheets, and so must offer tempting premiums to
persuade bondholders to sell. But the investor has to weigh that
against a shrinking supply of quality credits.
"Typically the kind of company able to do this would be in a strong
financial position and with the impact from commodity prices and
general economic stress, there's a small pool of stronger credits
versus two or three years ago," said Grehan.
"But if there's a significant financial gain from that tender
process, then you have to strongly consider it."
Muaddi said the overall supply of EM dollar-denominated bonds is
expected to remain very limited as credit spreads are at their
widest levels since the global financial crisis. This makes it
expensive for companies to issue new debt.
Another downside for bondholders is that companies do not always
offer premiums as good as KMG's. In Socar's case, its 2017 bonds
were already trading above par, and it offered just $1,020 for every
Some investors also expressed reservations about companies without
state backing reducing their cash cushions, saying it might be good
for the bonds that were the subject of the buyback but not for any
"In some cases they have been buying back short-dated bonds, then
the long-dated bonds trade at a bigger discount," said Rob
Drijkoningen, global co-head emerging markets debt at Neuberger
(Editing by Catherine Evans)
[© 2016 Thomson Reuters. All rights
Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.