Developing countries that did not take advantage of historically low yields to sell international bonds in the first half of 2013 are finding themselves left high and dry as borrowing costs rise.
Emerging market borrowers sold more than $200 billion of bonds between January and July, a record-breaking streak that culminated in April with Rwanda issuing a 10-year dollar bond at a yield of less than 7 percent.
But the U.S. Federal Reserve's indication that it will turn off the liquidity taps which have depressed interest rates in the West and fueled demand for higher-yielding assets has burst a bubble that had developed in emerging debt, bankers say.
"In March/April, some valuations were very high, investors were awash with liquidity and were desperate for higher-yielding instruments," said Chris Tuffey, head of EEMEA debt capital markets at Credit Suisse. "Prices got to levels driven by technicals rather than fundamentals."
Issuance fell dramatically last month, when only 25 bonds were issued, according to Thomson Reuters data, compared with 82 in May, 103 in April, and 66 in June 2012. Emerging debt prices have fallen as a sharp rise in U.S. yields robs riskier borrowers of their usual yield appeal.
Countries such as Bahrain and Russia have continued to hold investor presentations, known as roadshows, or assigned lead managers for planned international debt sales, but no bonds have followed.
Nigeria held off initially on issuing a bond following a roadshow last week, but announced launch plans on Tuesday.
Borrowers have regularly held "non-deal" roadshows since the 2008/09 financial crisis made them nervous of committing to a particular timetable for issuing debt, although investors say such pitches always take place with a bond sale in mind.
Markets have been so favorable until recently, however, that even unfamiliar names, such as last year's debut borrower Zambia, were able to raise money as soon as their roadshows ended, drawing massive demand.
Emerging market debt was yielding on average less than 5 percent in April, an unprecedentedly low level, but that has now risen to around 7 percent, meaning that borrowers will have to pay much more for their funding.
Rising interest costs could make life difficult for countries already struggling with high debt and deficits.
"A lot of issuers have not fully woken up to the fact that issuance at higher yields will significantly change the debt sustainability picture," said David Hauner, head of EEMEA fixed income strategy at BofA-Merrill Lynch Global Research.
African countries waiting in the wings include Kenya and Tanzania, while Ghana said on Tuesday it was awaiting advice from lead arrangers Barclays and Citi before naming a bond launch date.
It did say it was concerned by the impact of the Fed.
Other countries which have held roadshows in the past few weeks include Latvia and Ukraine, according to Thomson Reuters market news and information service IFR.
Some, such as Kenya, which has made and dropped plans for its first Eurobond several times since 2007, may not have any pressing need to borrow, while others may find alternative, and cheaper, sources of funding.
Ukraine's debt insurance costs have recently hit 18-month highs, however, as investors worry that without an International Monetary Fund deal, the country will not be able to refinance its debt. Kiev sold a $1 billion 10-year Eurobond in April and said it aimed to raise another $2.5 billion this year.
More regular sovereign borrowers may also struggle to complete their annual issuance programs, let alone borrow in advance of next year's plan, as countries often seek to do.
Turkey has raised $4.2 billion of its $6.5 billion borrowing target for this year, while Hungary has completed $3.25 billion of a 2013 target of around $5.5 billion.
"People used to do a lot of pre-funding and that won't be the case any more," said Gorky Urquieta, co-head of emerging markets debt at asset manager Neuberger Berman.
Companies and financial firms, which made up the vast bulk of this year's issuance, are also holding back.
Turkish banks Ziraat and Yapi Kredi are among those that have said they are waiting for better market conditions, while Nigeria's Diamond Bank ended a roadshow last week without a deal.
Bankers involved in emerging market debt remain optimistic the recent rise in U.S. Treasury yields may be temporary, saying this month's U.S. employment numbers and Federal Reserve meeting could put a different complexion on the Fed's intentions.
If that is the case, for emerging market borrowers, "the summer should be active, rather than quiet," said Credit Suisse's Tuffey.
But countries and companies that missed the window which closed in April will have to resign themselves to borrowing at higher rates. "Emerging markets will never have it as good again," BofA-ML's Hauner said.
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