Volatility Raises Questions about Bond Supply

Some bankers have been predicting anywhere between $5bn-$7bn in new bond supply for September and perhaps some more this month as companies look to tap before the post-summer rush, but this week’s rout and the gloomy mood hanging over the market raises doubts about just how many deals will see the light of day, at least in the short-term. This comes after US equity markets fell a good 4% Thursday, while the Bovespa plummeted 5.7% as risk aversion spiked over fears of an economic slowdown. “If risks escalate and there is a massive selloff in the markets, the September pipeline could move to December,” says one investor. Names like development bank BNDES, Colombian utility Empresa de Energia de Bogota (EEB), Brazilian electricity company Eletrobras, Brazilian toll-road company CCR, steelmaker Usiminas as well as banks like Banco do Brasil and Bradesco have all been heard eyeing either the dollar or global BRL market. To be sure, in theory pricing has become even more attractive after the yield on the 10-year UST hit 2.46% Thursday, breaching the 2.49% low reached in November 2010, but volatility is likely to make execution difficult. “If USTs continue at low levels and market conditions permit, there is potential for very high volumes in the $5bn-$7bn range or more,” notes a DCM banker. “Activity in the secondary over the last few sessions has seen demand for the belly of the curve but there has been more interest for 30-year bonds.” However, Wednesday saw secondaries slump alongside the rest of the broader market. “This is probably the worse day in EM debt this year, though we have yet to get to levels seen during the May sell-off last year,” said one EM corporate investor Thursday. “People are waiting for the payroll number (Friday) to see if we get some relief from that.” Still investors have money to put to work and bankers have been expecting companies to start announcing deals in late August. Meanwhile, the buyside is putting greater emphasis on liquidity. “In t