On Bullish Investors Chase New Iraqi Bonds
It strikes me the journo opened this right: To understand how big the appetite is for emerging market debt these days, one should look at what has been happening to prices of bonds newly issued by Iraq, a country that has suffered one of the worst economic and political upheavals in recent history.

It's hard not to think the quest for returns is not getting, well, rather far out there.

Since the bonds started trading officially at the beginning of the week, prices have jumped from about 70 to a high of nearly 74 this week. Andrew Chappell, associate director at Exotix, the London-based broker, says: “We are still seeing a lot of demand chasing very little paper.”

Indeed. Lots of liquidity chasing very little paper indeed.

Now, we have a word for that. Let me think. No a phrase. Asset bubble.

Prices receded to about 72 yesterday, translating to a yield of 8.95 per cent. That means investors currently perceive Iraq as having about the same credit risk as Jamaica, but as having less risk than both Ecuador and Argentina, say analysts, because the comparable bond yields on the latter two countries are higher than yields on Iraq’s bond.

Let me say that placing Iraq in the same risk category as Jamaica strikes me as daft.

Less risk than Argentina? At least Argentina has a bloody fucking proper government. Okay, one rather prone to writing off debt, but Iraq just got a big old gift. One rather should think that has built certain potential expectations. And neither Ecuador nor Argentina presently run a serious risk of splitting into mini statelets.

Such bullishness has been playing out among most emerging market bonds for three years. But there seems to be no end in sight for the rally, at least in the short term. Rising demand for higher-yielding emerging market bonds pushed up prices to new highs yesterday and sent the risk spread, as measured by JPMorgan’s EMBI+ index, three basis points tighter to a fresh low of 219bp over US Treasuries.

Well, it's certainly not a bad time to load up on debt if you're in an emerging market and you can get 2.19 percent over US Gov - although that's dollar denominated as I recall, so we got no small bit of currency risk there.

Then on the other hand, ifyou have dollar denominated debt now, who the fuck knows which way your game is going to go given the utterly whacked position the USD is in. Up again against all reason? Down? Sideways for a while?

Part of the recent rally has been helped by a continued sell-off in the US Treasury market. But Will Oswald, global head of emerging markets quantitative strategy at JPMorgan, says: “There are continued strong inflows from investors in Asia and the Middle East.” The bank’s latest client survey indicated there was about $1.9bn of strategic inflows in the first three weeks of this month and a pipeline of about $1bn in the near term.

I am unable to parse this quote. Am I dim or is it not clear if Oswald is refering to emerging markets or US G paper?

Of course it could be my narcotics.

Skipping over a bit about increased risk appetite (or delusion about what risk is being taken on):

There are concerns down the road. As Mr Riley of Fitch Ratings explains, emerging market countries have become one of the great beneficiaries of the global imbalance which has most of them running current account surpluses while the US has a current account deficit.

“There could be a lot of unwinding when there is a correction to global imbalances,” he says. “At some point along the line, the US must cut its deficit and then the emerging markets will see their surpluses decline and their external positions worsen.”

Indeed, concerns down the road.

For the moment, however, investor interest in the wider asset class as well as individual credits is unlikely to go away. Iraq, for instance, faces huge challenges, including the completion of political transition and economic rehabilitation. But it has also enormous long-term economic potential and its bonds are backed by the world’s third largest oil reserves.

Mehmet Simsek, strategist at Merrill Lynch, also points out that demand for Iraq’s paper is likely to be strong, if only because of its expected inclusion in various EM benchmark indices. The Iraqi bond, which has a face value of $2.7bn, is set to enter JPMorgan’s EMBI Global index by the end of March and is likely to be included in other indices.

But Jim Croft, emerging markets trader at Commerzbank, warns: “The overall feeling is one of extreme bullishness, but there is a risk of consolidation given the extent and speed of the rally.”

Nice ass covering, Jim. A bit stereotypical and lacking in panache, but nice ass covering.

Now, as to
Mid East becomes project finance hub, this is intriguing although the article posed more questions for me than it answered. As in re Western bank liquidity, but one has to suspect oil liq. backflowing.

Project finance activity in the Middle East surged more than 60 per cent last year, as western banks entered the region in force.

Public-private partnerships use the capital markets to finance infrastructure and industrial projects, as state-controlled entities are often unwilling or unable to commit public funds via the national budget.

The volume of bank lending to projects in the region last year jumped to $29bn from $17bn in 2004, as banks financed projects in the energy and utility industries.

“Last year was the year western bank liquidity arrived in force in the region,” said Rod Morrison of Project Finance International, part of Thomson Financial, the data provider.

Growth in the Middle East is, unsurprisingly, driven by the energy sector. The global thirst for energy products has pushed commodity prices to record highs and accelerated the growth of liquified natural gas developments. Demand for LNG has risen as the US and the UK import more gas and demand from emerging economies, including China and India, has soared.

Well, if by Middle East we mean Gulf.....

Strong competition between the new entrants has squeezed margins and given the projects access to longer-dated financing. Project bank loan deals in the region are now regularly pitched in the 50bp-60bp range and tenors are moving to a common standard of 25 years, from about 100bp and 20 years.

Well.

The size and capacity of the international banks also mean local competitors are being squeezed out. “Local or regional banks simply can’t do 60bp at 25 years,” said Mr Morrison.

The more cynical among us might ask if the Big Boys should do 60 bp at 25 on the projects. Can and should not being the same words.

Now, that may mean the regionals will have to direct their money to non-gov non-mega projects, which might end up being a good thing.

But given volumes as noted, maybe not:

Last year, regional players accounted for about 25 per cent of deal volumes, down from more than 40 per cent in the previous two years. However, the rapid growth of the overall market means local banks have also increased lending volumes, from about $3.5bn in 2003 to $8bn last year.

There being so much liquidity sloshing about its almost sinful.

A note perhaps on a real change:

“Five years ago international banks followed western money into the region to invest in projects there,” said Mr Elliston. “Now we also work with Middle Eastern companies on investing their money outside the region. This has been a major shift in recent years.”

Projects international banks have worked on include investments by Wataniya, the Kuwaiti telecoms group, in the Algerian market.

I do think there has been more direct MENA company financing for the big projects, and supporting, e.g. Wataniya's investment in its Algerian affiliate shows some appetite for risky business - Algeria is a booming mobile market, but good lord it is a pain in the ass basket case of a backwards ass socialist mess.

Now, finally for the Gulf is ... well ... just mad news:
Scramble for shares in Islamic bank.

Demand for shares in the initial public listing of Al Rayyan, an Islamic bank in Qatar, has prompted the authorities to call in riot police to calm down would-be investors ahead of the application deadline at the end of this week.

Government institutions are selling 55 per cent of Al Rayyan - which will not open for business until October - in a $1.1bn IPO.

I am not sure this even needs the slightest comment.

Not open for business until October (2006 one presumes), IPO, and riot police.

Brilliant.

Obviously now in the Gulf one need only come up with a Really Big Idea and a properly Islamic wrapper.

In October a wholesale tranche open to non-Emiratis in the $561m IPO of Dana Gas in the UAE was 220 times oversubscribed and fights broke out at overcrowded receiving banks.

Bu the way, this is sheer laziness, but do any of my dear comrades have a link to what the subscribers profile was.

I did like this though:
Last week, tens of thousands of would-be investors had turned up in Doha. Riot police were called in after people camping outside the stadium began to form surging crowds. QNB introduced a queuing system and by Saturday 10,000 tokens had been distributed, and positions near the front of the line were reportedly changing hands for up to $300.

Mazen Al Shakarchi, QNB's assistant general manager for local investment, said Qatar's booming economy was the underlying cause of the frenzy, but conceded that pricing was an issue. "Some investors are obviously speculating about the price when it lists," he says. "That's anyone's guess, but the trend in the region is for high multiples."

All I can say is there is no way the Gulf equities boom ends well if the Khaliji authorities don't start showing a whole fucking lot more vision.

Which one can not reasonably expect.