Trends in EM and CEE Debt Capital Markets International Business - - PowerPoint PPT Presentation

International Business Congress – Law, Banking and Finance

CEEMEA Debt Capital Markets

Venice, 21 April 2017

Trends in EM and CEE Debt Capital Markets

140 145 150 155 160 165 170

2

A series of big events shaped Emerging market primary markets in 2016 and 2017YTD

Source: Bondradar as of 2 April 2017

Monthly Emerging markets primary issuance since January 2016

Volatile start in 2016

• Shaky

start in 2016 with heightened China growth concerns

• Aftermath of the

December Fed rate hike

• Low

commodity prices Improving market backdrop

• EM issuance enjoyed a

turnaround as oil prices began to stabilise in late February

• The FOMC meeting at the

end of March suggesting the Fed would remain “cautious” towards future rate hikes was viewed as a dovish signal Brexit volatiliy

• Heightened

volatility before and after the Brexit referendum

• EM primary

markets volume fell significantly in June Brexit-induced EM rally

• EM

markets demonstrated a swift rebound after the Brexit vote driven by dovish central bank policies Post-FOMC issuance rush

• The

FOMC meeting mid- September

• pened

the door for a very active end to the month and October Trump election victory

• A sharp rise in

global bond yields since Donald Trump’s surprising election victory spurred an underperformance

• f EM debt
• The

December rate hike also increased volatility Strong start in 2017

• Despite ongoing uncertainty

regarding the policies of the new US administration, primary markets picked up in the first months of 2017

• Issuance driven by LatAm and

Asian borrowers

• The run-up to the March rate

hike led to some volatility at the end of February

USD bn

12 9 12 21 22 13 20 11 29 21 19 10 25 23 28 11 5 13 19 13 11 11 6 16 11 1 6 24 12 9 4 5 14 18 20 9 25 3 15 36 6 2 15 11 32 27 19 39 58 55 33 56 21 60 68 27 18 64 45 69 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 CEEMEA Latam Asia USD EM Sovereign Bond Index

3

Second highest annual issuance volume on record in 2016 despite repeated bouts of financial markets' volatility

Sources: Bondradar, UniCredit research as of 2 April 2017 Note: CEE includes CIS countries and Turkey

Emerging markets bond issuance in previous years CEE bond issuance in 2016compared to previous years

USD bn USD bn

275 429 457 507 350 481 177 2011 2012 2013 2014 2015 2016 2017YTD 69 120 128 81 44 60 22 2011 2012 2013 2014 2015 2016 2017YTD

• 2016 was a year of surprises, stunning political

upsets, and repeated bouts of financial markets’

• volatility. Despite these shocks and after a dismal

start, financial markets demonstrated a remarkable resilience, essentially shrugging off concerns about the impact of the Brexit vote and resulting in a long run of risk-on sentiment that pushed portfolio flows to EM to a record high during the summer and early fall

• In 2016, EM produced its second highest annual

issuance volume on record at USD 481bn, following only 2014's USD 507bn

• Issuance varied throughout the year with

different regions seeing periods of record supply as well as extended dry spells

• Primary markets slowed abruptly after

Donald Trump's unexpected USD election victory

• The more self-sufficient Asian region

was the only source of consistent issuance in the final two months of the year

95 129 131 130 115 85 177 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017

4

Record-breaking issuance start to 2017YTD

Sources: Bondradar, UniCredit research as of 2 April 2017 Note: CEE includes CIS countries and Turkey

Emerging markets bond issuance in Q1 2017 compared to previous years CEE bond issuance in Q1 2017 compared to previous years

USD bn USD bn

28 30 40 33 16 16 22 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017

• Emerging market issuance was very strong in the

first three months of 2017, with USD 177bn of Eurobonds placed by corporate and sovereign issuers.

• This was twice the issuance in 1Q 2016,

with corporate issuers based in China placing three times as much so far in 2017 compared to last year. Chinese financial and corporate issuers with USD 36bn of bonds issued dwarfed any other single country

• Issuance in CEE was also strong, but its relative

importance has diminished in the last few years, partly as a result of lower government financing needs and a substitution of external debt for debt denominated in local currencies.

• Outside of CEE, sovereign issuance was very

strong with Argentina issuing USD 10bn and Middle Eastern issuers also very active with first- time issuer Kuwait placing USD 8bn in March

40 39 31 91 7 27 2013 2014 2015 2016 Q1 2016Q1 2017 128 81 44 60 16 22 2013 2014 2015 2016 Q1 2016Q1 2017

5

What regions were driving EM issuance growth ?

CEE issuance is lagging behind other EM regions

Source: Bondradar as of 9 April 2017 (1) Including Turkey

LatAm Asia CEE Middle East Africa LatAm Asia CEE/CIS(1) Middle East Africa CEEMEA CEEMEA

182 136 87 156 22 57 2013 2014 2015 2016 Q1 2016Q1 2017

• 25%
• 36%

+80% +156%

123 135 80 123 22 45 2013 2014 2015 2016 Q1 2016Q1 2017

+10%

• 41%

+54% +99%

152 236 183 201 22 75 2013 2014 2015 2016 Q1 2016Q1 2017

+235% +10%

• 23%

+55%

• 36%
• 46%

+36% +33%

• 1%
• 20%

+190% +315%

15 17 12 8 0.4 8 2013 2014 2015 2016 Q1 2016Q1 2017

+17%

• 28%
• 32%

+2087%

Growth drivers in the CEEMEA region

USD bn USD bn USD bn USD bn USD bn USD bn

12 12 15 12 3 4 2013 2014 2015 2016 Q1 2016 Q1 2017 62 126 103 112 11 46 2013 2014 2015 2016 Q1 2016 Q1 2017

6

Primary issuance of selected EM countries

Russian issuance picked up again in 2016 but is still subdued compared to 2013

Source: Bondradar as of 9 April 2017

CEEMEA China CEEMEA Indonesia CEEMEA South Korea Asia

+329%

• 19%

+102% +10%

CEEMEA Mexico CEEMEA Brazil CEEMEA Argentina CEEMEA Russia CEEMEA Turkey CEEMEA Poland

+64% +27%

• 7%
• 21%

22 24 19 24 3 7 2013 2014 2015 2016 Q1 2016 Q1 2017 +184%

• 24%

+13% +30%

LatAm CEEMEA

38 38 29 39 16 9 2013 2014 2015 2016 Q1 2016 Q1 2017

• 43%
• 25%

+/-0% +36% 39 43 7 20 10 10 2013 2014 2015 2016 Q1 2016 Q1 2017 +10%

• 83%

+171% +/-0% 1 1 3 35 19 13 2013 2014 2015 2016 Q1 2016 Q1 2017 +17% +174% +956%

• 31%

52 11 5 15 5 5 2013 2014 2015 2016 Q1 2016 Q1 2017

• 79%
• 55%

+199% +/-0% 16 17 7 13 4 5 2013 2014 2015 2016 Q1 2016 Q1 2017 +4%

• 62%

+96% +19% 4 12 5 9 4 3 2013 2014 2015 2016 Q1 2016 Q1 2017 +181% -54% +72%

• 26%

USD bn USD bn USD bn USD bn USD bn USD bn USD bn USD bn USD bn

7

CEE primary market characteristics versus Emerging markets

Source: Bondradar as of 2 April 2017

Primary market activity in CEE in 2017YTD Primary market activity in Emerging Market in 2017YTD Volume by currency Volume by type Volume by region and country Volume by currency Volume by type Volume by country

29% 51% 58% 46% 48% 64% 46% 37% 51% 49% 7% 3% 5% 3% 3% 2013 2014 2015 2016 2017YTD EUR USD Other 40% 56% 70% 55% 54% 39% 18% 17% 28% 30% 21% 26% 13% 17% 16% 2013 2014 2015 2016 2017YTD SSA Corp FIG 41% 14% 12% 25% 22% 13% 21% 15% 21% 24% 3% 15% 12% 16% 15% 4% 10% 8% 9% 12% 4% 7% 6% 7% 35% 34% 47% 22% 27% 2013 2014 2015 2016 2017YTD Russia Turkey Poland Slovenia Romania Other 12% 15% 16% 14% 15% 78% 73% 76% 82% 80% 10% 12% 8% 4% 5% 2013 2014 2015 2016 2017YTD EUR USD Other 26% 29% 34% 42% 49% 56% 48% 44% 39% 32% 17% 23% 21% 19% 19% 2013 2014 2015 2016 2017YTD SSA Corp FIG 14% 25% 29% 23% 26% 9% 8% 9% 19% 15% 28% 16% 13% 12% 12% 9% 8% 2% 4% 6% 8% 8% 8% 8% 5% 33% 35% 39% 33% 35% 2013 2014 2015 2016 2017YTD China Middle East CEE/CIS Brazil Mexico Other

8

A closer look at the Russian primary market

Russian issuance volumes by industry

• Russian primary issuance

dominated by Metals & Mining and Oil & Gas credits

• FIG issuance is still subdued

compared to 2013

Source: UniCredit research, Bloomberg as of 10 April 2017

• The strong performance of Russian credits over the last two years coupled with the scarcity of supply (compared to 2013) led to a spike in

demand for recent Russian issues, especially for blue chip corporate companies

• Demand is further enhanced by domestic investors (unlike other EM markets such as Turkey)
• Recent Russian issuers therefore managed to reprice their secondary curve and price bond transactions flat or with a negative new

issue premium (e.g. Gazprom, Nornickel, Severstal, etc.)

25% 15% 22% 20% 16% 30% 75% 17% 15% 13% 15% 3% 34% 11% 56% 6% 6% 14% 16% 2% 3% 13% 27% 20% 8% 16%

2013 2014 2015 2016 2017YTD

Oil & Gas FIG Metals & Mining Transport Chemicals Sovereign Other

0.8 1.2 1.6 2.0 2.4 2.8 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 US 5yr Mid-Swap US 10yr Mid-Swap 20 30 40 50 60 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Oil Price (Brent) 10 15 20 25 30 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Volatility index (VIX) (Rhs)

9

Key Emerging market indicators rebounded in 2017YTD

Source: UniCredit research, Bloomberg as of 12 April 2017

USD mid-swap rates spiked after Trump's election victory

Mid Z-Spread (bps)

Trump's election victory led to a spike of mid-swap rates in 2016 with rates trading stable in 2017YTD

Steady oil price recovery since Q2 2016

Following a severe decline at the end of 2015 and into 2016, oil (and other commodity) prices have posted a steady recovery since Q2 2016

USD/bbl.

Global volatility indicator

Volatility at a low after volatility hikes following the Brexit vote and Trump's unexpected election victory

Trump's surprise election victory Brexit vote Average since 1 January 2016: USD 46

• After the rollercoaster ride of 2016, with its many political shocks, reversals
• f risk appetite and soaring volatility, financial markets have rebounded this

year

• Volatility has ebbed to a 15-year low and EM assets rebounded strongly
• Much of the recent bout of market optimism may be overdone as it is

rooted in expectations of a major boost to US growth but there is also a more fundamental basis for the recent rebound in market optimism: the global economy has never looked so good since 2011

• The growth outlook has brightened across the globe, and growth in EMs

is gathering speed thanks to rising commodity prices, improved policies, and recovering global trade

Trump's surprise election victory

10

Emerging market volatility at a historic low

The global investment environment in 2017 has delivered average returns for most asset classes but below average volatility

Source: UniCredit research; Bloomberg as of 5 April 2017

Volatility across asset classes (calculated from 1Q 2002)

• The global investment environment during the first three months of 2017 has been very favorable across asset classes and in particular to

emerging markets stocks and bonds which have performed better than the typical first quarter

• The most salient feature across assets is that volatility is below the levels for comparable periods in previous years but also lower than the

average quarterly volatility since 2002

• For some asset classes such as EM corporates, the volatility of returns reached record lows, while returns were in line with the average
• UniCredit believes that the global environment for emerging markets is favorable, but we also think that this pattern of record low volatility

across asset classes will be difficult to continue going forward as there are several triggers for instability that have been lightly discounted by the market

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% EM Corporate US HY EM Sov Europe EM Sovereign US Tsy 10y US Stocks Global bonds Europe Stocks EU HY EM Local EM Stocks CRB Gold 75th pctile 25th pctile Median 1Q 2017

• 2017YTD inflows are in excess of USD 20bn during the first three months of the year, a record exceeding that for 2013
• Appetite for local-currency bond funds has increased over the past five weeks as investors become more constructive on EM inflation

and currency valuations.

• ETFs are raising their presence higher, representing one third of total fund allocations so far
• The stellar performance in EM allocations is partly explained by a reversal of the outflows following the risk-off period in the month after the

US presidential election.

• The level of EM-dedicated AUM now exceeds that prior to the election date and the more than USD 20bn of inflows in 2017

reversed the around USD 15bn of post-election outflows

• UniCredit remains optimistic about the asset class. Balance of payments portfolio flows data for the first months of the year indicate that net

flows into EM stocks and bonds are gathering speed, particularly in March, leading us to conclude that the flow story was not just a matter of an adjustment to the asset class mix in favor of EM fixed income but an overall increase in allocations.

11

Allocations to EM fixed-income funds have reached historic highs in 2017YTD

Source: UniCredit research, Bloomberg as of 10 April 2017 USD m

• 2,000

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Jan Mar Apr May Jun Jul Aug Sep Nov Dec 2014 2015 2016 2017YTD

Cumulative flows into EM bond funds Cumulative flows to EM fixed income ETFs

USD m

• 30,000
• 20,000
• 10,000

10,000 20,000 30,000 40,000 Jan Mar Apr May Jun Jul Aug Sep Nov Dec 2014 2015 2016 2017YTD

12

Growth prospects will improve in 2017 and 2018 across the CEE region

Source: UniCredit research

• 2.8
• 0.2

1.2 0.7

• 4
• 3
• 2
• 1

1 2 2015 2016 2017F 2018F 6.1 1.5 2.5 3.5 1 2 3 4 5 6 7 2015 2016 2017F 2018F

Russia – Real GDP (%) change Turkey – Real GDP (%) change Poland – Real GDP (%) change

3.9 2.8 3 3.4 1 2 3 4 5 2015 2016 2017F 2018F

Bulgaria – Real GDP (%) change Hungary – Real GDP (%) change Serbia – Real GDP (%) change

3.6 3.4 3.9 3.6 1 2 3 4 5 2015 2016 2017F 2018F 3.1 2 4 3.6 1 2 3 4 5 2015 2016 2017F 2018F 0.8 2.8 3.2 3.2 1 2 3 4 2015 2016 2017F 2018F 3.1 2 4 3.6 1 2 3 4 5 2015 2016 2017F 2018F

13

Performance of Emerging market debt in previous years

Russian credits significantly outperformed other EM peers over the last two years

Source: Bloomberg as of 10 April 2017 The Bloomberg USD Emerging Market Sovereign Bond Indices are engineered to measure the market of USD-denominated fixed-rate securities of sovereign issuers. Indices are rules-based and market-value weighted.

Wider CEE USD debt performance of selected countries in 2013, 2014, 2015 and 2016 (Bloomberg USD Emerging Market Indices)

2013 2014 2015 2016

EM USD debt performance of selected countries in 2013, 2014, 2015 and 2016 (Bloomberg USD Emerging Market Indices)

• 8%
• 11%
• 9%
• 8%
• 11%
• 7%
• 3%
• 6%

12% 9% 11% 10% 14% 11% 1% 12%

• 2%
• 16%
• 7%

3%

• 4%
• 3%
• 2%

3% 4% 21% 14% 4% 11% 10% 16% 3% Mexico Brazil Colombia Chile Peru South Africa Nigeria Philippines

• 6%
• 13%
• 3%

0% 4% 0%

• 1%
• 8%

20% 8% 16% 14% 10% 11% 17%

• 1%

3% 3% 6% 3% 7% 11%

• 1%

2% 3% 5% 8% 5% Russia Turkey Poland Romania Hungary Croatia Serbia

14

Strong recovery of Emerging market debt in 2017YTD

Source: Bloomberg as of 10 April 2017 The Bloomberg USD Emerging Market Sovereign Bond Indices are engineered to measure the market of USD-denominated fixed-rate securities of sovereign issuers. Indices are rules-based and market-value weighted.

Performance in 2017YTD Performance since Donald Trump's election victory

Wider CEE USD debt performance of selected countries 2017YTD and since US elections (Bloomberg USD Emerging Market Indices) EM USD debt performance of selected countries 2017YTD and since US elections (Bloomberg USD Emerging Market Indices)

3% 6% 2% 5% 3% 4% 4% 2% 1%

• 1%
• 1%

0% 2% 3% Russia Turkey Poland Romania Hungary Croatia Serbia 5% 8% 5% 3% 4% 1% 5% 2% 5%

• 2%

2% 0%

• 1%
• 2%
• 4%

6%

• 2%

0% Mexico Brazil Colombia Chile Peru South Africa Nigeria Philippines Indonesia

15

Performance of Emerging market debt versus other asset classes in 2017YTD

Source: Bloomberg as of 31 March 2017

Emerging market debt

4.9% 3.2% 3.2% 6.5% 3.9% 2.2% 2.0% 1.9% 0.8% 0.5% EM Frontier Markets EM Local Markets (Local Currency) EM Corporate (Hard Currency) EM Local Markets (USD) EM Sovereigns (Hard Currency)

Equities

6.4% 4.9% 5.5%

• 1.1%

11.1% 15.8% 10.7% 10.4% 10.1% 6.2% European Equities MSCI World S&P 500 Japanese Equities EM Equties

UST and Bund FX

5.2%

• 3.5%

1.9% 2.0% EM FX USD spot index

High grade

0.0% 1.3%

• 0.3%
• 0.4%

Euro HG US HG

High yield

2.5% 1.4% 4.9% 2.9% US HY Euro HY 0.7%

• 0.1%
• 2.0%
• 0.4%

UST Bund

Performance in 2017YTD Performance since Donald Trump's election victory

• Lower USD volatility
• More stable commodity markets
• Improving EM growth and fundamentals and constructive

global environment

• Strong inflows post-US elections: The more than USD 20bn
• f inflows in 2017 reversed the c. USD 15bn of outflows

after the US elections

• EM trading volumes are up
• Tighter hard currency spreads, appetite for local-currency

bond funds has increased over the past weeks

• Fed is less likely to surprise Emerging markets
• Recovery in EM surpassed the selloff post-Trump
• EM sovereign and corporate spreads back to 2014 levels
• EM trading tighter than high yield and returns better than

investment grade bonds

• Robust demand from international and local investors
• Higher G3 bond yields
• Potential increasing protectionism
• Geopolitical and political risks
• Spreads near lows

16

Positive and negative determinants influencing Emerging markets

Positive Negative

17

Trends in CEE and Emerging markets in 2017YTD

• EM primary issuance at record highs driven
• Wide variety of fixed income instruments issued in EM primary markets and successful introduction of new products

in EM opening up a completely new market and investor base for the region:

• Mortgage covered bonds
• Green bonds
• Schuldscheindarlehen
• Local currency Eurobonds (e.g. Russian Ruble Eurobonds)
• Tier 2 FIG transactions
• Liability management transactions
• Russian borrowers are repricing their secondary curves in recent transactions (primary pricing tighter than

secondary levels)

• Changes in the investor space:
• US investors less engaged in recent transactions (especially out of Russia), while demand from European investors

is stickier and less price sensitive

• Remarkable resilience of EM assets despite major global and internal challenges

18

UniCredit's Eurobond transactions in the CEE & CIS region

Source: UniCredit

Selected Issues from CEE and CIS region

Otkritie FC Bank USD 400m 4.500% Senior Notes due 2019 Joint Lead Manager Oct 2016 Gazprom EUR 1bn 3.125% Senior Notes due 2023 Joint Lead Manager/ Joint Bookrunner Nov 2016 Rusal USD 600m 5.125% Senior Notes due 2022 Joint Lead Manager Jan 2017 Yapı Kredi USD 600m 5.750% Senior Unsecured Notes due 2022 Joint Lead Manager Feb 2017 Nornickel USD 1,000m 4.100% Senior Notes due 2023 Joint Lead Manager and Joint Bookrunner Apr 2017 Credit Bank of Moscow USD 600m 7.500% Tier 2 Notes due 2027 Joint Bookrunner Mar 2017 Southern Gas Corridor USD 1bn 6.875% Senior Notes Tap due 2026 Joint Lead Manager Mar 2017 Tengizchevroil USD 1bn 4.000% Senior Notes due 2026 Joint Lead Manager Jul 2016 Global Ports USD 350m 6.500% Senior Notes due 2023 Joint Lead Manager Sep 2016 RCS & RDS EUR 350m 5.000% Senior Notes due 2023 Joint Lead Manager Oct 2016 TSKB USD 300m 4.875% Green Notes due 2021 Joint Bookrunner May 2016 Halkbank USD 500m 5.000% Senior Unsecured Notes due 2021 Joint Global Coordinator Jun 2016 PKN Orlen EUR 750m 2.500% Senior Unsecured Notes due 2023 Joint Lead Managers Jun 2016 Norilsk Nickel USD 1,000m 6.625% Senior Notes due 2022 Joint Bookrunner Oct 2015 Evraz USD 750m 8.250% Senior Notes due 2021 Joint Bookrunner Dec 2015 Southern Gas Corridor USD 1bn 6.875% Senior Notes due 2026 Joint Lead Manager March 2016 Global Ports USD 350m 6.872% Senior Notes due 2022 Joint Lead Manager Apr 2016 Yapı Kredi USD 500m 8.5% Tier 2 Capital Notes due 2025 Joint Bookrunner Mar 2016 Vakif Bank EUR 500m 2.375% Mortgage Covered Bond Structuring Bank and Joint Bookrunner Apr 2016 MOL EUR 750m 2.625% Senior Notes due 2023 Joint Bookrunner Apr 2016 Gazprom EUR 1bn 4.625% Senior Notes due 2018 Joint Lead Manager/ Joint Bookrunner Oct 2015

19

Your UniCredit contacts

CEEMEA Debt Capital Markets Müge Eksi Managing Director Head of CEEMEA Debt Capital Markets

• Tel. +44 20 7826 1125

Mobile +44 741 870 0649 Muge.Eksi@unicredit.eu Imprint: UniCredit Bank AG Moor House, 120 London Wall London EC2Y 5ET United Kingdom CEE CIB Business Research and Communication Adel Ayari Head of CEE CIB Business Research and Communication

• Tel. +43 505 05-51728

Mobile +43 664 88341493 Adel.Ayari@unicredit.eu Imprint: UniCredit S.p.A. Zweigniederlassung Wien Julius Tandler Platz 3 1090 Vienna Austria

20

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