The appetite for emerging market securities has risen sharply this year, based on an intensified search for yield among investors and a concomitant decline in risk aversion, Standard & Poor’s Ratings Services claims.

Meanwhile, liquidity conditions in global capital markets have remained benign, with most major central banks maintaining an accommodative stance. Factors such as low interest rates, improving credit quality, and rising investor demand have prompted a healthy pipeline of new bond issues from the emerging markets, even though volumes are still well below levels seen prior to the Asian financial crisis.

Improving credit quality has also impacted emerging market issuance positively; downgrades accounted for 54% of all emerging market rating actions in the second quarter, the lowest share since the first quarter of 2000. “Receptive global demand has also led to an increase in the share of cross-border issuance by emerging-market issuers in the year to date,” Diane Vazza, head of Standard & Poor’s Global Fixed Income Research group, says. “Higher-rated issuers from the emerging markets-especially in the Asia-Pacific region-are likely taking advantage of more attractive margins in the cross-border market in lieu of costlier funding alternatives, such as syndicated loans or domestic bonds.”

New bond issues posted a strong upturn in the year to date, recording an increase of 18.9%. Emerging market entities raised US$61.3bn in the period ending August 6 compared with US$51.5bn in January-August of the previous year and US$78.4bn in full year 2002.

July saw especially heavy volume of US$11.7bn, the highest volume grossed in a single month since May 2002. The biggest gains by region were seen in the Commonwealth of Independent States (CIS) region, where volumes nearly tripled, albeit from low levels. The Asia-Pacific region traditionally the largest borrower by volume saw gains of 8.5%, whereas Latin America expanded 50.5%.

Meanwhile, issuers based in Eastern Europe and the Middle East failed to participate in the upside recorded year to date. Among the top borrowers by country so far this year have been Taiwan (US$8.9bn), Mexico (US$7.8bn), Hong Kong (US$6.4bn), and South Korea (US$5.8bn). All sectors, barring financial institutions, saw increases in volume on a year-over-year basis in the period to date. The telecommunications sector saw a noteworthy increase to US$9.1bn in the year ending August 6, nearly twice the level of the volume seen in the corresponding period a year earlier.

Some large issues from Hong Kong-based conglomerate Hutchison Whampoa Ltd totalling US$3.6bn accounted for a significant portion of the increase, coupled with some sizeable issues from Russian and Brazilian telecommunication companies. Banking sector volume advanced 5.6% year over year to US$14.6bn. Meanwhile, bond issues from the smaller utility sector gained 26.4% year over year to US$4.2bn, prompted by increased borrowing from issuers based in Latin America and the Asia-Pacific regions.

The broadly defined industrial category gained 21.4% year over year, recording US$25.6bn in the year to date. The most prominent borrowers within the industrial sector this year were integrated oil and gas, high technology, consumer products, and transportation. Gains were seen most visibly in the high technology, and transportation sub-sectors, as well as in the smaller forest products and building materials and retail/restaurant sub-sectors. Issuers from the integrated oil and gas sector featured prominently on the list of top emerging market borrowers this year by volume. Of the nine issuers that borrowed more than US$500mn, five issuers belonged to this sector.

“The increased borrowing by entities in this sector likely reflects increased investment spending in anticipation of improving global economic prospects, receding fears of the impact of larger oil supplies from Iraq, and relatively tight inventory levels in the US,” Vazza said.

The Mexican state-owned oil and gas company Petroleos Mexicanos (Pemex) had the largest issue on record, valued at US$2.5bn. Russia-based OAO Gazprom followed in second place, with new issues totalling US$1.8bn. Investment grade-rated entities continued to have an easier time raising funds in the bond market, even though the recent pickup in investor interest has led to a shrinking gap between these two categories relative to 2001 levels. Of the total emerging-market issues with ratings, 76% were investment grade (‘BBB-‘ and above) and the remainder speculative grade (‘BB+’ and below).

At the same time, the biggest year-over-year increase in issuance was in the ‘A’ rating category (including the ‘A+’, ‘A’, and ‘A-‘ rating designations) even though the median rating among emerging markets remained even with a year ago in the ‘BBB’ rating category. The increased appetite for risk among global investors has set the stage for increased cross-border issuance. In the year to date, the proportion of cross-border issues relative to total issuance by all emerging market-based issuers rose to 67%, higher than the 52% in the comparable period a year earlier as well as the shares recorded in the two prior years. The increase in cross-border borrowings was especially prominent in Latin America , which showed an increase to 67% for the share of cross-border issues to total compared with 41% in the same period a year ago.

The Asia-Pacific region also demonstrated an increase, recording shares of 61% and 49%, respectively. The US dollar remained the currency of choice among emerging market issuers, even though the number of transactions denominated in euros showed a bigger increase. Slightly more than half of all transactions (51%) were dollar-based transactions.

The volume of deals that were dollar-based totalled US$31.1bn, a 34% increase compared with the same period a year ago. Euro-based deals expanded 230% year over year, but still only accounted for US$6.8bn in volume in the year to date.

“Looking ahead, emerging-market issuers will continue to take advantage of an attractive funding environment, characterized by relatively low interest rates and investor demand,” Vazza concludes. “The decelerating upward momentum reflected in commodity prices-whose trend is generally positively correlated with emerging-market issuance-suggests that gains may be more modest in the remainder in the year. It also suggests that although issuance conditions will remain relatively attractive, the chances of matching the mid-1990s highs are remote.”

To obtain a copy of the full report from S&P, contact the media hotline on (+44) (0)20 7826 3504 or email .