At a time when developing market debt is not the most favored asset class, debut issuer Azerbaijan’s recent E1.25 billion, 10-year Eurobond did remarkably well – and not just because the largest nation in the Caucusus region has oil.
According to Doug Coté, chief market strategist for ING U.S. Investment Management, the success of the Azerbaijani sovereign bond is largely a function of investors’ desire for investment opportunities that provide diversification within the broader developing markets asset class.
“There is a difference between the performance of frontier markets and emerging markets and as an investor, you want to put frontier markets in your portfolio now and wait for three to five years because longer-term, frontier markets are going to continue doing better than emerging markets,” he said. “Frontier markets have lower debt -to-GDP ratios than emerging markets, they have a younger workforce, and they are usually commodity centric. Azerbaijan, which has oil and gas, fits all those frontier market themes, so it’s good for investors to have it in their portfolios.”
“What you can say about Azerbaijan and other small issuers is that they offer a way to diversify within an asset class that is actually pretty highly concentrated,” agreed Clem Miller, investment strategist for Wilmington Trust Advisors. “There are a few countries that dominate the indices for emerging markets sovereign debt – Russia, Turkey, Indonesia, Mexico and Brazil – so there’s a premium for being able to diversify to other countries, and the diversification desire did, in this case, outweigh the broader issues affecting emerging market bonds.”
Azerbaijan was also able to successfully place its bond at a time when tensions in the broader Central and Eastern European region are high as a result of Russia’s involvement in Crimea. But that issue isn’t likely to affect the nation at all, according to Daniel Broby, former CIO for London-based boutique investment firm Silk Invest and an expert on frontier markets. Although Azerbaijan, like Ukraine, is a member of the Commonwealth of Independent States (CIS), “there is little love lost between Azerbaijan and Russia, the latter having destroyed much of Azeri culture,” Broby said. “Unlike in Ukraine, few in Baku [the Azeri capital] are yearning for Russian assistance.”
However, Azerbaijan is susceptible to tensions on the border it shares with long-time rival Armenia, since the two countries have been in a fiery conflict over the region of Nargorno-Karabakh.
Armenia, which is a poorer nation and far more indebted than Azerbaijan, issued its first Eurobond last year. Dubbed the “Kardashian Bond,” proceeds went to repay a bilateral loan extended by Russia during the financial crisis. Armenia has also reportedly lauded Russia for its involvement in Crimea.