Emerging market debt rush set to run despite Ukraine U-turn

* Record first half year for emerging market debt sales

* Scramble to borrow after coronavirus crisis, oil rout

* Most high-yield borrowers are able to access market

* Those most at risk of default to seek alternatives

By Tom Arnold

LONDON, July 2 (Reuters) - A flourishing first half for emerging market debt issuance is expected to continue, with worries among some investors about a risk of oversupply eased by Ukraine's cancellation of a $1.75 billion Eurobond.

Higher-yield emerging market borrowers like Ukraine have been tempted back to the market by growing risk appetite after a glut of investment grade issues by Gulf governments and Israel in the immediate wake of the coronavirus crisis and oil price rout.

Ukraine's plan was promptly aborted at the request of investors, sources said, after central bank governor Yakiv Smoliy unexpectedly resigned, in a reminder of the risks inherent in some emerging markets.

But Ukraine's last-minute change is unlikely to deter appetite for other higher-yield issuers.

"For some borrowers, financing levels are now more attractive than pre-crisis. Our pipeline is similar to what we saw in June, so we do not anticipate a slowdown in July," said Stefan Weiler, head of Central and Eastern Europe, Middle East and Africa debt capital markets at JPMorgan.

Weiler said a mix of corporates, financial institutions and governments from most regions were preparing to access markets this month, with funding costs starting to become comparable to pre-crisis levels on a yield basis.

Belarus, Albania and Dubai-based ports operator DP World were among recent issuers, capping off a record first half, during which $110.5 billion was sold by sovereign issuers and $274.8 billion by corporates, Refinitiv data shows.

Although some borrowers, such as Saudi Arabia and Russian issuers, have even been able to achieve record low yields, some investors are worried about the risk of oversupply.

The latest bonds from Albania and Belarus have traded sideways since launch, while Egypt's recent issue has not performed particularly well, Nick Eisinger, principal, fixed income emerging markets at Vanguard, said.

"The market is still concerned about the fundamentals and the outlook for some of the riskier names ... if there's too much supply and that's not with a decent enough concession the market struggles a bit," Eisinger said.

The stronger performance was being sustained by relatively small amounts of inflows into emerging market debt compared to recent years, despite large amounts of liquidity issued by major central banks, he added.

Debt flows to emerging markets reached $23.5 billion in June, data from the Institute of International Finance shows, continuing a recovery from March lows.

ALTERNATIVE ROUTES

Sub-Saharan African states have so far been absent from the market, with participants saying governments may be weighing alternatives, such as official debt relief or assistance from the International Monetary Fund.

The Group of 20 major economies (G20) launched an initiative in April to suspend debt payments for the world's poorest nations to help them cope with the fallout from the pandemic.

Borrowers most at risk of default have also been absent.

"The market is distinguishing between distressed and other higher yield names," Steffen Reichold, portfolio manager at ‎Stone Harbor Investment Partners, said.

"A lot depends on what spread level issuers are willing to issue at. It does make sense for some weaker countries to borrow from the IMF now and come to the market later when pricing may have improved," Reichold added. (Editing by Alexander Smith)