Corporate Debt’s Index Industry Inroads
Bank of America/Merrill Lynch, after a record performance and volume year for emerging corporate external debt, promoted a rival benchmark to JP Morgan’s veteran CEMBI, with greater coverage of almost 50 countries and tabulation of both euro and dollar-denominated issues. The push came as previously shunned Central Europe, which had led the field pre-crisis, was welcomed back to the fold, with the BoA regular global investment survey registering a pronounced Russia overweight versus other destinations. The routinely followed Cembi’s spread meanwhile dipped below 250 basis points in early February despite lower publically-tracked fund flows, Mideast and inflation worries, and Treasury yield reversion on portfolio share preference, lackluster budget deficit reduction plans, and the scheduled end of the Federal Reserve’s QE II buying. The corporate composite return has in turn crept toward 6 percent as almost $40 billion was raised in the initial weeks of 2011, with full-year forecasts ranging from $150-175 billion. Latin America has been fastest out the block with half that amount, and quasi-sovereigns have prevailed overall, with the Brazilian and Venezuelan state oil companies securing almost $10 billion. The MENA region had resurfaced with Dubai restructurings in course before the Egypt turmoil, which hit prime names like Orascom and added a geopolitical premium. Developed European banks with local networks also sold off, but sovereign spillover from the periphery after the Greece and Ireland rescues was cushioned by supposed strides toward a “comprehensive solution” to be finalized at an end-March EU summit. In Asia, where high-yielders had joined top-grade issuers, anti-inflation interest rate hikes along with targeted real estate cooling measures may combine to brake activity in many industries outside commodities which continue to enjoy a boom. Inadequate disclosure among newer placements again was highlighted by accounting misrepresentations at China Forestry, against the background of a stepped up probe by US regulators into so-called reverse mergers where attorneys and bankers obtain NASDAQ and NYSE listings.
To divert attention from these concerns participants have lauded the onset of the RMB “Dim Sum” bond market in Hong Kong where both Chinese and foreign sponsors including Caterpillar and McDonalds have featured. Bank deposits could more than triple this year to approach RMB 1 trillion supporting expanded flotation scope. Despite administrative and practical obstacles, investors are drawn by likely currency appreciation while firms can get cheaper than dollar funding. Synthetic products have been created to hedge and gain exposure beyond existing alternatives in the hope that the dish sampling soon becomes standard meal fare.
