Corporate Bonds’ Defiant Default Position
At the same a Brazilian meatpacker postponed a repayment following formal default by an electricity distributor and Chinese authorities came to the rescue of a squeezed domestic issuer as property companies again experienced a spike in external yield, a Vietnamese bank indicated global bond durability with a debut two years after state shipbuilder Vinashin reneged on a syndicated loan and the sovereign rating was downgraded. The majority government-held Vietinbank raised $250 million in 5-year paper at a 8.25 percent yield and competitors plan to follow with the scarcity of dollar funding onshore on continued high inflation and monetary policy swings. Loan-deposit ratios exceed 100 percent, and the central bank has resumed rate cutting to deliver 6 percent GDP growth. Inflation may halve to the 10 percent range and the trade deficit may shrink by the same magnitude to 5 percent of GDP. Equity investors have expressed enthusiasm for property rebound as the index remains a frontier standout after a terrible 2011. Officials predict only 3 percent currency depreciation and with aid, FDI and remittance inflows international reserves should improve 30 percent to almost $20 billion. The CEMBI spread has touched 400 basis points but primary activity has been untrammeled at a record $125 billion through May, overwhelmingly skewed toward Asia and Latin America and quasi-sovereign and top-notch borrowers. However with Kazakh bank BTA’s second and other Asian defaults such as Sino Forest the nominal total so far at over $6 billion surpasses all of 2011. The net ratings trend across industries and regions is toward downgrades, and big houses like ING have recently raised restructuring projections with $75 billion in bonds from 125 names trading at distressed 1000 point-plus levels. In a worst-case scenario the default rate could near 2009’s 14 percent, especially with extension of the 50 percent $100 billion cross-border loan drop recorded in the first quarter.
European institutions under debt and regulatory crunches have systematically retreated on a geographic and product line basis. New Asian and Latin American participants have moved into the void, but development banks are again preparing to offer emergency trade finance in response to small exporter requests. Leveraged loans have collapsed, and $175 billion in principal repayments come due by year-end. Spanish banks have reduced Americas exposure and sold off operations, with the private pension franchise now on the block. Chinese and Japanese groups have assumed export credit mandates but the former favor strategic state enterprises while the latter seek temporary margin pick-up over flat domestic portfolios. With the combination of pressures corporate bond secondary prices have flagged the past month and entering the summer lull advisers recommend that management consider selective buybacks to preserve parade formation.
