Local Corporate Bonds’ Index Indecency
After months of launch speculation Bank of America Merrill Lunch beat rivals to initiate a local corporate bond index limited to $250 billion in Euroclearable components, about one-twentieth the size of the aggregate Asia-heavy universe. A sub-index at half that amount tracks Islamic-style sukuk, and larger constituents also active in external markets include Mexico’s America Movil, South Africa’s Eskom and Malaysia’s Maybank. The sponsor estimates that dedicated asset class money is only $10 billion currently versus the $80 billion to domestic government debt, but notes a post-2008 tripling in volume mainly in the BRICS. Issuance in 2012, three quarters from Asia’s $2 trillion outstanding and China in particular, was $825 billion according to Dealogic, with Latin America and Europe at a combined $400 billion. China’s market is inaccessible outside the foreign investor quota scheme, and secondary trading is scant with the internal buyer base of long-term institutional investors. Custody, withholding tax and exchange controls are also obstacles, and bank and quasi-sovereign paper is most common with subordinated and convertible instruments featuring unlike in foreign taps. Korean blue-chips have completed cross-border placements in Malaysia and Thailand and swapped them into won. Elsewhere through Q3 Indian and Brazilian firms had raised $15 billion and Mexican and Russian ones $25 billion. Pension and insurance funds at home are the primary targets, with major developing economy holdings for the former at $2 trillion and $3.5 trillion for the latter, according to industry sources. Asian life insurers have $2.5 trillion on hand, while private pension takeovers in Hungary and Poland slashed allocation there. In the Czech Republic, Israel, South Africa and Turkey 10-20 percent of the bond portfolio is corporate. Latin America’s retirement vehicles in Chile, Brazil, Colombia, Peru and Mexico have $775 billion available as of end-2012, almost one-fifth of GDP, with half in fixed-income.
Defaults were prominent the past year, as the second-tier Tongyang chaebol in Korea was one of several country bankruptcies with a high retail investor ownership. The thirty biggest conglomerates with top-notch ratings command the space with about $40 billion in maturities due in 2103. In Europe S&P predicted additional junk issuer difficulties after ten episodes involving almost EUR 10 billion in non-payment through the first half concentrated in peripheral member names. In South Africa’s $50 billion market engineering firm First Tech defaulted on floating rate notes recently as weak reporting and covenants were revealed. In Brazil the new insolvency code, which in smaller cases has involved lengthy delays and complicated securities hierarchy claims will now be tested further by OGX’s record regional collapse. The government despite its status as a large creditor through the state development bank has indicated a rescue is out of the question unlike in 2009, when liquidity and working capital support was provided to exporters aided by an outside US Federal Reserve swap line as the panic index peaked.
