Corporate Bonds’ Anxious Mood Altering
As global fixed-income houses note another record annual pace of external corporate issuance at $250 billion through July, against the background of 20 percent yearly growth since 2008 to $1.5 trillion outstripping both the EMBI sovereign and US high-yield markets, CEMBI index creator JP Morgan in a research piece has tried to reassure investors about “overblown” fragility fears in light of ratings, country and industry composition. Unlike the IMF and BIS in prominent warnings, it rejects systemic risk in the asset class while acknowledging “weaker credit metrics” in recent years. Although expansion has been double the rate of output increase, the segment is still under 10 percent of GDP in Asia and Latin America which comprise two-thirds of the universe. Underlying drivers include the need to fund cross-border deals and to fill the gap left by the halving of syndicated loan activity to $50 billion/ quarter in 2011-12 with the European bank crisis. Financial institutions in particular which had relied on their interbank and trade finance lines moved to diversify, with the country focus from Brazil, China and Russia accounting for over 40 percent of activity. Brazil’s outstanding leads at $200 billion, and Russian volume tapered even before the post-Crimea sanctions period but remains ahead of Chinese followed regionally by Korean. Quasi-sovereigns including 100 percent government-owned firms are half the market mainly from the banking and energy sectors, according to the report. In Kazakhstan and the Gulf this category represents 80 percent of the total, and together the industries are 55 percent of the debt stock with infrastructure only around 1 percent despite headline attention. Among smaller groupings that have surged are India and Turkey financials, Venezuela oil, and Hong Kong real estate. One-third of proceeds have been used for refinancing and just below that amount for capital spending. Asian and Middle Eastern placements are taken up locally by a broad investor base, while Latin American ones go overwhelmingly to US and dedicated buyers. Only about $65 billion is benchmarked to the CEMBI but long-term funds now entering have not changed strategy or allocation with the general bond selloff in 2013 or recent geopolitical strains, JP Morgan argues.
Despite higher leverage ratios and likely backup in interest rates to the previous 6-7 percent range maturities for more vulnerable speculative issuers are only $20 billion annually in 2015-16. Average tenor is now 8.5 years, and the large country participants including Mexico face the same manageable $20 billion yearly maximum easily covered by foreign exchange reserves. Currencies could depreciate but even with the 20 percent decline against the dollar in 2013 defaults did not jump. The sovereign external position encourages ratings stability and outside the consumer and utility sectors companies generate hard currency earnings or hedge exposure. Russia is a special case under US and EU capital markets boycotts for state banks and oil producers, and while full foreign rollovers may not be viable flexibility and modest near-term repayments may offer a breather, the analysis comments.
