Corporate Debt’s Spin Cycle Splotch
As corporate bonds entered the last quarter with big CEMBI components Brazil and Russia demoted to high-yield and issuance off 30 percent, sell side houses have tried to pre-empt crisis talk by citing normal features of business cycle correction, including more cautious borrowing and operating approaches. Emerging market GDP growth will stay around 4 percent on average though next year, a modest margin over advanced economies, with China and India continuing to lift Asia in comparison with Europe and Latin America. Commodity prices will remain weak, and that category is one-quarter of the corporate external debt universe just behind financials at one-third. Large quasi-sovereign oil and gas names dominate the group, with Latin American exposure the greatest by region and state support is assumed should troubles persist in light of strategic and subsidy policy implementation values. Currency depreciation will also continue against the dollar into 2016 but has benefited commodity producers through lower local costs, and management in Brazil, Russia, Kazakhstan, South Africa, Colombia, Indonesia and elsewhere has accommodated this trend for several years. Asian and European units have held up better, and management globally has moved to cut costs and pare leverage in response, according to JP Morgan research.
Gross debt expansion has slowed to single digits, and 2015 issuance will be around $250 billion against the original $375 billion projection, with higher-rated credits half the sum. In recent months several firms have conducted liability management swaps and leverage has come down to under 2.5 times. Capex rather than refinancing is absorbing proceeds, and dividend and share repurchase programs have been slashed. The high-yield default rate is over 4 percent after Ukraine’s crash, and one-third have involved distressed exchanges. Chinese property which had drawn warnings has turned to the onshore market in the last quarter with official encouragement, and maturities for the overall class were only $20 billion this year. Low-rated bonds below BB have been shunned with that threshold accounting for half the segment’s activity. “Fallen angels” from investment grade like Petrobras and sanctioned Russian companies have worsened financial ratios, but government facilities are available as backstops, the analysis suggests. In Q3 $40 billion of Russian debt matured and 40 percent of that amount was likely in the form of intragroup loans, according to the central bank. In the next twelve months $90 billion is due against reported reserves of $370 billion and no ruble devaluation expectation, it adds.
Petrobras shelved a planned domestic bond placement as lawmakers considered a formal impeachment proceeding against President Dilma Rousseff for fiscal account reporting violations, although she still has not been linked to the Car Wash bribery investigation. However her predecessor and mentor Lula is firmly in judicial sights for alleged influence peddling on behalf of construction giant Odebrecht, and may try to move Workers Party loyalists to his defense by attacking pension reform and other measures already dividing the ruling party coalition. In China too S&P ratings recently noted that the “invincibility perception” of state-owned enterprises may be banished under a looming squeeze as it surveyed the top 200 companies by revenue. Leverage risk is up and recovery is not “on the horizon” as construction, transport and mining borrower prospects are dim under likely short-term scenarios.
