Corporate Debt’s Maturity Wall Wobble
After a 35 percent dip in 2015 external corporate bond issuance is predicted to retreat further to the $200-225 billion range this year, with buybacks leaving net financing need negative, according to sell-side houses. JP Morgan’s CEMBI index is up over 5 percent, as the average spread over Treasuries steers toward 350 basis points from 400 basis points with current calm, aided by continued state support for quasi-sovereign default candidates like Brazil’s Petrobras. From 2017-20 the tranquility may not last with a spike to $200 billion in annual maturities, over one-third from speculative grade or unrated companies, and half by region in Asia. However the bank in recent research tries to offer reassurance that investors will not take their lumps with the lumpy profile. It points out that reduced capital spending has improved leverage ratios, and the liability management focus should extend over the medium term to slim the amount outstanding while overhanging country risks Brazil and Russia still refrain from participation. BIS figures through end-2015 reflect diminished cross-border loan exposure in the same vein with $3.5 trillion in claims, a 15 percent decline from the preceding year top. China and Europe accounted for $500 billion of the $700 billion drawdown, with Latin America off slightly and the Mideast/Africa the sole riser on Gulf oil exporter project and budget funding demand. The maturity hump as a portion of total bonds through end-decade at 55 percent is in line with historic trends, although 2017’s alone at over 10 percent is high, the analysis acknowledges. However the high-yield contingent is constant at around 35 percent, and they have been most affected by the current 3.5 percent asset class default rate. By country China and Korea have the highest obligations coming due at $65 billion combined, but local investor support can bridge the gap. Sanctioned Russian issuers owe $25 billion in 2017 but can rely on sovereign backing, and geopolitical and ruble pressures have also eased. The government just re-entered the external market to pave the way for corporates, but many global portfolio managers demurred because of the lingering boycott, which may not be lifted without a broad East Ukraine settlement. Turkey is a worry but repayments are not heavy until 2018, and in Brazil half of the universe is financials without rollover difficulties so far throughout the constitutional crisis and deep recession. Calls and tenders are a new sudden complication but positive for the asset class overall in terms of cash flow and future burdens, the study notes. Bank subordinated debt designed to comply with Basel capital guidelines has been routinely called at the first eligible date, although the practice could change with proposed updated rules.
Industry group EMTA reported that corporate trading was 15 percent of total Q1 volume of $1.2 trillion, up over 10 percent from the previous quarter. Sovereign bonds were 20 percent and 65 percent was local paper, reflecting continued strong domestic preference among the fifty firms surveyed. Mexican instruments were the most popular at almost one-fifth of turnover, followed by Indian and Brazilian ones with respective 15 percent and 10 percent shares. China and South Africa ranked behind them in standard activity, while Turkey joined Brazil in the CDS lead with their general walls of worry.
