Corporate Bonds’ Evenly Dispersed Blessings
The CEMBI’s 2017 8% return was slightly lower than the previous year’s 10%, but gains were equally distributed between rating and regional segments, JP Morgan commented in its annual asset class roundup. High yield led results at 45% of issuance, and by industry commodities including hydrocarbon and mining names were the winners. The benchmark spread has dropped the past two years with low volatility reminiscent of the early 2000s period, when the margin was lower than the current 230 basis points over Treasuries. Duration has been steady at 4.5 years, and the CEMBI Broad traded inside the sovereign EMBIG Diversified in 2017 due to a combination of Asia high-grade credits in the former and distressed weighting Venezuela/PDVSA, continuing to miss payments, in the latter. High-yield in turn has been tighter than the US counterpart, likely because of the universe of well-supported quasi-sovereigns. By geography Latin America and Africa were the top performers (+12%), followed by Europe, Asia and the Middle East in declining order although their range was a narrow 5-7%. The external sovereign and local government JP Morgan indices had respective 9% and 15% gains but also fluctuated more widely. The biggest individual issue surge was from Petrobras (+17%) and other Brazilian banking and industrial components also shined. China listings like CNOOC, Bank of China and Evergrande were likewise major contributors, according to the research.
Speculative-grade default rates fell to a six-year low of 2%, with the number halved to sixteen from the preceding year, as “robust” refinancing conditions enabled weak story access. Latina offshore spilled over into 2018, as Noble and Agrokor hurt Asia and Europe, respectively. Venezuela state oil company PDVSA did not enter the total, even though derivatives body ISDA and ratings agencies declared default while the government intends an as yet undefined restructuring. Recovery values almost doubled to 50%, with the bottom levels in the consumer and financial sectors. Leverage was the same as in 2016 at 3 times, with Latin America the most indebted region. The rating upgrade to downgrade ratio was 0.8, with Argentina getting 15 promotions after S&P raised the sovereign to “B.” Turkish companies were slashed an equal number with Fitch’s BB+ cut, while China had the most downgrades at 55 versus 30 upgrades. The Middle East and Africa suffered with South Africa and Qatar actions, which may fade under the prospect of fresh ANC ruling party leadership and lifting of the GCC boycott this year. Primary activity was a record approaching $500 billion, 50% above 2016, with net financing “manageable” under $150 billion. Tenders and buybacks were a hefty $80 billion, and Asia was over half of volume at $300 billion with “sustained” local investor support, the survey notes. China was $200 billion, with Korea next at $25 billion and financials were half of regional supply. In Europe Russia marked its post-sanctions rebound with $20 billion, although new US Treasury Department guidance could again close the window. Regulation S SEC-registered private placements were 55% of the total, beating the previous year peak, and debuts were one-fifth of all transactions, another precedent in value terms although not in issuer number. Asia had 125 maiden offerings, with ASEAN active in particular under longstanding bond market promotion programs.
