Corporate Bonds’ Unsung Universal Strains
Corporate bond spreads widened against sovereigns, which dipped below 300 basis points over US Treasuries in May on resumed retail fund inflows, with the former benchmark at half the EMBI advance, despite $150 billion in oversubscribed gross issuance predominantly from top-rated names in Asia and Latin America. Under ratcheting sanctions Russian borrowers accounting for 12 percent of the CEMBI have been absent slashing Europe’s share to just 10 percent of the total. In Asia and the Middle East local banks and institutional investors have overwhelmingly absorbed the placements, and Latin American companies have tended to tap only sophisticated private buyers and switch to euro-denominated instruments. Prominent defaults this year include a small Ukrainian bank in trouble months before the Crimea escalation, and Mexico’s Oceanographia which pulled down Citigroup executives accused of collusion with it. Other big sponsors have spurred anxiety: Petrobras has become a presidential campaign headache with accusations of overpayment for foreign acquisitions; Chinese property developers have postponed operations on mixed real estate readings and leverage concerns; and Venezuela’s PDVSA has hit the market with a $5 billion program to mobilize scarce dollars after earlier renouncing 2014 entry. According to specialists the asset class has avoided selloffs due to limited liquidity and dealer inventory and the presence of cross-over bids from the saturated US high-grade and high-yield markets. Emerging economy constituents are a tiny portion of their benchmarks and ratings are relatively firm although downgrades now outstrip upgrades. Debuts that represented one-quarter of activity in 2013 have been rarer and financials have resumed popularity to meet Basel III capital standards, especially through subordinated structures with equity conversion features. Gross leverage has hit new peaks in Asia and Latin America, but 2014 rollover needs are manageable at $80 billion overall, particularly with syndicated loans also reviving post-Eurozone crisis as $75 billion was arranged in March according to industry figures. Unrated and speculative portions have come back in line with their 30 percent historic asset class average, but Europe’s regional one will be meager as the Russia-Ukraine and Turkey respective geopolitical and political sagas continue to unfold, analysts believe. A Kazakh bank in the category has already restructured, and Ukrainian private issuers could soon conduct distressed exchanges.
In Asia in contrast election outcomes in India and Indonesia should be positive for their state and family-owned credits while China preference is for giant government enterprises versus caution on second-tier banks and aggressive property firms. Dubai conventional and sukuk varieties continue to enjoy Gulf-wide support, while Venezuela’s oil company paper should be snapped up by both state and private buyers in desperate need of foreign exchange despite the recent re-launch of the SICAD trading scheme. President Maduro however has spurned the same common ground in reaching out to peaceful and violent opponents as he invited dialogue surrounded by arrest and military assault strains.
