Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: ggersh who wrote (95733)	10/24/2012 6:14:51 AM
From: elmatador	Read Replies (1) \| Respond to of 218588

EM bonds: watch out for 2014 October 23, 2012 2:15 am by Pan Kwan Yuk Readers of beyondbrics know that emerging markets bonds are hot properties at the moment. Investors are flocking to them for their attractive yields and EM companies and governments, emboldened by the demand, have been happy to oblige, issuing a record $360bn in hard-currency bonds so far this year. But every bond issued adds to the money that must be repaid somewhere down the line. For David Spegel, head of emerging markets strategy at ING, 2014 could be a crunch year for EM bond refinancing – particularly of speculative-grade bonds. In a note on EM debt default, Spegel writes that EM bond defaults for the first nine months of the year have already hit $11.8bn – more than double the total of $4.3bn in the full year of 2011. While Spegel expects defaults to peak in the fourth quarter before rapidly falling back to $5.2bn in 2013, he cautioned there could be another surge in EM corporate defaults in 2014. The reason? Blame the US and Europe. From the note: [We] still expect that worse credit market conditions will be emerging in 2014 with high amortisations for speculative-grade EM bonds and US HY, the maturities of ECB LTRO operations and an increase of US mortgage resets… We also take stock of the very real threat that sovereign downgrades of Spain and possibly Italy to “junk” status will drag a number of corporates rated BBB in speculative grade territory. This would result in a shock to the expected global corporate HY refunding picture, seeing HY maturities potentially increase by $187bn or 83% YoY and adding $199bn to the already high 2014 HY schedule. In other words, a sharp rise in the number of speculative-grade US and EM corporate credits (rated BB+ or lower) falling due in 2014, combined with the very real possibility that Spain and Italy could be downgraded to junk status, would create a “crowding out” effect that could make it harder for EM companies to meet their refinancing needs – potentially sparking another wave of defaults. Spegel reckons there are over $100bn of Italian and Spanish corporate bonds rated BBB that are due next year. Assuming these are downgraded with their sovereigns, that would more than triple the amount of high-yield bonds maturing in H1 2013, from $45bn to $145bn. (See chart below) Of course, high refunding requirements need not result in higher defaults if investors retain their appetite for risk. But as beyondbrics has previously noted, much of the current frenzy over EM bonds has been concentrated in the investment-grade segment of the market. While blue chips like Petrobras or Bimbo have had little trouble finding buyers for their debt, demand for EM high-yield bonds has been decidedly more subdued. All this could change if investors’ hunger for yield gets worse, prompting them to put more money in riskier – but higher yielding assets like high yield bonds. For EM high-yield issuers, they can only hope it won’t be too little or too late.