(Bloomberg) — The influx of corporate debt from emerging markets is drying up as major central banks continue to raise borrowing costs and investors grow wary after a series of famous corporate bankruptcies. .
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Businesses from developing economies have sold just $60 billion in global bonds this year — down about 18 percent, or $13 billion, from the same period last year, according to data compiled by Bloomberg. synthetic. That’s the smallest amount to start any year since 2016, shortly after the Federal Reserve kicked off its last rate-raising cycle.
This time, the world’s most influential monetary authority is even more aggressive in its quest to tame inflation. That, coupled with Wall Street’s waning confidence in emerging markets in the wake of the corporate meltdown at India’s Adani Group and Brazil’s Americanas SA, has analysts flagging a further risk. limited access to capital markets for the second year in a row – and the trouble it could cause for highly indebted companies. .
“The market is not open to most of our issuers,” said Siby Thomas, portfolio manager specializing in emerging markets corporate debt at T. Rowe Price. “You’re seeing this ramifications in the market where companies that want to issue can’t issue because it’s too expensive, and higher rated companies that can issue don’t want to because they can’t wait. .”
Issuance from both emerging market and high-yield US firms spiked in the first years of the pandemic as policymakers reduced borrowing costs to support support their economy. But that trend ended when the Fed and other major central banks embarked on a battle against continued price pressures last year.
“Companies tend to actively manage their upcoming maturities a few years in advance and take advantage of low yields in 2020 and 2021,” said Sara Grut, an analyst at Goldman Sachs Group Inc. School is just the flip side of that.”
While junk-rated U.S. companies can maintain some access to the bond market, with total issuance up about 5 percent this year compared with the same period in 2022, companies rated Similar rankings from developing countries are not so fortunate.
That leaves some companies in a quandary. While investment-grade borrowers can often continue operating without the help of foreign bondholders, there are fewer options for junk-rated companies with high leverage. and generally have a riskier outlook.
According to Lisandro Miguens, head of debt capital markets for Latin America at JPMorgan Chase & Co, companies that need cash may have to turn to domestic debt markets, private placement or multilateral financing sources.
“Financial markets are highly volatile due to Fed rate uncertainty, and emerging companies are no exception,” he said. Companies “need to align their financial strategies with this reality and be prepared to act accordingly.”
Wall Street has begun to take a more cautious approach to emerging market assets as the early-year rally fades and the global economy sees a soft landing. Sentiment has also soured in developed markets after Silicon Valley Bank became the biggest U.S. lender to fail in more than a decade.
Emerging markets dollar bonds fell 2.2% in February, bringing year-to-date returns to just 0.6%, according to data compiled by Bloomberg. Meanwhile, the measure of US high-yield debt has grown by 2.2% this year.
According to Akbar Causer, a portfolio manager at Eaton Vance Management focused on emerging market debt, with attractive yields available in more mature markets, an incentive for investors to accept The higher the risk, the lower the risk.
“The standard for everything else is high,” he said, as U.S. Treasuries offer attractive yields.
And while the fall in wealth tied to Adani’s vast business empire following a report on short sellers and an accounting scandal at Brazilian retailer Americanas is no sign of the asset class. All in all, they’ve certainly raised eyebrows among some emerging-market corporate debt money managers. .
According to Bloomberg data, a whopping 77% of new corporate bond deals from developing countries this year came from investment-grade issuers. The data shows that companies from China are the most active in the global debt market, followed by companies in Saudi Arabia and South Korea.
From here, the question is when will emerging markets’ corporate debt reopen. Omotunde Lawal, a portfolio manager at Barings Ltd, said ending the Fed’s tightening efforts would make it easier to borrow. Of course, the timing is still uncertain.
In the meantime, only the best-prepared emerging issuers will be able to sell debt during the short market break, said Andres Copete, Latin America regional director for debt capital markets business at Deutsche Bank AG, said.
“We are not overly optimistic about the overall volume for the year,” he said. “It will be very thick, very uneven and very focused on specific windows for the rest of the year.”
What to see
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India’s inflation is expected to linger above target, boosting the likelihood of the central bank tightening further in April.
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Bloomberg Intelligence expects the People’s Bank of China to keep one-year rates steady in March, though it will likely opt for further easing throughout 2023.
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In Argentina, February inflation could eventually reach 100%, according to Bloomberg Intelligence.
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Sri Lanka’s gross domestic product reading could show a deeper year-on-year decline in the late 2022 period.
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Bank Indonesia is likely to leave its base rate unchanged, according to economists surveyed by Bloomberg.
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Policymakers in Russia are said to be keeping policy rates steady at 7.5%, although Bloomberg Intelligence said they could signal an intention to raise rates in April.
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Brazil will report employment data for January, which will be one of the first major data readings since the third inauguration of President Luiz Inacio Lula da Silva.
–With support from Esteban Duarte.
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