Opportunities Still Exist in Cautious Market, Argue Corporate Bond Forum Speakers
ING played host to EMTA’s Second Annual Corporate Bond Forum in London, which was held on January 29, 2008. The event, part of EMTA’s efforts to highlight issues unique to the EM corporate bond markets, drew a standing-room only crowd of over 100 attendees.
Eric Ollum of ING polled speakers for their view on the direction of the EM corporate market in 2008. Renaissance Capital’s Richard Segal still saw a lot of value in the marketplace but warned that additional bad news could surface before spreads narrow in perhaps six months or so.
“We are having a lot harder time trying to convince crossovers into the [EM corporate] market,” acknowledged Victoria Miles of JPMorgan. A supply overhang is also deterring investors from jumping into the market, she reasoned. However, Miles noted that inflows to the asset class continue from core investors, who appear to be increasing their allocations to EM corporates to as much as 20% next year.
Eric Jayaweera of UBS gave a trader’s perspective, and voiced his observation that demand has dropped by about one-third compared to January 2007. Jayaweera specified that although demand has actually increased from Russian banks, and while retail private banks continue to buy paper, other buyers are less active, including EM dedicated funds, general credit hedge funds, high yield accounts and proprietary trading desks (which he stated had been “decimated” and have mostly disappeared from the EM corporate market save for a few new entrants).
BlueBay Asset Management’s Polina Kurdyavko spoke enthusiastically about the potential for the EM corporate market. “The good times are just about to begin; for the first-time credits are being differentiated based on fundamentals and this year we think we can make money on relative value opportunities,” she stated. She added that because many issues won’t be able to access the capital markets in 2008, those that do will have to offer investors attractive premiums.
Ollum asked Kurdyavko, following her advice on bond covenants last year, if she had seen a move to tighter covenants and greater investor scrutiny in recent months. “Covenants are like seatbelts,” she noted, “they work when an accident happens, not when the road is bumpy.” She suggested that tight covenants in some cases had improved the overall financial health of the issuer, but that investors also need to look at the seniority of debt, the reason the borrower is issuing debt, the size of the issue and quality of the accounts when they are deciding whether to buy a new issue.
Miles was requested to comment on potential performance by EM bank issues given the current market environment. Generally, Latin American banks are defensively positioned and she suggested Argentine and Brazilian banks as defensive plays. Concerns over the health of Kazakh banks are increasingly priced into the market, although she believed pain has yet to be fully transmitted through their financial accounts; however, she acknowledged that there should be a net paydown of debt in 2008, which may leave banks better positioned in terms of the medium-term outlook. Miles expressed concern at the level of borrowing that had been accumulated by Russian banks.