CORPORATE BOND FORUM - January 29, 2009
EMTA Corporate Bond Forum: Not All Doom and Gloom
EMTA’s Corporate Bond Forum drew a standing-room only crowd on January 29, 2009. ING Bank NV hosted the event in London, which included a panel discussion and cocktail reception. While speakers acknowledged the current difficulties in the market—and expected the negative climate to persist for the near future—they also discussed lessons learned from the crisis and suggested profits can still be made in the sector.
Moderator Eric Ollom (ING Financial Markets) opened the Forum by polling panelists for their corporate default rate expectations in 2009. Victoria Miles of JPMorgan ventured that the overall default rate was likely to be 1 1/2 to 2 1/2% while acknowledging that this was skewed on the low side due to the predominance of quasi-sovereign paper. Miles broke down default rates by region, estimating that Latin corporate defaults could be between 5 and 10% compared with rates of 2½% and 3% in CEMEA. “In terms of recoveries, we are seeing some encouraging signs,” she added, noting a general “willingness to pay” in Latin America, or cases such as Vitro, where the issuer is proactively reaching out to creditors.
Blue Bay Asset Management’s Polina Kurdyavko observed that current spreads indicate market expectations of an 8% default rate. She continued that in calculating recovery potential for EM corporates, one must consider transparency, local legal frameworks and the difficulty of forming creditor committees.
Investors have learned from the crisis that they need to pay attention to both fundamentals and technical factors, while also doing their homework on each country and specific instrument, Kurdyavko stressed. Another lesson gleaned was the speed at which repricing can occur. Eric Jayaweera of UBS, who contributed a trader’s point of view to the discussion, commented that investors now also need to factor in counterparty risk and pay attention to funding gaps. Max Wolman (Aberdeen Asset Management) stressed the need to take a macro-based approach in investment selection, before analyzing bond covenants and cash flow.
Liquidity will continue to be an issue with many firms dramatically cutting their proprietary trading activity, Jayaweera pointed out. “But it is not all doom and gloom…although there is not going to be any new supply, we do see some new clients coming in,” he noted, specifying that Russian banks have become increasingly active in the market. Wolman called attention to anecdotal evidence of large amounts of cash on the sidelines, with real money accounts and pension funds being possible sources of new inflows. Kurdyavko believed that dedicated funds will not run away from EM corporates, though cross-over investors would show less interest. She and Jayaweera agreed that equity funds would be new buyers of EM corporates.
Also covered by the panel were the 2009 issuance prospects. Miles forecast that issuance would drop to $35-$40 billion versus $50 billion in 2008 (most of which occurred in the first half) and $150 billion in 2007. Wolman predicted that there would be some issuance in Q2 and Q3, albeit most would be the result of reverse inquiries. Issues will be shorter-term, though, with 3-year deals rather than 10-year issues.
Ollom concluded the discussion by asking for speaker recommendations. Jayaweera spoke positively on Tengizchevroil (because of its low production costs) and Privat Bank (“you are currently compensated for default risk and they are very aggressive about collecting on non-performing loans.”) He also recommended selling short-dated protection in “high quality” firms such as Gazprom. Jayaweera joined other panelists in avoiding the Russian local corporate bond market.
ISA and GVT in Brazil, and P.T. Paiton were Miles’ picks. She would not recommend Brazilian steel producers (on a valuation basis) and Russian corporates generally (because of the potential downgrade of the sovereign from investment grade and any resulting forced selling).
Kurdyavko liked defensive plays such as Latin utilities (seconding a buy on Endesa Brasil), while remaining concerned about the prospects for the real estate sector in China and Mexico. Kurdyavko also considered Tengizchevroil and Qatar’s Ras Laffon to be among the most undervalued credits.
Wolman favored Vimpelcom for its cash flows. He also discussed the potential for Nigerian banks while panning Kazakh banks such as BTAS. Ollom contributed his own investment selections as well, recommending the Brazilian beef sector (especially Bertin), Cemex (“there is no chance of a default”) and other “multinational blue-chip names that will benefit from the economic stimulus packages.” His pans included Gruma, which he expected to avoid defaulting but which he described as “over-priced for a B credit.”
EMTA began its Corporate Bond Forum series in 2007 in order to provide a venue for the general discussion of corporate bond issues. In addition to its annual Corporate Bond Forums in London and New York (which will be held later this year), EMTA has also held seminars on the legal and practical considerations concerning corporate bond covenants and recently initiated a new series of corporate credit-specific investor discussions.