Corporate Bond Forum (NYC) - September 10, 2013

EMTA CORPORATE BOND FORUM
Tuesday, September 10, 2013 

Sponsored by   

The Yale Club
50 Vanderbilt Avenue (at 44th Street)
New York City 

Topics will include:  

• What is the expected direction of EM credit trends and who are the most likely default and downgrade candidates going forward?  
• How might Fed tapering impact EM corporate profitability and repayment risks?  
• In what ways might a China hard landing and/or the government's attempt to reorient its economy impact EM corporates? Who stands to benefit most?  
• What are the potential risks and rewards for investing in corporates in the new market darling Mexico versus a less certain Brazil?  
• What has been the market experience on secondary market liquidity?  

3:45 p.m. Registration

4:00 p.m. Panel Discussion
Current Prospects for the EM Corporate Bond Market
David Spegel (ING Financial Markets) – Moderator
Anne Milne (Bank of America Merrill Lynch)
Sarah Leshner (HSBC Securities (USA) Inc.)
Carla Buffulin (OppenheimerFunds)
Katherine Renfrew (TIAA-CREF)

5:00 p.m.
Cocktail Reception  

Attendance is complimentary for EMTA Members. The registration fee for non-members is US$495. 

EM Corporate Panel Addresses Market Deepening and the Impact of Chinese Growth 

ING hosted EMTA’s Seventh Annual Corporate Bond Forum in New York City on Tuesday, September 10, 2013.  The event attracted 150 market participants and covered a variety of topics, including the medium-term risk outlook, market deepening and the impact of Chinese growth on EM corporates. 

David Spegel of ING reviewed recent EM corporate bond performance in light of tapering-related outflows.  He asked speakers to discuss their views on key drivers and risks for EM corporates.  Sarah Leshner (HSBC Securities (USA) Inc.) noted that generally market sentiment had been “tepid.”  Generally, she argued, investors were concerned by political and macroeconomic weakness in many EM countries and slowing domestic demand.  Leshner cited concerns ranging from lackluster Brazilian GDP to FX challenges in countries like India; however, “there are pockets and sectors in the EM corporate asset class that we are less cautious about,” she stated. 

TIAA-CREF’s Katherine Renfrew acknowledged that she, like most in the market, had been caught off guard by the rise in UST rates.  “However, this was not an EM-specific phenomenon, and those of us who have been in the market for a while have seen these cycles before,” she emphasized.  EM corporates had, in fact, weathered the storm comparatively well, and the large EM economies would remain investment grade credits.  “If you look ahead more than just the current quarter, you can still get good returns on EM corporates,” she concluded. 

Anne Milne (Bank of America Merrill Lynch) judged EM to be attractive on a valuation basis, with spread differentials over US high-grade at their highest levels since 2009… “and this is attracting attention from cross over investors.”  While corporate earnings had declined for the last seven quarters, “we saw the beginning of a turnaround in 2Q with fundamentals improving in all three regions, with the largest improvements in Asia and EMEA.”  Technically, EM outflows were driving performance; however, Milne highlighted that the 2013 AUM decreases were still relatively small compared to the large inflows into the asset class in 2012.  Spegel concurred that the recent sell-off had restored some of the market’s allure. 

On investor base deepening, Milne surmised that the “great rotation” into equities in 2013 was likely to pre-empt a continued deepening of the investor base that had occurred in recent years in the near-term.  However, she saw local pension funds in countries such as Chile, Peru and Colombia “running out of domestic opportunities,” and suggested they could provide support for external EM corporate debt.  Additionally, international pension funds are still under-invested in Emerging Markets, which should help the EM asset class. 

“We have seen more accounts move into EM corporates, but with low convictions, as a lot of this has been from investors whose teams are looking at EM corporates for the first time,” Leshner stated.  According to her, market turbulence scared many non-dedicated investors out of the marketplace, although she believed there was some evidence of some funds starting to return.  “An asset class with $1.5 trillion in debt outstanding is just not an asset class that will go away,” declared Milne, while Spegel agreed with speakers that demand for EM corporate debt would continue. 

EM corporate defaults would likely hover around 3.5%, estimated Milne, with a slight increase possible in 2014.  Commodity price movements and FX rates would prove more important factors than concerns over FOMC tapering, in her assessment.  In Spegel’s assessment, despite a small increase in EM defaults, the risk premium in EM corporates vis-a-vis US issuances was not justified on a fundamental basis.  Renfrew admitted to taking a “highly selective” view on Asian high-yield issuances, and suggested some EM corporates might have “benefited from the 1Q euphoria.”  Finally, Leshner highlighted the Middle East as a region with improving economic fundamentals, in spite of recent political instability.   

Panelists had a range of views regarding the Chinese economy although none predicted a “hard landing.”  Milne confirmed Bank of America’s 7.6% GDP and ‘soft landing’ forecast, while Renfrew stated “we consider risks to be more to the downside in China, despite the recent positive short-term economic data.  Slower growth is a necessary move to a more consumption-led driven model away from investment driven, and we view the recent large buildup in local corporate debt as a risk in China as the increased rate of issuance has been over a fairly short time period.”  Leshner noted that HSBC’s China economist hadn’t ruled out a possible upside surprise.  Spegel added that the move towards consumption-led growth was helping avoid the building of speculative bubbles. 

Contrasting Mexican to Brazilian credits, Milne saw value in both, while recognizing the greater choice among Brazilian corporates.  Leshner pointed out that Brazilian issues were generally more liquid.  Despite a smaller sample set vs. Mexico, Brazilian defaults “seemed to be more orderly and more quickly resolved,” she added.  Renfrew admitted to being “a tad concerned about the Brazilian quasi-sovereign space.” 

The discussion concluded with analyst recommendations.  Leshner reaffirmed her recommendations in Middle Eastern corporates.  “Despite political risk, short-term spread widening can be reversed, as the market has just seen in the Russian overture on Syria, and politically-driven sell-offs are not unusual in this area,” she underscored.  She also affirmed HSBC’s bullish view on Chinese property issues, and “over-punished” Brazilian drillers.  Milne favored Russian oils and top tier Russian banks, select high-yield Asian properties, and Latin infrastructure names such as Cemex. 

In addition to annual New York and London Corporate Bond Forums, EMTA also holds occasional events addressing specific EM corporate bond events.  Most recently, the trade association held a special seminar on challenges for the Mexican homebuilder sector in New York in May 2013.