EMTA CORPORATE BOND FORUM
Wednesday, October 1, 2014
Sponsored by BNP Paribas
Marriott Marquis Hotel
1535 Broadway (at 45th Street)
New York City
Topics will include:
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Current Prospects for the EM Corporate Bond Market
David Spegel (BNP Paribas) – Moderator
Anne Milne (Bank of America Merrill Lynch)
Jamie Nicholson (Credit Suisse)
Jonathan Prin (JPMorgan Asset Management)
Katherine Renfrew (TIAA-CREF)
5:00 p.m.
Cocktail Reception
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$695.
Panelists Discuss Risks to EM Corporate Bond Market as Inflows Continue
Over 150 market participants attended EMTA’s Corporate Bond Forum in New York. BNP Paribas sponsored the event, which took place on Thursday, October 1, 2014. In opening remarks, EMTA noted that this event was being held shortly after its quarterly Volume Survey report had showed EM corporate bond trading surpassing EM sovereign trading for the first time, a significant milestone in the history of the EM marketplace.
EMTA Board Director David Spegel (BNP Paribas) moderated the discussion, and provided context for the discussion. Spegel observed that EM corporates had recently underperformed compared to their sovereign counterparts, dragged down by Russian corporate performance among other factors. On the other hand, EM corporate funds had showed inflows, compared to outflows to dedicated EM sovereign accounts, he commented.
Spegel asked his panelists for their thoughts on drivers of EM corporate performance in the near- and medium-terms. Jonathan Prin (JPMorgan Asset Management) underscored the importance of US rates to the EM corporate bond market, with improving US growth indicators potentially leading to rate hikes. Prin seconded the importance of asset class inflows, commenting that “there are mandates that are waiting to be put to work.”
TIAA-CREF’s Katherine Renfrew agreed that US rates were a primary driver, and mused that perhaps the market had become too complacent following Spring 2013’s “taper tantrum.” Renfrew continued to monitor geopolitical developments in Russia, Hong Kong, Brazil and the Middle East. However, despite such warnings, “I am actually constructive on the EM corporate market,” she admitted. Renfrew encouraged investors to look at local EM corporate bond markets. “Don’t avoid even looking at them because of poor liquidity,” she stated.
Jamie Nicholson (Credit Suisse) added currency depreciations and a “risk on, risk off” mentality as potential risks to EM corporates (while recognizing that some corporates would benefit from currency depreciations.) Outflows from PIMCO, following the departure of Bill Gross, could affect the market in the near-term, she cautioned.
Anne Milne of Bank of America Merrill Lynch reminded attendees that most recent EM corporate market sell-offs had been prompted by external factors, such as the EU financial crisis, the US debt ceiling/Standard & Poor’s downgrade, as well as the 2013 US rate fear sell-off. Additional negative developments in Ukraine/Russia could result in a further widening in Russian investment-grade names by perhaps 100 bps (and Russian IG paper was already more than 230 bps wider than other EM IG corporate bonds). Argentina or Venezuela could also disturb the market with bad news.
Finally, moderator Spegel added his own concerns about US rates, “in particular, the very front end of the curve, where the 2Y-5Y differential has yet to adjust to nearing tapering risks.” EM bank bonds were the most technically vulnerable, he argued, given that over 60% of outstanding issues mature in less than five years. “Spreads there are very tight; they don’t give you a lot of cushion to absorb US rate increase shock,” he stressed. Short-term, dollar appreciation would hurt the sugar, metal and energy sectors most in his view, as the underlying commodity prices were inversely related to dollar value, and thus would have a negative impact on revenues.
Credit fundamentals were also addressed at the Forum. Nicholson tried to resist generalizing, but with approximately 100 new deals per month, “the message is you can never be relaxed about credit fundamentals; and it is very difficult for the buy-side to really dig deep into the deals.” One major development in the EM corporate arena in recent years is the ability for companies to obtain long-term financing at low rates; such rates, combined with global liquidity, would help to prevent defaults. Milne observed that both EM and DM growth rates were expected to increase in 2015 (her firm maintained 4.9% and 2.4% forecasts, respectively), which would help many firms. She agreed that covering 2000 corporate issuers would remain a challenge to investors. Buy-sider Prin argued that many deals are pulled if the buy-side doesn’t like an issuer’s fundamental story, and affirmed that, despite understaffing, investors do pay attention to fundamental factors.
Speakers issued warnings on Basel III-related concerns. “Co-co” bonds should be a top focus for investors in 2015, Milne argued. Some co-co bonds were lower in corporate capital structure than equity, so “you run the risk of being not just converted into equity, but being wiped out altogether.” Retail investors attracted to their high yields might not understand their loss potential. “It will be a big topic, especially in the Asian market, and it is very important that investors are familiar with how they work,” she stressed. Prin was in total agreement; “it is hard for us to imagine that there is adequate demand for the amount of these bonds that are going to be issued in a short time-frame.” He suggested that smaller deals, packaged with Tier II bonds, was one possible way “to make this work.” Spegel observed that with one-quarter of EM debt issues by the bank sector, the adoption of Basel III criteria by EM banks will have a significant impact on the credit quality of investor portfolios.
The importance of the Brazilian presidential elections was also discussed. The protein sector would likely benefit from a weaker BRL and was less politically sensitive, according to Nicholson. Milne expressed her hope that any post-election policy reforms come quickly, because any threat to Brazil’s investment grade status (i.e., a move to BBB- or equivalent level combined with a continued negative outlook) would have more than a short-term effect. Prin saw Brazilian corporate pricing as having adjusted to an expectation of a re-election of President Rousseff after some speculation she could lose the election.
The event concluded with panelist recommendations. Nicholson favored Mexican corporates including the cement, infrastructure, drilling and auto part export sectors, as well as selected Central American credits. Some of the selections of Milne’s team included top tier Asian properties, Vimpelcom (seconded by Spegel), Cemex and YPF, while avoiding some utilities, sugar producers and iron ore producers. Prin favored investment instruments that were linked to US growth, as well as those which would benefit from Mexican energy-sector reforms.
Renfrew acknowledged she was “still not there on Chinese property; we have been traditionally underweight, and many of these companies still don’t meet our requirements.” She was sensitive to Indian and Indonesian valuations, despite a generally favorable stance. “We also like Turkish banks long-term, but we need to monitor what direction that country is going in.”