EMTA Corporate Bond Forum (London) - Jan. 26

Attendance is complimentary for EMTA Members / US$695 for non-members.

Due to space limitations, this event is not open to members of the press. 

This event is now sold out. We hope to see you at our other events in London on January 29 and February 16.

London EMTA Corporate Bond Speakers Debate Causes of 1Q EM Malaise

For the tenth consecutive year, David Spegel (ICBC Standard Bank) led a panel discussion at EMTA’s Corporate Bond Forum in London. The event sold out quickly with over 100 EMTA members in attendance on Tuesday, January 26, 2016 and was hosted by ICBC Standard Bank.

Reviewing his notes from the 2015 event, Spegel noted that, “some risks from last year remain on the table—sanctions remain in place for Russia, there is continued drama in Brazil—and yet PDVSA is still making debt payments.” The long-awaited US rate hike had finally occurred, he noted, while he pondered whether the 2017 panel would be discussing QE4 if investors remained discouraged by US growth prospects. On the positive side, Spegel admitted his surprise that Russian corporate defaults had been limited, despite the one-two punch of sanctions and low oil prices.

Spegel discussed new risks to the asset class, including the threat of capitulation, and asked panellists to describe their greatest concerns. Kay Hope (Bank of America Merrill Lynch) observed that corporate bond analysts “have all become oil experts over the last 18 months,” and that oil remained a key issue for EM corporates. While her firm did not predict a hard landing in China, its growth forecast remained at 6.6%, well below recent years. Hope pointed out that Bank of America’s forecast of 3 additional US rate hikes was on the hawkish end of Street views, suggesting that concern over US growth remained an investor focus.

In Hope’s view, sanctions may have ironically aided Russian corporates, forcing the build-up of cash positions before the effects of the oil price collapse became more widely felt. Her base case remained that sanctions would remain in place, while noting increased diplomatic chatter of removing sanctions. Finally, Hope underscored that reforms in Russia tended to happen when oil prices were low.

“There are plenty of reasons for concerns over China,” added JPMorgan’s Victoria Miles, who described herself as a China bear. “We worry now about how long the rebalancing in China will take, given the extent of the corporate debt overhang,” she stated, while stressing that, “the fallout from a China-driven slowdown might be felt more strongly in many EM countries than in China itself.” Miles argued that macro-selection would remain important in 2016 in corporate selection; “for example, if you were overweight Russia and underweight Brazil last year, you probably did well, no matter what.” Miles voiced concern that EM corporates could generally “languish a bit” in 2016.

Siddharth Dahiya (Aberdeen Asset Management) agreed that China, the global commodity slowdown and Fed rate hike prospects remained the most important market risks. Dahiya commented that market technicals could be worse, and attributed much of the selling to retail panicking rather than a massive institutional retreat. He added that “there is very little involvement from cross-overs at the moment.”

AB’s Okan Akin also struck a somewhat optimistic tone and underscored that EM corporates continued to offer opportunities for those who did their homework. “If you can avoid defaulting names, you can get some decent yields...but you have to make the right calls on places such as Russia and Ukraine.” Akin advised attendees to focus on the relationship between US high yield and EM corporates.

The effects of the commodity shock were further examined. Akin lamented that, “on a recent trip to the Middle East, I came away with the impression that the strategy in many cases was to hope.” Middle East sovereigns would face difficulties in raising taxes or cutting spending, and while they had built up large reserves, he warned of future problems. Akin specified, however, that a “major crisis” was not likely in the next 18 months. He recommended close monitoring, as some issuers could become increasingly desperate for financing. “They will
have to pay up to get deals done, and there will be a lot less local demand.” Both external (Yemen, Saudi-Iran) and domestic (unrest in the case of subsidy reduction) political risks existed, he highlighted.

Hope expressed her view that, in general, Asian corporates had not repriced, and ventured that this could be attributed to a strong local bid. She argued that EM corporate performance “hadn’t been too bad compared to other debt classes.” She urged caution on Latin credits, and noted that questions remain on which quasi-sovereigns would be supported by their governments, including Petrobras.

“The case can be made that a lot of forced selling has already occurred,” Miles said. She pointed out that Latin credits had much more institutional support than other regions, where locals owned much of the debt. Following up on Akin’s Middle East concerns, Miles singled out the UAE’s high level of debt/GDP.

Spegel observed that excess oil proceeds tended to find their way into the financial markets, and warned that if oil stayed at low levels, another hundred billion dollars in sovereign wealth funds could exit the financial markets this year. Even at consensus forecasts of $45 per barrel, a withdrawal of $150 billion from financial markets, generally, was likely.

Speaker predictions of default rates varied (and methodology differed), but remained in lower single digits. “The market is now getting conditioned, and more distressed exchanges are happening,” stated Miles, who noted possible moral hazard issues. Pre-emptive bondholder committees had been formed in some cases, and deals have involved “decent recovery rates; they have been done quickly so everyone gets to move on,” she affirmed. Miles expected that Russian corporates could weather the storm in 2016, although a “big hump of maturities in 2017” was worth monitoring (although, she added, there appeared to be market consensus that Moscow would support larger Russian companies).

Akin argued that pricing for Latin American corporates already accounted for default risk. He expected that corporate defaults would peak in 2016 and subsequently stabilize. He criticized the overall “lax” bond covenants in EM high yield issues; “these will hurt investors in recoveries.”

Dahiya assumed low recovery rates in any potential Indonesian corporate default, and stated that Chinese issues hadn’t really been tested yet (“my own personal view is binary....one would either get bailed out with a high recovery, or one would get a very low recovery”). Hope noted that her firm’s default forecast for EM corporates was lower than its estimate for the US high-yield market. Half of 2016’s EM corporate defaults would be in Latin America, with the remainder evenly divided between Asia and EMEA, in her view. Moderator Spegel noted that energy and commodity issues would likely account for 70% of defaults.

Panelists concurred that issuance would remain well below 2013-14 peaks, with Spegel noting the dearth of new issues in January. “It probably won’t be until February or March until issuers capitulate; perhaps Middle East issuers will come first, because they have no funding alternatives,” stated Miles. Akin believed market expectations of Chinese corporate Eurobond supply were overdone, as issuers in the People’s Republic tapped the domestic markets instead.

The panel concluded with recommendations. Hope championed mid-maturity Russian oil and gas bonds (2020-23 maturities), citing an expectation of oil prices recovering in the 2H. Miles noted that JPMorgan’s house view was that, despite low prices, it was still too early to buy Brazilian corporates. Dahiya’s favorites included telecommunications companies and selected Latin American utilities, and Akin recommended Brazilian exporters that could benefit from BRL weakness. Finally, moderator Spegel voiced concern that commodity weakness could spill over into EM banking sectors.