EMTA Corporate Bond Forum in Boston - Nov. 8

4:00 p.m. Panel Discussion
Opportunities and Challenges in EM Corporate Bonds
Anne Milne (Bank of America Merrill Lynch) – Moderator
Mustafa Ulukan (GMO)
Natalia Corfield (J.P. Morgan Chase)
Elisabeth Colleran (Loomis Sayles)
Paolo Valle (Manulife Asset Management) 

5:00 p.m. Cocktail Reception 

Additional Support Provided by J.P. Morgan.  

We regret that this event is not open to the media.

Registration fee for EMTA Members: US$75 / US$695 for Non-members.  

 Opinions Diverge on MEXCAT, Argentina at EMTA Corporate Panel in Boston

Speakers at EMTA’s Annual Corporate Bond Forum in Boston agreed that US rate hikes and US-China tensions would largely determine marketplace direction for the near future, while expressing diverging likely outcomes on the MEXCAT bond issue and the Argentine economic outlook. The event took place on Thursday, November 8, 2018 and was hosted by Bank of America Merrill Lynch. MarketAxess and JPMorgan added support to the event.

Moderator Anne Milne (Bank of America Merrill Lynch) characterized 2018 as a turbulent year for EM corporates, with net new issuance negative for the LatAm and CEMEA regions. With the long-term picture hard to discern, she asked Forum panelists to define what they saw as the most important short-term market drivers.

Paolo Valle (Manulife Asset Management) stated that he would be focusing on China, US rates and unresolved idiosyncratic issues such as Turkey. “If the Fed accelerates hiking because of inflation, that could be negative for the asset class,” he commented, adding that his base case was “max, 2-3 more hikes.”

Elisabeth Colleran (Loomis Sayles) agreed that US hikes and China would be top market drivers. “Any resolution—even symbolic—of the US-China trade wars would be nice for the asset class,” she stated. Colleran also stressed the EM-DM growth differential would remain important, with EM country fundamentals “strong and likely to continue.”

JPMorgan’s Natalia Corfield highlighted the relative outperformance of LatAm corporates (although still negative) vs. overall EM corporates , led by positive Brazilian performance. Brazil, and the actions by President-elect Bolsonaro, would be a main driver for LatAm corporates in her view. Also likely to play a major role was the release of the Mexican budget, “which will show who [President-elect] AMLO really is.” Concurring that US rates would be a main driver for EM corporates generally, she noted her firm’s forecast of 5 additional hikes until the end of 2019.

Turning to elections, Milne noted that, while the Brazilian election outcome appeared to provide clarity of future direction, investor anxiety about a “government by referendum” in Mexico had risen following the decision to cancel construction of the new Mexico City airport. GMO’s Mustafa Ulukan envisioned three possible scenarios for MEXCAT bonds: (1) the bonds are serviced and the airport is built; (2) the bonds are restructured and (3) “they kick the can down the road,” with the airport not completed. Acknowledging that he was in the pessimistic camp, he announced that, “to us it seems clear there will be a restructuring.” He expressed surprise at MEXCAT bonds trading tight to Pemex; “for all its faults, Pemex is a profitable company, and you know where its next cash is coming from.”

Corfield adopted a more optimistic view. “The most rational outcome would be a negotiated resolution between the government and bondholders; the government doesn’t want a default,” she commented. Corfield reasoned that bondholders could be repaid by airline tariffs, and a friendly negotiation could result in bondholder access to an additional construction trust that is not currently available to them. She concurred, however, that current yields were overly optimistic. “To me, 6 or 7% is not enough…there is always room for drama if the government is not rational,” she concluded.
Volatility in other markets was also discussed. Colleran termed a recent meeting with an Argentina official as “positive.” In her view, the notebook scandal appears to have fallen off the radar of investors, and “we would take a hard look at new offers [from Argentina corporates].”

Even more enthusiastic was Valle, who referred to Argentina as “one of the best stories out there…and a safe bet for the next few months.” The notebook scandal was focused on the previous government, not the current administration, and the adjustment mandated in the IMF program “could create a virtuous circle.” Valle recognized the risks of investing in Argentina, but judged yields as appropriate. In addition, he specified that it was unlikely that any Provinces would be allowed to fail “in the next three to six months.”

Corfield underscored that both the notebook scandal and the anti-corruption framework in Argentina were quite new. Agreeing that Argentina could be a good short-term trade, she warned of potential headline risk as the elections draw closer. She also noted that the country’s current IMF program does not cover 2020.

Ulukan saw signs of stabilization in Turkey, with both the current account and politics “moving in the right direction.” Turkish officials appeared to have “bought themselves some time,” although Ulukan expressed reluctance to quantify how much. He stressed that bank debt rollovers continued to depend on market confidence, with only half of their $100 billion in refinancing needs over the next 12 months covered by “friendly sources” such as foreign bank partners.

Panelists were generally positive on Brazil’s outlook, while agreeing that pension reform passage would remain a key factor. “Everyone knows it needs to be done, but there is always a price to it,” stated Valle. Corfield noted that the first efforts to reform social security had occurred 20 years ago. In her analysis, Bolsonaro would need the support of 80-85% of the non-leftist parties, assuming the Left voted against the reform, “and that won’t be easy.”

On defaults, Corfield offered a 3.4% projection for 2019, an increase from 2018, with each case idiosyncratic and no major sectoral nor country-wide issue. Colleran opined that Chinese property companies might be less risky than in the past; “the sector looks like a tool in the tool box, as policy restrictions on Chinese property companies could be relaxed in light of the trade war.”