EMTA Corporate Bond Forum (London) - Jan. 24(2)

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

“Go Forward, Bravely” Say Speakers at EMTA London Corporate Bond Forum

Proceed with caution was the theme of EMTA’s Annual Corporate Bond Forum in London, although speakers agreed that economic improvements supported the asset class. The event was hosted by UBS on Wednesday, January 24, 2018, with additional support provided by Market Axess.

In a discussion led by UBS’s Marik Narain, speakers discussed the narrow spreads in the corporate bond market. Siddharth Dahiya (Aberdeen Asset Management) reasoned that, while “most of us here probably think spreads are too tight, they definitely should be tighter than they were 2 or 3 years ago.” Dahiya cited factors such as improved commodity pricing and macro structural reforms as justifying current spreads. Alan Siow of BlueBay Asset Management voiced a concurring view. “It’s hard to say that the lights are all green…go for it bravely, but carefully.”

Kay Hope (Bank of America Merrill Lynch) and Sarah Leshner Carvalho (Barclays) further highlighted the fact of commodity pricing supporting EM corporate assets. Hope stressed that, “more than just oil companies benefit from higher oil prices,” while Leshner Carvalho noted that oil price movements affected Latin corporates more than their EMEA counterparts. Leshner Carvalho praised Petrobras for “seeming to do everything right over the past 18 months…they don’t have the massive funding gap that they had years ago.” Finally, Hope advised that, “there is room for differentiation…Gazprom has its highest leverage in years, although it’s still lower than LatAm.”

Sell-Side panellists acknowledged that forecasts made at the 2017 event had proven too conservative. 2018 issuance estimates ranged from $365 to $400 billion, with the bulk of it from Asia, and negative EMEA supply. Dahiya opined that excess supply was not an issue for the market; “when the market can’t absorb paper, the market closes down and the big issuers use other sources of finance.” Siow observed that one of the tailwinds assisting EM corporate issuance was the fact that they were generally used for capex or liability management exercises, and usually not for mergers or share buy-backs, as in DM.

The panel concurred that the nascent EM local-currency corporate bond market would continue to develop, with increased domestic savings providing more local fund buying. Such a change would make EM corporates less vulnerable to UST and US$ moves.

Leshner Carvalho listed as risks to the asset class geopolitical concerns, such as the Mexican and Brazilian elections, as well as NAFTA negotiations. However, she believed that despite populist rhetoric—and headlines—MEXCAT’s new airport was likely to be too far in progress to be derailed. Pemex would not directly be affected by a cancellation of NAFTA, but AMLO’s calls for a public referendum on energy reform would not help the company. Dahiya acknowledged that he would opportunistically consider several Mexican issues should they become tangled up in a NAFTA-related sell-off.

Possible new US sanctions on Russia were also something that Hope was monitoring, and which remained opaque. She added that half of upcoming Russian maturities was from sanctioned firms, “so there is less and less sanctioned debt in the market.”

Predictions for total returns in EM corporates ranged from 3% to 5.5%, with UST forecasts ranging from 2.7% to 2.9%. Siow saw opportunities in each region; “there are a lot of things we would like to buy on dips.”