EM corporate debt flashes a risky signal as costs surge

Debt markets are signalling a widening gap between emerging market (EM) corporate borrowers and their sovereign peers, amid mounting concerns over the ability of companies to refinance at higher rates.

While risk premiums on corporate and sovereign EM debt were similar at the start of 2022, investors are now demanding 72 basis points more from corporate issuers, according to Bloomberg indexes.

The cost of raising new debt is prohibitive for many firms, effectively shutting them out of the market. Those that have managed to place bonds face sky-high costs. Emergingmarket borrowers are suffering not only from tightening monetary policy but also increased foreign exchange volatility, often making hard-currency debt payments more expensive for EM companies.

“At the moment, the market is still shut because no one wants to lock in these higher rates,” said Omotunde Lawal, head of emerging-market corporate debt at Barings in London. She noted that tapping international capital markets at such high yields was “the last option” for companies, adding that many firms had sought to refinance when rates were low.

Latam Airlines Group AS sold dollar debt last week with a coupon of 13.375%, becoming the first EM company in years to borrow more than $1bn at such rates.

EM sovereign debt has rallied more than corporate notes on signs of a cooling inflation picture in the US, boosting speculation of a slower pace of Federal Reserve rate hikes. Tighter monetary policy in the US has fuelled the dollar’s surge, making debt payments more costly and reducing liquidity available for borrowers in the developing world.

Turkey, Hungary and Poland successfully tapped international debt markets in past weeks, reducing worries over the financing of their foreigncurrency debt.

S&P Global Ratings warned in a recent note that corporate defaults in emerging markets, largely attributable to China-based homebuilders, are climbing. That’s as a nearly $250bn wall of maturity for emerging market debt due next year looms into view, according to data compiled by Bloomberg.

Borrowers are competing for funds that are getting scarcer as $83bn left emerging-market debt funds this year, according to EPFR Global data, published by Bank of America. EM corporate debt has handed investors a 19% loss so far in 2022 according to data compiled by Bloomberg, compared with a 11% decline for US high-yield debt - another risky, dollar-denominated asset class.

Issuance by emerging-market companies has amounted to only $15bn since the start of October, slumping 77% from the same period last year, versus a 29% decline for EM government debt, according to Bloombergcompiled data.

“We really need to see lower yields before the primary market can come back properly,” said Philip Fielding, co-head of emerging-market debt at Mackay Shields UK LLP, which has $126bn under management. “Market worries about refinancing risks should decline as more primary deals get printed.”

Elsewhere in credit markets: There were six issuers across six tranches in Europe’s publicly syndicated debt market yesterday morning, with minimum issuance volume expected to be at €2.57bn ($2.68bn) equivalent.

More companies in England and Wales were forced to close by creditors in October than in any month since Covid-19 starting spreading, showing that UK creditors are back to adopting pre-pandemic practices in retrieving unpaid debt.

Soaring energy bills drove UK inflation even higher than expected to a 41year high in October, adding to pressure on the Bank of England to act.

The looming wall of maturing bonds facing Sweden’s leveraged property sector continues to prompt negative rating actions from the agencies assessing the likelihood of defaults.

Telecom Italia’s long-term issuer default rating was downgraded by Fitch to BB- from BB and outlook remains stable. European leveraged-loan and high-yield par volume defaults are set to rise “materially” in 2023 and 2024, according to November 15 report from Fitch Ratings

Yields are soaring in China’s local credit market, after having been sanguine throughout the property sector’s debt crisis.

South Korean insurer Hanwha Life Insurance Co will buy back its hybrid securities at the first opportunity next year, an assurance for investors rattled by the decision of a competitor to skip a payment, which triggered a selloff in perpetual bonds across Asia.

Rakuten Group Inc. is marketing a $500mn dollar bond to bolster the Japanese internet firm’s struggling mobile unit, in a test of demand for a rare junk debt offering from the country and a borrower under financial strains.