Emerging debt default rates on the rise

July 24, 2012

Times are tough and unsurprisingly, default rates among emerging market companies are rising.

David Spegel, ING Bank’s head of emerging debt, has a note out, calculating that there have been $8.271 billion worth of defaults by 19 emerging market issuers so far this year — nearly double the total $4.28 billion witnessed during the whole of 2011.

And there is more to come — 208 bonds worth $75.7 billion are currently trading at yield levels classed as distressed (above 1000 basis points), Spegel says, while another 120 bonds worth $45 billion are at “stressed” levels (yields between 700 and 999 bps).   Over half of the “distressed” bonds are in Latin America (see graphic below).  His list suggests there could be $2.4 billion worth of additional defaults in 2012 which would bring the 2012 total to $10.7 billion. Spegel adds however that defaults would drop next year to $6.8 billion.

 

Now for the good news. These default rates, seen peaking in November at 3.6 percent, are actually pretty low (Emerging market defaults rose to 13.75 percent in December 2009 and were at a record high 30 percent during the 2001-2002 crisis) and Spegel estimates that the worst is now past.  Second, default rates in EM are neck and neck with U.S. speculative grade corporates and should have the edge by year-end, according to ING. The note says:

Emerging markets’ higher yields, despite comparable default rates, should help entice further flows from developed markets….Emerging corporate spreads remain significantly more alluring than those in the United States even in the high-grade arena.

For instance, emerging companies with a single B credit rating offer a 238 bps average yield premium to similarly rated U.S. corporates. For investment grade BBB-rated entities the spread is 225 bps.

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