Rollover risks rising on high-yield bonds

October 11, 2012

Emerging market corporate debt is in high demand, as we pointed out in this article yesterday.  But we noted headwinds too, not least the amount of debt that will fall due in coming years as a result of the current bond issuance bonanza.

David Spegel, head of emerging debt research at ING in New York is highlighting a new danger — that of the exponential increase in speculative grade debt, especially from developed markets, that is up for rollover in coming years. A swathe  of credit rating downgrades for European companies this year mean that many fund managers who bought high-grade assets, have now found themselves holding sub-investment grade paper.  He calculates in a note this week that $47 billion of “junk” rated European paper will find itself up for refinancing in the first half of next year, more than double the levels that were rolled over in the first half of 2012.

It gets worse. The big danger now is that as Spain and Italy tumble into the junk-rated category (Ratings agency S&P on Wednesday cut Spain to BBB-, just one notch above junk) their blue-chip companies may well have to follow suit.  Spegel estimates over $100 billion in Spanish and Italian BBB rated corporate bonds are due next year. If these slip into speculative grade, it would triple the amount  of high-yield paper that needs refinancing in the first six months of 2013.

The picture is slightly less dire in the United States next year but it worsens in 2014  when high-yield debt redemptions total $121 billion, or a 60 percent jump from 2012 levels, Spegel says, adding:

Should risk-appetite sour…refunding may prove problematic for many global speculative grade corporates, in which case we could look forward to significantly higher global default rates as soon as 2014.

See the graphic below for the high-yield debt rollover picture in coming years:











So what’s the danger on emerging bonds? Many of these credits compete for funding in the high-yield asset class (which was once limited to emerging market borrowers or very weak entities from developed nations ) so unless global central banks continue to gush liquidity, they could find it hard to roll over maturing debt.  Defaults will rise all around.

Spegel continues to recommend a risk-on approach to emerging debt for now, with the caveat that this stance should be reversed in early 2013 ahead of the looming rollovers. But he tells clients:

The supply-side implications of Spanish downgrade to junk for the global HY bond universe may force us to bring forward our target date.

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