Emerging corporate debt: still booming
The corporate bond juggernaut continues apace in emerging markets.
In a note at the end of last week, analysts at Bank of America/Merrill Lynch estimated that companies from the developing world have sold debt worth $179 billion already this year. Originally, the bank had forecast $268 billion in corporate debt issuance in 2013, a touch below last year’s $290 billion but it is finding itself, like many others, marking up its estimates.
Oleg Melentyev, credit strategist at BofA/Merrill, writes that recent bumper bond sales imply quarterly issuance is running at 10-11 percent of market size, well above the past average. Melentyev points out that the first 4.5 months of the year tend to account for 35 percent of full-year total debt sales by EM companies. If this formula were applied now, it would imply total 2013 new debt issuance at $420 billion.
For now, however, the bank expects $316 billion in full year corporate issuance from EM, with Asia accounting for $126 billion of this.
Clearly, all this doesn’t come without risk. While the drying-up of syndicated loan markets is at least partly responsible for the corporate bond boom, there is no denying that companies are raising more and more money in a market that is only too willing to lend. That has pushed the sector past the $1 trillion mark, making it bigger than the U.S. high-yield debt market. Just since the beginning of 2012, the stock of EM corporate hard currency bonds has increased by over $400 billion, JPMorgan said in a note published last week.
What of investors’ returns? The picture is not as rosy as in past years. Higher yield assumptions on U.S. Treasuries could reduce potential returns this year by 1.0-1.5 percentage points, JPM analysts warn. Year-to-date, investment grade emerging corporate debt has returned just 1 percent while high-yield has provided 3 percent, BofA/ML said. That’s well below the 4.1 percent return Thomson Reuters data shows on global high-yield debt.
But things could yet pick up. JPM recommends staying overweight its CEMBI corporate debt index, reckoning the sector’s relatively high yields will provide some insulation against Treasury upheavals. Melentyev of BofA/Merrill expects 3.7 percent returns on EM corporate debt this year. But speculative-grade EM credits, he reckons, will be returning a healthy 7.8 percent.