Emerging Junk Yields at High Show Record Bond Sales May Slow
The pace of bond sales by junk-rated emerging-market companies is poised to slow from record issuance in the second quarter as concern that the global recovery is faltering sends yields to the highest this year.
Dollar debt sold by speculative-grade borrowers yielded as much as 7.72 percent on June 27, the highest level since Sept. 2, according to the JPMorgan Chase & Co. Corporate EMBI Index. The difference in yield with investment-grade developing-nation securities hit 243 basis points, or 2.43 percentage points, the biggest spread in almost eight months, the data show.
Emerging-market companies sold $30 billion of junk bonds from April to June, up 58 percent from a year earlier and the most in any quarter since Bloomberg began compiling data in 1999. The average yield was 7.61 percent on June 30, up 58 basis points from a five-year low of 7.03 percent on April 28, the biggest increase in any period since May last year as concern the U.S. economic recovery is stalling and speculation Greece will default reduced appetite for riskier assets.
“High yield is under pressure clearly from the Greek concerns, but also from the significant slowdown in global activity,” David Hauner, head of emerging Europe, Middle East and Africa economics and fixed-income strategy at Bank of America Merrill Lynch Global Research in London, said in a telephone interview on June 27. If “Greece remains a concern then we may see that a lot of the issuance that was supposed to happen in the second half gets shelved,” he said.
Cemex SAB, the largest cement maker in the Americas, scrapped a $650 million bond offering on June 23 because of “volatility” in global markets, according to Jorge Perez, a spokesman for the company, which is rated B by Standard & Poor’s, its fifth-highest level of junk.
Cement and ready-mix concrete shipments to the U.S. won’t grow as fast this year as Monterrey, Mexico-based Cemex expected, Fernando Gonzalez, the company’s chief financial officer, said on April 29. They had been predicting cement shipments would grow 5 percent and concrete sales 6 percent.
GCL-Poly Energy Holdings Ltd. (3800), China’s largest polysilicon maker, and China Qinfa Group Ltd. (866), a coal company, both said in June that they were suspending planned bond issues because of volatile markets and a U.S. probe into accounting practices of some Chinese companies trading on that country’s stock markets.
No junk-rated Chinese companies have sold U.S. dollar- denominated bonds since short-seller Carson Block’s Muddy Waters LLC said on June 2 that Sino-Forest Corp. (TRE), a tree-plantation owner, overstated its timber holdings.
Emerging junk yields jumped 46 basis points last month, as Greek Prime Minister George Papandreou said his country needed a fresh bailout to avoid a debt default and German officials suggested private bondholders might make a contribution to rescue efforts.
Signs also emerged during June that the U.S. economy may be faltering, with non-farm payrolls missing analysts’ expectations on June 3 and Institute of Supply Management data published on June 1 showing that manufacturing expanded at the slowest pace in more than a year in May.
Only $4 billion worth of junk-rated emerging company bonds were sold in June, compared with $26 billion in the first two months of the quarter, according to data compiled by Bloomberg.
“General appetite for risk among investors has decreased,” Yerlan Syzdykov, who helps manage about $1.84 billion in emerging-market debt at Pioneer Investments in Dublin, said in an e-mailed response to questions on June 27. The end of the U.S. Federal Reserve’s $600 billion program of bond purchases in June and the failure by U.S. lawmakers to agree on extending that country’s debt ceiling have also unsettled investors, he said.
Lower debt levels and higher growth potential in emerging markets than in the developed world should mean developing country bond issuance continues at record levels in the second half of the year, Bryan Pascoe, head of debt capital markets at HSBC Bank Plc in London, said in a telephone interview on June 24. HSBC was the largest underwriter of emerging-market bonds in the second quarter, and led issues worth $13.9 billion, according to data compiled by Bloomberg.
“We expect the deal pipeline across the board,” in both major developing world currencies and local currencies “to be fully reloaded and investor demand to be strong, creating active third and fourth quarters,” Pascoe said.
Developing economies are set to grow by 6.5 percent this year, compared with 2.4 percent growth by advanced economies, according to the International Monetary Fund. Gross government debt in developing nations is equivalent to 34 percent of gross domestic product this year, a third of the level for advanced nations, IMF data show.
Record-low yields earlier in the second quarter spurred Evraz Group SA (EVR), Russia’s largest steelmaker, to sell bonds, Chief Financial Officer Giacomo Baizini said by telephone from Moscow on June 24.
Evraz, rated B1 by Moody’s Investors Service, its fourth highest junk rating, raised $850 million from a sale of bonds due in 2018 on April 19 with a coupon of 6.75 percent, the lowest ever for the company. The yield on the bonds rose to as high as 6.92 percent on June 27 from as low as 6.47 percent on June 8. It retreated to 6.71 percent on June 30.
“Yields have picked up a little bit,” Baizini said. “It’s obviously easy with hindsight, but we seem to have been lucky with the moment.” The company has no need to issue more debt for the rest of the year, he said.
’Less Issuance Left’
Total bond issuance by emerging-market borrowers climbed to $248 billion in the second quarter, 15 percent more than the previous record for any quarter, set from July to September of last year, according to data compiled by Bloomberg. Issuance in the first half of this year, of $454 billion, was also the highest on record for the period.
While concerns over Greece and the global economy may stabilize, bond sales are likely to slip in the second half as many companies have already met their financing needs, said Pioneer Investments’ Syzdykov.
“We had a record first half due to the good demand from investors on one hand and willingness of issuers to capitalize on the low interest rate environment on the other,” he said, “The trend is not likely to continue given there is less issuance left.”
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