Record Bond Payments Loom as Emerging Company Debt Costs Hit 16-Month High
Companies in emerging markets have record amounts of international debt coming due just as financing costs rise to a 16-month high and their currencies sink the most since 2008.
Businesses in the 10 biggest developing economies have at least $54 billion of foreign-currency bonds maturing in the next 12 months, the most since Bloomberg began compiling the data in 1999. The market for new international debt issues dried up after emerging-nation currencies tumbled 11 percent from this year’s high and the average cost to refinance dollar bonds rose to 6.4 percent from 5.6 percent in August, JPMorgan Chase & Co. indexes show.
Weaker exchange rates have boosted interest expenses at a time when revenue is growing at the slowest pace since May 2010, squeezing profits at businesses from New Delhi-based Bharti Airtel Ltd. (BHARTI) to Turk Hava Yollari AO of Istanbul. With overseas markets shut for all but the highest-rated credits, rising interest costs have sent borrowers to local bond investors and banks for financing.
“Corporates had assumed that emerging-market currencies were going to appreciate against the dollar for a long, long time,” said Bhanu Baweja, the head of emerging-market currency and credit strategy at UBS AG in London. “I don’t think they’ve done enough to hedge” against weakness, he said.
Per-share sales for MSCI Emerging Market Index companies have increased 10 percent in the past 12 months, the slowest pace since May 2010, and analysts predict growth will ease to 3.4 percent during the next year, according to data compiled by Bloomberg. Earnings may rise 11 percent, down from 22 percent, estimates compiled by Bloomberg show.
Bharti Airtel, the Indian mobile-phone company with about $10 billion of overseas debt, may report a 5 billion rupee ($103 million) hit to second-quarter earnings after the rupee fell to the lowest level since 2009, according to Goldman Sachs Group Inc. Turk Hava Yollari (THYAO), the carrier known as Turkish Airlines, faces $158 million of losses after the lira’s slide to a record low, Ekspres Invest said. Beijing-based Parkson Retail Group Ltd., which has $200 million of dollar bonds coming due next month, is in talks with banks to increase a loan taken out in 2010 by $150 million, two people familiar with the matter said last week.
Emerging-market companies sold a record $108 billion of foreign-currency debt in the first half of the year as yields slipped to an average 5.78 percent, or 136 basis points below the five-year average, according to data compiled by Bloomberg and New York-based JPMorgan. Borrowing costs fell as economic growth rates three times faster than developed nations spurred investors to pour $14 billion into emerging-market bond funds, data compiled by JPMorgan and Cambridge, Massachusetts-based research firm EPFR Global show.
Now, international issuance is dwindling on concern that Europe’s debt crisis and a faltering U.S. economic expansion will dent demand for emerging-market goods and slow growth.
Foreign-currency bond sales by companies in developing nations totaled $2.6 billion in September, compared with $43 billion of local debt offerings, the biggest gap since 2008, data compiled by Bloomberg show. There were no foreign-currency debt sales last month by companies rated below investment grade by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings, according to data compiled by Bloomberg.
Bharti has about $10 billion of unhedged foreign-currency debt after the company used loans to fund its $9 billion purchase of the African assets of Kuwait’s Mobile Telecommunications Co. last year, according to Sachin Salgaonkar, a Goldman Sachs analyst in Mumbai. The company and its subsidiaries have about $450 million of debt coming due in the next 12 months, according to data compiled by Bloomberg.
Second-quarter earnings forecasts for Bharti probably will decline during the next few weeks as analysts factor in the effect of foreign-exchange losses from paying dollar debt with depreciated rupees, Salgaonkar wrote in an Oct. 6 note. Bharti gets about 26 percent of its revenue in foreign currency, according to Salgaonkar.
Bharti shares, which sank 11 percent since the end of July as the rupee tumbled, are moving in lockstep with the currency by the most in two years, data compiled by Bloomberg show.
Raza Khan, a spokesman for Bharti, declined to comment in an e-mail.
Turkish Airlines has the equivalent of $3 billion in unhedged debt in dollars and euros, according to Selim Kunter, an equity analyst at Ekspres Invest, an Istanbul-based brokerage. Foreign-currency losses may “pressure” the stock, which has tumbled 45 percent this year, Kunter said in a phone interview.
The carrier expects to pay about $1.6 billion of debt within the next three years, obligations that stem from long- term leases for aircraft purchases, Tugba Celik, a spokeswoman for the company, said in an e-mailed reply to questions. Turkish Airlines, whose debt is denominated mostly in dollars, gets about 85 percent of its revenue from international sales and the company’s debt expenses will be covered in the “long term” by revenue, according to Celik.
The lira has weakened 17 percent against the dollar in 2011, the second-most among 21 emerging-market currencies tracked by Bloomberg after South Africa’s rand, and touched a record low of 1.9096 on Oct. 4. Turkish companies have $60.5 billion of overseas loans maturing between July 2011 and July 2012, with the highest monthly amount of $7.93 billion due in December, according to data compiled by the central bank.
“These are historically high levels,” said Tim Ash, the head of emerging-market research at Royal Bank of Scotland Group Plc in London. Turkish companies “face a weight of external liabilities,” Ash said.
Even companies that don’t have to contend with weaker currencies are facing higher borrowing costs. Yields on Beijing- based Parkson Retail’s 7.875 percent bonds maturing next month have climbed to 14.5 percent from a low of 2.2 percent in May even as the yuan rose 1.7 percent against the dollar, according to data compiled by Bloomberg.
Parkson, the third-largest Hong Kong-listed department store operator by market value, is seeking to increase its loan maturing in 2013 to $400 million from $250 million, said two people who declined to be identified because the details are private. DBS Bank Ltd., JPMorgan, Malayan Banking Bhd. (MAY), Natixis (KN) and Standard Chartered Plc are arranging the facility, the people said.
China’s exports grew the least in seven months in September and the customs bureau warned on Oct. 13 of “severe challenges” as the global economy slows.
“Weaker economic growth in emerging markets may come from the weakness in Europe,” said UBS’s Baweja. “Capital is becoming scarce and all companies are paying more to issue debt.”
The 6.36 percent yield on JPMorgan’s CEMBI Broad Index is the highest since June 2010, except for a surge at the end of September and beginning of the month that sent the gauge as high as 7.13 percent.
Investors demand 447 basis points, or 4.44 percentage points, in extra yield to hold dollar-denominated emerging- market corporate bonds rather than U.S. Treasuries, up from 256 in April, according to the CEMBI index. The spread was as wide as 1,044 basis points in October 2008 during the height of the global financial crisis.
Companies have taken steps to limit their exposure to currency swings since 2008, according to Joao Consiglio, a Sao Paulo-based managing director at Banco Santander Brasil SA, the Brazilian unit of Spain’s largest bank.
MSCI Emerging Markets index companies have an average current ratio, or assets divided by liabilities, of 1.9, up from 1.8 in 2008, according to data compiled by Bloomberg.
Cia. de Bebidas das Americas, Latin America’s largest brewer already has the dollars needed to repay about $500 million of bonds coming due on Dec. 15, the Sao Paulo-based company said in an e-mailed reply to questions.
MDM Bank of Moscow has set aside funds for 220 million euros ($304 million) of debt maturing Nov. 16, according to a company official who declined to be named citing company policy. Parkson’s $200 million of bonds due Nov. 14 “have been fully hedged from day one,” Chief Financial Officer Clarence Wong said in an e-mailed response to questions on Oct. 13.
Three years ago, companies from Moscow-based United Co. Rusal, the world’s largest aluminum producer, to Aracruz Celulose SA, the Brazilian pulp maker acquired by Votorantim Celulose & Papel SA in 2009 to form Fibria Celulose SA, restructured debts as their currencies tumbled amid a seizure in global credit markets.
Emerging-market central banks have acted to prevent their currencies from spiraling lower in the past two months. Turkey has sold about $7.7 billion of its currency reserves since Aug. 5 to support the lira, while central banks in Russia, Poland, Malaysia and the Philippines have sold foreign-exchange to boost their exchange rates. Brazil used derivatives to shore up the real last month after the biggest five-day plunge since 1999.
The JPMorgan ELMI+ Index, a gauge of emerging-market currency returns versus the dollar, sank as much as 11 percent from its May high through Oct. 4, the biggest peak-to-trough decline since 2008, before trimming losses to 8 percent as of Oct. 14.
Weaker currencies “will definitely have an impact” on borrowing costs, said Knut Harald Nilsson, part of a team of emerging-market money managers that helps oversee about $7.3 billion at Skagen Funds in Stavanger, Norway. “Some companies borrow in dollars because it’s cheap, but what if the currency goes against you?”
Joyce Chang, the global head of emerging markets and credit research at JPMorgan, has an “underweight” recommendation on emerging-market company debt relative to government bonds and predicted in an Oct. 4 research report that the yield spread on the CEMBI index will climb to 525 basis points by the end of 2011, or 213 basis points higher than the average during the past 12 months.
“Market access will be restricted to the better-known” companies in developing nations, Chang said in the report.
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