Moody’s Focuses on Emerging Currency Risk Amid Record Bonds

Moody’s Investors Service said it’s assessing the risk of currency depreciation damaging the creditworthiness of emerging-market companies after record foreign bond sales.

Emerging market companies have raised a record $224 billion of international bonds this year, compared with $153 billion in the same period last year, according to data compiled by Bloomberg.

“The amount of U.S. dollar and euro debt outstanding has increased considerably year-by-year, and with it the risk of currency mismatch,” Moody’s analysts including Philip Robinson in London said in the report.

While companies are benefiting from plunging bond yields spurred by interest rates in the U.S., Europe and Japan at virtually zero, issuers may be vulnerable to increased repayment costs if their revenue isn’t in the same currency as they’re borrowing in, according to Moody’s.

Among the currencies highlighted by the ratings company are the South African rand, which has tumbled 8.5 percent against the dollar in 2013, making it the biggest loser among 24 emerging-market currencies tracked by Bloomberg. Moody’s also mentioned the Czech koruna, which has fallen 5.8 percent, and the Russian ruble, which has lost 3.2 percent.

“We would consider in our rating assessment the effect of a potential currency depreciation on a company’s immediate liquidity,” the Moody’s analysts wrote. “Where interest or principal payments are due in the near future, there is clearly little time for a reversal of the exchange rate movements.”

Issuance Outlook

Moody’s said it would assess management strategy for dealing with exchange-rate risk and any mitigating factors including cash held in the borrowing currency. For OAO Gazprom, Russia’s natural gas exporter, and India’s Tata Motors Ltd., raising funds in foreign currency makes operational sense, Moody’s said.

International bond sales by emerging-market companies and governments may soar to a record $600 billion this year from $430 billion last year, and reach $1 trillion in three years, Hakan Wohlin, global head of debt origination at Deutsche Bank AG in London, said in an interview yesterday.

Petroleo Brasileiro SA raised $11 billion this week, the biggest bond sale by an emerging-market issuer, as it seeks to develop the largest offshore oil find in the Americas in more than 30 years. Brazil’s real has appreciated 1.6 percent against the dollar this year.

“Going forward, issuance activity will remain high,” Wohlin said by phone yesterday. “Deals such as Petrobras will not be unusual.”

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