Emerging-Market Distressed Bonds Have Worst Month in Year

Emerging-market distressed debt had its worst month in more than a year in August amid banking turmoil in South Africa and Turkey, a coal-industry rout and the conflict in Ukraine.

The bonds tumbled 5 percent, the biggest decline since a 6.54 percent loss in June 2013, according to Bank of America Merrill Lynch’s Distressed Emerging Markets Corporate Plus index. That leaves the gauge, which was little changed in July, poised for its first quarterly retreat since the April-to-June period last year.

African Bank Investments Ltd., South Africa’s biggest provider of unsecured loans, was rescued by the central bank on Aug. 10, while Islamic lender Asya Katilim Bankasi AS of Turkey faces more rating cuts as depositors pulled their money. Notes sold by the two lenders were among the biggest losers that included Czech coal producer New World Resources Plc and Ukraine farm group Mriya Agro Holding AG.

The emergency support given to African Bank “was a big shock because it was the first investment-grade credit event we had in South Africa,” said Bronwyn Blood, a Newlands, South Africa-based money manager at Cadiz Asset Management Pty. Her firm manages $1.8 billion of bonds. “It makes people more skeptical of credit as an asset class here, and that may last for a couple more months before it blows over.”

Reckless Lending

Abil, as the lender is known, will be investigated by the central bank for evidence of fraud, reckless lending and lack of disclosure, Pretoria-based South African Reserve Bank said on its website yesterday.

“There were questions about African Bank’s financing model and it highlights the need to understand the business models as a matter of course” in emerging markets, said Rian le Roux, chief economist in Cape Town at Old Mutual Investment Group.

The incident further heightened credit risks in developing countries after Argentina defaulted on its debt for a second time since 2001 in July. Tensions in Russia remain elevated on speculation the U.S. and Europe will expand economic sanctions to punish Vladimir Putin for backing rebels in Ukraine. Credit-default swaps on both nations surged in August to the highest levels since May.

The economic outlook for Eastern Europe is “under pressure from the sanctions and counter-sanctions from Russia,” Vladimir Miklashevsky, an emerging-market economist and trading desk strategist at Danske Bank, said in an e-mail interview. “There is no visible growth there.”

August Losers

African Bank’s $350 million of 8.125 percent notes due February 2017 fell 29.5 cents on the dollar in August to 69.2 cents, sending the yield up to 25.9 percent from 10.39 percent, according to Bloomberg-compiled prices. They were cut to junk by Moody’s Investors Service on May 29 before the lender collapsed.

The yield on Istanbul-based Asya Bankasi’s $250 million sukuk climbed to 14.72 percent from 9.79 percent in the same period, according to Bank of America’s prices. Moody’s cut its deposit rating three steps to B2 on Aug. 22 and another two steps to Caa1 a week later after “significant outflows” of deposit this year.

At New World Resources, bondholders approved a restructuring on Aug. 29 that helps the Czech coal miner with 810 million euros ($1.1 billion) of debt avert bankruptcy. Miners worldwide have faced a cash crunch following a 17.2 percent slump in coking coal prices this year, adding to a 47 percent slide in the previous three years.

Before it's here, it's on the Bloomberg Terminal.