What Debt Cliff? Easing Emerging Company Defaults Defy Gloom

  • Defaults on emerging high-yield bonds fall to 3% in March
  • Currency mismatch was "the dog that didn't bite": Ashmore

Just six months after the IMF joined a chorus of regulators and credit-rating agencies warning emerging markets were on the cusp of a wave of corporate defaults, the reverse is taking place.

Rates of non-payment on emerging-market high-yield bonds have fallen every month this year to a four-month low of 3 percent in March, according to data compiled by Bank of America Merrill Lynch. That compares with defaults on U.S. high-yield bonds rising to 4.6 percent. Energy companies account for much of the disparity, with those in emerging markets mostly propped up with public money while U.S. issuers bear the full brunt of weak oil prices decimating revenues, Bank of America said.

With $180 billion emerging-market corporate dollar debt due by 2020, economists from the International Monetary Fund to the Bank for International Settlements have warned that weakening developing-nation currencies would raise the cost of repayment and lead to more defaults. In practice, state support, hedging strategies and more recently a recovery in emerging currencies have helped companies pay their debts, according to Ashmore Group Plc and Aberdeen Asset Management Plc.

“The currency mismatch warning has turned out to be the dog that didn’t bite,” said Jan Dehn, London-based head of research at Ashmore, which manages about $51 billion in emerging markets. “I don’t see any reason why there should be a dramatic surge in default rates.”

Currency Relief

The worst for emerging companies has probably passed as currencies climb from the lowest levels since 2009 reached in January, according to Dehn. The MSCI Emerging Markets Currency Index has surged more than 6 percent in three months as sentiment toward riskier assets improved, in part because the Federal Reserve became more reluctant to raise interest rates and the threat of a strong dollar receded. The index weakened 0.1 percent by 1:27 p.m. in London on Monday.

Increased investor appetite has in turn lowered borrowing costs for developing-nation companies, making it easier for them to refinance through the bond market, according to Siddharth Dahiya, who helps oversee about $11 billion at Aberdeen in London as head of emerging-market corporate debt. The average yield in the Bloomberg Dollar High-Yield Emerging-Market Corporate Bond Index dropped to 8.8 percent last week, the lowest since August.

Not Convinced

The IMF isn’t convinced risks are abating. Emerging-market governments could harm their own credit profiles if they continue to protect state-backed companies, according to the fund.

"Excessive emerging-market corporate debt is one of the forces threatening financial stability," IMF spokesman Andreas Adriano said in e-mailed comments on Thursday.

Analysts at Moody’s Investors Service take a similar view. Default risk has increased in Europe, the Middle East and Africa because “investors are now more cautious and discriminating, and market access is more uncertain," Moody’s said in a research note published April 20.

While the global tally of defaults has climbed to 51 this year, the highest since the 2008-2009 financial crisis, emerging markets only accounted for nine of these, Standard & Poor’s reported in a note published on Friday. The U.S. has had 39 defaults, S&P said.

Companies in developing nations are proving more resilient than their U.S. peers to the impact of oil prices, that fell to a 12-year low in January, according to Bank of America. Emerging high-yield corporate dollar bonds returned 8 percent this year, the best start to a year since 2012, vindicating for now those investors who have braved the debt-cliff warnings.

“The corporate debt mismatch was a little bit hyped,” Jim Barrineau, a New York-based emerging-market money manager at Schroder Investment Management Ltd., with about $450 billion in assets worldwide. “If we see a continuation of the recovery in emerging markets, defaults should be at historic lows.”

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