IIF RESEARCH NOTE

Emerging Market Corporate Bonds: Rollover Risks Ahead?

EM corporates face over $1.6 trillion in maturing bond in 2014-18
March 2014
CONFIDENTIAL
As Fed tapering proceeds in the coming quarters, prices of
corporate bonds of emerging market firms in countries with
weak fundamentals could come under pressure. If investor appetite diminishes, these firms may face difficulty in rolling over
these bonds, amid rising leverage and weaker earnings.
A stall in emerging market corporate bond issuance
In the ultra-low rate environment since the 2008-09 financial
crisis, EM corporates have taken advantage of strong investor
appetite to come to market. Issuance of hard-currency bonds
has been particularly robust over the past two years, with hardcurrency (U.S. dollar, euro, yen and Swiss franc) issuance topping
$185 billion and $200 billion respectively in 2012 and 2013
(Chart 1). Steady growth in EM corporate USD debt outstanding
took the market capitalization of the JPM CEMBI index to $716
billion at the end of 2013, from some $150 billion at end-2009.
This year also started on a strong note, with EM corporates
issuing some $19bn of hard-currency denominated bonds in
January. However, February has seen only $5bn in issuance. EM
corporate bond issuance in EM currencies has also slowed down
this year with a total of $32bn through February or $193 billion
annualized (35% of 2013 level) (Chart 1).
Higher borrowing costs have hurt
Jittery markets and higher borrowing costs may be part of
the explanation for softer issuancethe overall CEMBI spread
rose about 40bp in January, with corporates from more vulnerable EM countries much harder hit. Turkish corporate hard currency spreads, for instance, spiked by more than 100bp in January
before subsiding in February while Brazilian and South African
corporates saw spreads widen by 50-60 basis points. The renewed spike in Russian corporate bond spreads as tensions with
Ukraine flared is a good illustration both of funding risk and investor discrimination (Chart 2).
EM corporates face over $1.6 trillion in maturing debt
A key underlying concern centers on the continued ability
of these EM corporatesmany first-time issuersto manage the
debt taken on in recent years. During 2014-2018, an estimated
$443 billion in hard-currency bonds (USD, EUR, JPY, CHF) will
mature. This is in addition to more than $1.2 trillion in maturing
corporate bonds dominated in domestic currency, non-domestic
EM currencies, and other mature market currencies over the
same period. This highlights the refinancing risk should borrowing costs rise further. Weak earnings growth may also constrain
the ability of EM corporates to service and repay maturing debt.
EM equities have suffered from negative EPS growth of around
4% per annum since 2012, compared with growth of 10-15%
p.a. in 2000-13. Moreover, corporate leverage has been rising
quickly, with total debt levels (domestic and external) now near
75% of GDP on average, up from 50% in 2007. While this is still
below that of mature corporates (80-100% of GDP), EM corporate leverage varies widely, with Mexican and Indonesian corporates at the lower end and Chinese, Hungarian and Korean firms
among the most highly leveraged (Chart 3).

Chart 1
EM-30 Corporate Bond Issuance
USD billion
800
700

USD, Euro, Yen, Swiss Franc

600

EM currencies

500
400
300

200
100
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Source: Thomson ONE. *annualized

Chart 2
Emerging Market USD--Denominated Corporate Spreads
bps, CEMBI indices
Emerging markets
500
Turkey
Russia
450
Brazil
Mexico
400
350
300
250
200
Jan 13

Apr 13

Jul 13

Oct 13

Jan 14

Source: Bloomberg, JP Morgan

Chart 3
Mature and Emerging Markets: Corporate Debt
percent of GDP
CH
HU
KO
EA
JP
UK
US
EM*
SG
TH
RU
IN
CZ
Q2 2007
BR
TR
Q2 2013
PO
SA
ZA
ID
MX
0

30

60

90

120

150

(Excerpted from IIF Capital Markets Monitor, March 2014, author: Elif
Aksoy, zaksoy@iif.com, 1-202-857-3647)
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