Turkey, Ukraine firms among emerging debt flashpoints

LONDON, July 19 Fri Jul 19, 2013 6:19am EDT

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LONDON, July 19 (Reuters) - Bonds of Turkish banks, Ukrainian state firms and central European miners were among the worst performers in a recent sell-off in emerging debt and investors are on alert for further price falls or even defaults.

The emerging corporate debt market has boomed in recent years, with the volume of outstanding debt passing $1 trillion last year and record issuance seen in the first half of 2013.

Low yields and investor appetite for risk have made the market attractive for borrowers, especially as much bank lending remains frozen.

But spreads on emerging corporate bonds in hard currencies have widened sharply over rising U.S. Treasury yields in the past few weeks, after the Federal Reserve said it will scale back stimulus which has fed demand for higher-yielding assets.

Latin America and emerging Europe were the worst-hit regions, according to JP Morgan data, as domestic problems in some countries exacerbated the moves.

Spreads have stabilised in recent days but absolute yields remain more than 100 basis points higher than three months ago.

In that time, the dollar has also strengthened against most emerging market currencies, making it more likely that corporate debt default rates will rise. The stronger dollar makes it harder for companies whose revenues are primarily in other currencies to service dollar debt payments.

ING forecasts the emerging debt default rate will rise above 3 percent by the year-end, compared with 2 percent in May.

The broad market moves have highlighted some particular country or sector underperformers.

"The sell-off started due to QE (quantitative easing), but some markets have specific issues," said Andre Andrijanovs, credit analyst at frontier markets broker Exotix.

"When the tapering concerns abated, some markets were still stuck in that sell-off."

Analysts and investors point to poor performance in Brazilian investment-grade corporate debt, for example, after Brazil's growth expectations disappointed this year and following public protests about poor services and corruption.

In Turkey, worries about anti-government demonstrations, a gaping current account deficit and political resistance to currency-supportive interest rate rises have hit bank debt.

Yapi Kredi's 2020 bond, launched in January amid a glut of Turkish corporate issuance, has seen its yield rise 230 basis points from the original 4 percent.

One company whose bonds are trading at levels that imply an increased risk of default is Turkish construction firm Yuksel , whose 2015 bond currently yields 43 percent.

Fitch and Moody's downgraded the firm's credit ratings earlier this year into the highly speculative triple-C bracket, expressing their concern about the company's liquidity position.

Higher yields make it harder for companies to issue new debt at sustainable levels.

In Ukraine, state-owned companies are under pressure on concerns about the country's economic outlook. The sovereign saw its rating outlook downgraded by Fitch last month.

"The politics and the macro situation are not improving, there is a concern about the current account deficit," said Andrijanovs. He added, however, that Ukrainian quasi-sovereign debt maturing in 2016 or later is offering attractive yields above 10 percent.

Metals and mining firms have also underperformed due to the collapse in commodity prices this year, with names such as Russia's Nord Gold and Czech firm New World Resources in the spotlight.

Nord Gold's debut dollar bond has seen a rise of more than 250 bps in its yield since it was launched in May, while New World Resources' 2021 bond is trading at a distressed yield of 34 percent.

JP Morgan analysts recommend staying underweight in emerging corporate debt compared with emerging sovereigns or U.S. high-grade and high-yield debt.

"We remain wary of potential outflows ... and implications from the downside risk to growth in some of the major emerging market economies such as China and Brazil," they said in a note.

Investors also said markets would remain volatile, but that early 2013 strong issuance levels provided some cushion.

"While we expect this to continue over the short term ... ultimately the fundamental outlook for emerging market countries remains supportive," said John Bates, emerging markets fixed income analyst at PineBridge Investments.

"Most of the corporate sector has issued recently, and refinance risks are therefore contained."

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