| LONDON, July 19
LONDON, July 19 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
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
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."