Investors snapped up emerging corporate debt in January, capitalising on a yield advantage over unfashionable sovereigns while retaining faith in the long-term emerging market story even as local equity prices cool.
Corporate bond sales from developing economies have outstripped emerging market sovereign supply, with $30 billion issued so far this year - nearly a fifth of the total emerging corporate issuance last year. Potential issuers are queuing up to talk to London-based investors - nine were roadshowing on a single day last week.
Bonds have been launched already by, among others, Turkey's Isbank and Russian mobile company Vimpelcom, while upcoming borrowers include Ukrainian steel producer Metinvest.
The familiar tale of a growing middle class in emerging markets firing up demand for consumer goods and financial services is taking investors directly to corporate issuance.
Unlike emerging equities, which some investors are now starting to see as expensive, corporate debt is still viewed as offering attractive yields.
Default risk also appears to be diminishing, helped by the global recovery, even as this recovery is making investors fret about falling US Treasury bond prices.
The corporate debt trend is likely to continue, with J. P Morgan forecasting more than $160 billion in emerging corporate debt issuance in 2011, similar to last year's already record volumes.
"Emerging corporate debt is offering a yield of around 7 percent for a BBB average rating - it's the best return you can see in the fixed-income space," Polina Kurdyavko, fund manager at BlueBay Asset Management, told investors this week.
A wobbly year-end for markets last year and a slow start this year has meant emerging market issuance overall is down, after a record 2010 in which around $300 billion was issued in international emerging market debt, according to bank estimates.
But investors are growing more confident in their risk assessment of corporate bonds. Default risk has traditionally been synonymous with emerging corporate debt. During the global financial crisis, many corporates defaulted, though more in local markets than in international debt markets, which tend to have more stringent legal covenants.
As global recovery takes hold, default rates should ebb.
ING forecasts the emerging corporate debt default rate being cut to 0.5 percent by June, less than a third of the 1.6 percent rate in December. This rising credit quality is attracting an increasing number of emerging market investors, and crossover investors who are looking for yield and don't mind the asset class.
Emerging corporate debt on J. P Morgan's CEMBI index is yielding around 285 basis points more than US Treasuries. Prudential Investment Management has $12.5 billion under management in emerging market debt, but its managers told a briefing this week that it saw those levels increasing due to expansion in corporate debt.
Where investors are fretting about possible restructuring of euro zone debt, for instance, Turkey's financial institutions are considered to have come through the global crisis in good shape.
Turkish bank Isbank this week issued a 5-year dollar bond which is trading at a lower yield than a recent issue from eurozone peripheral country Spain, although Isbank has a lower credit rating. Some investors are starting to become more cautious, however, given the high level of issuance and tightening yield spreads.
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