Loans, IPOs offset falling EM bond sales, ease default risk: analyst

Emerging governments and companies raised $1.64 trillion on global capital markets last year, up 13 percent from 2014, and their growing use of alternative financing such as loans may mitigate fears of widespread defaults, a veteran analyst said. Borrowers turned to IPOs and loan markets to offset falling sales of conventional bonds, David Spegel estimated in a note received on Wednesday.
Spegel, who made his name tracking the emerging bond sector between 1995-2014 at ING Bank in New York, compiles some of the most widely used data on emerging debt trends. He is currently head of global EM strategy at ICBC Standard Bank in London. Spegel said the revival of alternative financing options could ease fears of defaults across emerging markets in 2016.
Many economists, including at multilateral organisations such as the International Monetary Fund, have highlighted emerging debt as a key risk for coming years, predicting a sharp increase in defaults by companies unable to meet repayments. Spegel's data showed a 22 percent fall in conventional bond issuance in 2015, and even those numbers were boosted by gains in Asia which accounted for 65 percent of corporate debt sales. But he noted that loan origination in emerging markets had accelerated by 31 percent year on year, bringing the 2015 loan total to $686 billion.
That would indicate that loans, once a key capital source for emerging borrowers, are recovering after the 2008-2009 global crisis caused a sharp fall in bank lending. The loans, usually syndicated, are mostly taken from banks. "When we eliminate Asia from the numbers, we can see that EMs relied heavily on loan markets to offset declines in capital access elsewhere," Spegel said. "The overall picture is not so negative, therefore."
Capital raised via share IPOs and secondary offerings rose 50 percent from 2014. Equity placements in Latin America, one of the emerging regions hit hardest by the commodity price retreat, were buoyant.
With $34 billion in equity placements and $45 billion in loan financing, Latin American issuers more than made up for a $40 billion fall in bond issuance, his data shows. Appetite for emerging markets is likely to stay subdued in 2016, a clear headwind for companies and governments looking to refinance debt. Spegel predicts bond issuance at $429 billion this year, $40 billion below 2015. As a result, emerging defaults should rise in 2016 to $27 billion of defaults from $18 billion in 2015, Spegel predicts, or nearly 4 percent of all outstanding debt. This could rise to over 9 percent should Venezuelan state oil firm PDVSA be forced to default.