$13 billion drop in bond sales signals pain for EM Credit

(Bloomberg) — The pipeline of corporate loans from emerging markets is drying up as major central banks raise borrowing costs and investors grow increasingly wary after a series of high-profile corporate blowouts.

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Businesses in developing economies have sold only $60 billion worth of global bonds so far this year, according to data compiled by Bloomberg – a drop of nearly 18%, or $13 billion, from the same period last year. That’s the smallest amount to start any year since 2016, just after the Federal Reserve began its last rate-hike cycle.

This time, the world’s most influential monetary authority is looking even more aggressive as it tries to tame inflation. That, and Wall Street’s firm faith in emerging markets after corporate meltdowns at India’s Adani Group and Brazil’s Americanas SA, have analysts flagged the risk of a second-straight year of limited capital market access — and the trouble that highly indebted firms could face. may be born for

“The market is not open for most of our issuers,” said Siby Thomas, portfolio manager specializing in emerging-market corporate debt at T. Rowe Price. “You’re seeing this dichotomy in the market, where companies can’t issue because it’s too expensive, and the high-rated ones that can issue don’t want to because they can wait.”

In the first years of the pandemic there was an increase in issuance by both emerging-market firms and US high-yielding companies as policy makers reduced the cost of borrowing to prop up their economies. But that trend ended as the Fed and other major central banks began to battle against persistent price pressures last year.

“Corporates tend to actively manage their upcoming maturities a few years in advance, and take advantage of lower yields throughout 2020 and 2021,” said Sarah Grutt, an analyst at Goldman Sachs Group Inc. The environment is only another aspect of that issue.”

While junk-rated US firms have been able to maintain some access to the bond market, with issuances from the same period this year to 2022 falling about 5%, similarly-rated companies from developing countries have not been so lucky.

This has left some companies in a difficult position. While investment-grade borrowers can often proceed without the help of foreign bondholders, there are fewer options for junk-rated firms with higher leverage ratios and a generally riskier outlook.

Companies in need of cash may have to turn to domestic debt markets, private placements or multilateral funding sources, according to Lisandro Miguense, head of debt capital markets for Latin America at JPMorgan Chase & Co.

“Financial markets are very volatile as a result of Fed rates uncertainty, and EM corporates are no exception,” he said. Firms “need to be prepared to adapt their financing strategy to this reality and act accordingly.”

Wall Street has already begun to take a more cautious approach to developing-market assets as the early year rally fades and a softer landing appears for the global economy. Sentiment has also soured in developed markets, after a Silicon Valley bank became the biggest US lender to fail in more than a decade.

Emerging market dollar bonds fell 2.2% in February, reducing their year-to-date returns to just 0.6%, according to data compiled by Bloomberg. In comparison, one gauge of US high-yield debt is up 2.2% this year.