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Corporate Bond Forum September 21, 2009

Searching for Value at EMTA Corporate Forum in New York City

The search for value and whether the EM corporate bond market was overpriced were among the themes at EMTA’s third annual EM Corporate Bond Forum. The event was held at EMTA’s offi ce in midtown Manhattan on Monday, September 21, 2009. ING Financial Markets sponsored the event, which drew over 100 attendees. 

ING’s David Spegel moderated the afternoon panel session, beginning by reminding the audience of the context in which the previous year’s event had been held in the dramatic days of September 2008. Given the recent run-up in asset prices, Spegel asked speakers if current levels suggested a bubble, or whether further spread tightening was possible.   

WAMCO’s Robert Abad expressed strong concerns about prices being overly optimistic. “I don’t think I have ever seen anything like I have seen now….the fundamental background is so uncertain and we are still waiting for a fundamental justifi cation of current levels,” he stated. In contrast, Anne Milne of Deutsche Bank and Warren Mar (J.P. Morgan) were less pessimistic, suggesting there were instances of value remaining.   

Spegel broke down EM corporate default rates as calculated by ING, noting that EM High Yield had a 9.2% default rate thus far in 2009. He then requested speaker thoughts on the default rate in EM corporates and whether the majority of EM corporate defaults had already occurred. “The quick answer is ‘no,’” replied Abad, who turned directly to the audience, asking “do you all really believe that systemic risk is almost gone?”   

Mar noted that his fi rm’s fi gures showed a 10% default rate year to date, while maintaining a 13% forecast for the year. Current CEMBI levels imply a 7% default forecast next year, he observed, and pointed out the comparatively better sovereign outlook now vs. the 1998 market crisis. Mar saw the underweight position of crossover investors and new money from Asia and other regions as potentially positive factors for the asset class.   

TIAA-CREF’s Katherine Renfrew viewed the recovery as “directly a function of where commodities go.” She described herself as being in the more constructive camp, and added that “our sense is that most vulnerabilities have already been exposed.” 

Milne stressed that each region should be examined individually, and echoed earlier comments by Spegel that the highest default rates would be in CIS issues with lower instances of default in LatAm. However she added that investors are much more discriminating vis-à-vis B-rated deals from Latin companies, which consequently has kept the LatAm default rate lower.   

Turning to credit ratings, Spegel’s announced his analysis that credit ratings explained 70% of spread differentiation before the 2008/9 crisis but currently account for only 40% of differences in pricing. Did speakers believe there is less value in and greater uncertainty regarding credit ratings?   

“Ratings agencies are good for an outside perspective, but we fi nd it very important to do our own analysis,” declared Renfrew, who noted her team includes a quasi-ratings agency in house. “No one can totally rely on credit ratings agencies,” she continued.   

Abad noted his “100% agreement.” He described the agencies as providing “a valuable tool—a starting point, but the bottom line is you have to do your own work by talking to management, visiting the companies, etc.”   

Turning to the unexpected boom in EM corporate issuance in 2009, Milne reminded attendees the skepticism she faced for her relatively optimistic $30 bn corporate deal forecast made at the EMTA Annual Meeting in December 2008. She is now expecting $100 bn in deals for 2009. Mar concurred that issuance would reach $100 bn, with one-quarter of that remaining to be issued in the fi nal quarter. Asian deals will dominate 2009 issuance, followed by LatAm and CEMEA offerings, he noted. Finally Mar expected new supply to be wellsupported on a technical basis as reinvestment cash fl ows would roughly equal new issuance for the remainder of 2009. 

Spegel also asked for thoughts on how recent changes on both the buy- and sell-side would affect EM debt. Mar noted that sell-side fi rms have been increasingly turning toward a desk analyst model and away from a publishing model as a result of time-consuming regulatory hurdles.

Renfrew admitted her surprise at the number of exits in the buy-side in EM and added that she was also caught off guard by how quickly the US markets bounced back. And while it wasn’t that long ago that there wasn’t even liquidity in Pemex or Gazprom, new entrants are taking the place of more traditional players, she added. Finally some sovereign-only investors are looking at corporate debt for the fi rst time recently. Abad, while reiterating his current bearish overview of the market, reaffi rmed that “EM is here to stay and will drive the global economy.”

As for investment recommendations, Milne saw the best value in non-investment grade paper. Generally she preferred second-tier Mexican issues as being cheaper than top-tier names. Cemex could benefi t from momentum and improving numbers. Other recommendations included Banco de Galicia, the Provinces of Buenos Aires and Mendoza, China Fishery and Sino-Forest. Mar spoke positively on Globo and Vitro, while also suggesting investors focus on new issues for adding risk and duration to their portfolios.

Renfrew expressed caution on the China property sector and Kazakh banks. Abad favored telecoms, oil and gas, as well as industries that are proxies for economic growth. Spegel added Televisa and long-end CVRD paper.