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Corporate Bond Forum - September 22, 2010

Speakers at EM Corporate Bond Forum Concur EM Corporates Well Supported but Global Factors Remain a Risk

EMTA’s Corporate Bond Forum was held at the Parker Meridien Hotel in midtown Manhattan on Wednesday September 22, 2010.  ING Financial Markets hosted the event, which drew a standing-room only crowd of 150 market participants.  Speakers agreed that the market was well supported on a technical basis, although investors should be diligent in their investment selections. 

David Spegel (ING Financial Markets) repeated his moderating duties at the event by summarizing the recovery in EM pricing generally since last year’s event, led by the performance in underlying US Treasuries and strong asset class inflows.  Spegel then started the discussion by asking speakers for their thoughts on overall market performance.  Robert Abad (WAMCO) opined that market psychology has shifted from a global recovery story last year to a debt sustainability story following the Greece crisis (“the problems in Europe are not over, and we all know it.”)   Based on such a focus on debt sustainability, and not just growth, EM continues to look attractive compared to developed countries, according to Abad. 

Anne Milne of Bank of America Merrill Lynch highlighted the strong performance of both EM economies and many of the corporate issuers themselves.  She recommended, however, that investors be selective in their purchases.  Warren Mar (JPMorgan) offered his assessment that the rally could still have legs, especially on a relative value basis vs. the lower spreads of the US credit. 

TIAA-CREF’s Katherine Renfrew observed that the markets had recently priced in a higher possibility of a double-dip recession, and she did not expect a quick rebound in the US or developed country economies.  However, a recovery looked more likely than not, and she agreed that technically corporates are well-supported, especially with a “crowding-in” effect as sovereigns did not need to tap the market.  Value exists but could be short-lived in the event of a market panic, and she acknowledged that she was monitoring Spain closely, as well as Greece. 

Spegel revisited the 2009 event discussion of changes in the client base for EM corporates, and questioned panelists on any volatility implications.  Mar highlighted the increased demand from retail investors, especially from Asian and LatAm private banking, as well as increased Japanese and cross-over inflows.  His firm is currently forecasting $75 billion in new inflows into EM corporates, a dramatic increase from the $45 billion that JPMorgan had previously forecast in January.  Additionally, Mar noted that the amount of money now benchmarked to EM indices rose by $100 billion alone in 2010, and $12 billion alone is now benchmarked to the CEMBI.  Mar concluded that such “sticky money” is good news for the asset class, adding some level of support. 

Issuance year-to-date in 2010 has exceeded forecasts, with approximately $135 billion in corporate paper issued through September, according to ING figures.  Milne expected corporate issuance to total $160 billion by year-end, with Latin America and Asia exceeding or closing in on historical records, while Eastern Europe lags.  Commodity-related issuances could decline in a slower global growth environment, she advised.  Mar predicted an even more aggressive $180 billion in issues, noting that corporations were taking advantage of current market conditions to refinance or pre-fund.

With Brazil now rated investment-grade, Brazilian corporates are increasingly making their way into the Barclays Aggregate index, Renfrew reminded the audience, and this bolsters the importance of such debt as a more regular asset allocation rather than a tactical play.  Spegel added that scheduled amortizations and coupons should support at least $100 billion in new issues next year as well, and suggested Argentine corporates might prove more frequent issuers following recent taps from Province of Cordoba and City of Buenos Aires. 

Turning to a discussion of defaults, Spegel cited statistics showing average corporate recovery rates besting recent sovereign restructurings, and argued that this suggested corporate spreads should be tighter.  Renfrew underscored that legal systems in some EM countries such as Brazil have greater uncertainty than others.  “We still haven’t seen how this will work in practice, and how judges will make decisions,” she stated.  Additionally, she expressed concern regarding the large role of the public sector in Brazil’s banking sector, and hoped to see the role of BNDES gradually reduced. 

Mar seconded the concern about untested bankruptcy regimes.  On the positive side, restructurings prompted by the external crisis have generally moved faster and with higher recovery rates and should support the case for buying EM High Yield.  He did also warn, however, that the most recent experience should not necessarily be taken as the new order. 

The panel concluded with investor recommendations.  Abad was positive on the mining, oil and gas, and telecom sectors as “commodities will continue to be a huge story as China remains a net importer, and global urbanization and industrialization is far from over.” He expressed a constructive view of Latin America and Asia and “pockets of the UAE,” while also stating that last year’s crisis underscored the importance of liquidity in corporate issues. 

Renfrew saw most value in Korean, Brazilian and Chilean corporates and was concerned with the possible side effects of Mexico’s dependency on oil earnings.  Select bank issuances also appealed to her, as did select Asian high-yield debt. 

JPMorgan’s year-end target for the Corporate Bond Index predicted a 23 bps tightening from current levels, for an additional 3-4% in total returns over the fourth quarter and Mar envisioned most of that coming from Asian investment grade paper and Latin American high-yielders.  Additionally, the Chinese property and Mexican home-building sector offered value.  Milne also recommended Mexican home-builders, as well as Brazilian steel (especially CSN) and was less interested in Eastern European issues, due to weak Western European demand.  CEMEX could provide some opportunities, Milne added. 

Spegel listed a number of specific issues – IMCOPA ‘14s, which appeared to be emerging from a workout, and IIRSA ‘24s, “which allow investors to take Peru sovereign risk, while picking up substantial spreads over sovereigns.”  He also spoke positively on Evraz and Globopar. 

The event concluded with a cocktail party, also sponsored by ING. 

EMTA’s Corporate Bond Forums are held annually in New York and London.  The next Corporate Bond Forum will be held in London on January 25, 2011.