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Corporate Bond Forum - September 14, 2011

Inflows into EM Corporates at Record Levels While No Bubbles in Asset Class, Speakers at Corporate Bond Forum Note

ING Financial Markets hosted EMTA’s Corporate Bond Forum in New York on Wednesday, September 14, 2011.  An overflow crowd of 175 market participants attended the event, held at the Parker Meridien Hotel in New York City.

Moderator David Spegel (ING Financial Markets) recalled the economic backdrop at the time of the 2010 event, when deflation uncertainties, QE2 and concerns over growth all favored debt rather than equities.  In 2011, investor diversification away from “submerging” developed markets have led to a doubling of investor flows into EM, with the bulk of new investment in corporates.  Spegel asked speakers to discuss their thoughts on global trends in 2012.

Western Asset Management’s Robert Abad summarized two potential scenarios going forward – the “bad,” or a repeat of 2008; or the “very bad—which is a repeat of 2008 plus things we don’t know.”  Katherine Renfrew of TIAA-CREF expressed a slightly more optimistic tone, stating “we are not expecting a worse-than-2008 crisis this time, but it is clear greater bank consolidation is needed in Europe.”  A GM-type bankruptcy is unlikely, she reasoned, and problems in the European banking sector were mitigated by improved disclosure stemming from the stress tests.

Speakers offered slightly-varying statistics, while agreeing that corporate debt issuance remained at record levels.  Anne Milne of Bank of America Merrill Lynch expected issuance to increase 5% over 2010 levels, and stressed that, in addition to the growth in debt issuance, the number of firms issuing paper in the market has also been growing.

Turning to the prospects for Chinese high-yield, the recent issues at Sino Forest should remind investors that “due diligence is critical for Asia, and Asian high-yield issuers still need to prove they are fair to creditors in a work-out situation; we haven’t seen that yet,” noted Renfrew.  While the “potential lack of due diligence” on Chinese property issues was a cause of concern, yields have moved to a more attractive level, according to Renfrew.  Abad reminded the audience that countries such as China had yet to be tested in terms of a financial crisis and remained cautious on the supply and demand dynamics of Asian high-yield overall given its more volatile history.

Panelists concurred that any bubbles in EM corporates have been washed out.  “I don’t think we have seen a market where deals are getting done that shouldn’t be,” opined Santander’s Aaron Holsberg.  Milne noted that Brazilian banks could be at the early stages of a bubble if growth rates continue unabated, while clarifying they should not be considered a bubble currently.  Abad stated that bubbles were present “outside of EM” which presented a source of technical risk for the EM asset class as a whole.

Speakers discussed 2Q earnings surprises, and noted that weaker earnings at airlines and protein producers, and better-than-expected earnings at oil producers and Latin banks were trends that would likely continue.

The panel concluded with panelist recommendations on EM corporate bonds.  Abad favored the oil and gas sectors, as well as telecom (“yes, it’s boring but I love it in times like these.”)  Renfrew eschewed thin-margin, highly-leveraged corporations and would also avoid Kazakh and Middle East banks.  On the other hand, “quasi-sovereigns are still very compelling for risk-averse accounts, with the likelihood of the sovereign shoring up the issuer in some cases if needed.”  Holsberg voiced his enthusiasm for the Fibria, the Brazilian paper company, arguing that, “their willingness to play it safe and postpone their pulp expansion increases their chances of an upgrade to investment grade from at least one agency.”

Milne was constructive on top-tier Chinese property issues, and noted that many LatAm quasi-sovereigns are trading at historical wides.  Colombian utilities, top-tier Russian gas and oil firms, and Russian and Turkish banks also drew her attention.  For the more adventurous investors, “the market seems to be pricing in a credit event in Cemex which we don’t expect, as bankers have signaled a willingness to rollover debt maturing in 2014,” Spegel noted.

Following the panel session, attendees enjoyed a cocktail reception.