EMTA CORPORATE BOND FORUM (BOSTON)
Tuesday, November 3, 2015
The Langham Hotel - Chase Room
250 Frank Street
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Opportunities and Challenges in EM Corporate Bonds
Anne Milne (Bank of America Merrill Lynch) – Moderator
Jacob Steinfeld (JPMorgan)
Dave Cole (MFS)
Aaron Holsberg (Santander)
Sam Epee-Bounya (Wellington Management)
5:00 p.m. Cocktail Reception
Additional support provided by Bank of America Merrill Lynch, JPMorgan and Santander.
Registration fee for EMTA members: US$75 / US$695 for Non-Members.
EMTA Corporate Bond Forum Series Expands to Boston
Following a decade of EMTA corporate bond-specific events in New York and London, EMTA held its first corporate-focused Forum in Boston on Tuesday, November 3, 2015. MarketAxess sponsored the event, with additional support from Bank of America Merrill Lynch, JPMorgan and Santander. Over 60 market participants attended the event.
“It has been a rough year for EM, with many tribulations,” noted moderator Anne Milne (Bank of America Merrill Lynch) in introductory remarks. Although outstanding EM corporate debt had surpassed the $1 trillion mark, and in recent years issuance had surpassed $300 billion annually, the overall EM environment, as well as events such as the Petrobras scandal, had depressed recent EM issuance.
Milne asked speakers if the recent corporate issuance pull-back augured a more permanent development, or if it were a temporary lull. Jacob Steinfeld (JPMorgan) acknowledged that issuance would be lower in 2015 and 2016 compared to prior years. He further specified that only the Emerging Europe corporate asset class would grow in 2016, while Asian corporate issuance could decline by 15-20%. However, Steinfeld stressed the resilience of the corporate market as an asset class, highlighting that EM corporate debt had still outperformed EM sovereigns and US high yield.
Dave Cole (MFS) noted that, from his stance as a crossover portfolio manager, EM corporate debt was a relatively interesting opportunity. He assessed spreads as more attractive than asset classes, such as European high-yield.
“Any Latin company that has any business issuing USD external debt has likely already done so,” affirmed Aaron Holsberg (Santander). He argued that smaller companies and lower-tier credits will have to rely more on the syndicated bank loan and private placement markets for the foreseeable future.
Sam Epee-Bounya (Wellington Management) agreed with the panel that “EM corporate debt is here to stay…but our stress levels are higher!” China remained a wild card, and Brazilian companies should have a contingency plan if they were closed out of the market for 18-24 months in the event of further Petrobras scandal news, he advised.
Milne requested panelist suggestions on what could be done to attract IG accounts which had sold EM corporates in the aftermath of the downgrades of Petrobras and various Russian issuers. Epee-Bounya stressed that, without a confidence shock to Brazil including a political stabilization, crossover accounts were likely to remain on the sidelines. Steinfeld noted that US distressed funds have seen EM corporate opportunities, and have been rewarded in some cases (e.g., Mexican homebuilders) although the track record overall was mixed. Cole reminded the audience that crossovers continue to own select credits such as Cemex.
The decline in commodity pricing would continue to affect the EM corporate market according to the panel. Holsberg expected slowing commodity demand to remain a factor for EM corporates in 2016 and possibly 2017 as well. The oil and gas sector, as well as metals and mining, have been the worst performers ytd noted Steinfeld, who specified that commodity-issuers accounted for 27% of the CEMBI Index. Asian corporates, as net commodity importers, could continue to benefit.
Milne observed that Chinese corporate Eurobond issuance now surpassed all other corporates, although in Reg S form primarily, and paled to Chinese domestic issuance. How did China figure in EM corporate portfolios?, she asked. Epee-Bounya recommended caution when perusing the Chinese property sector, while noting an inclination to buy on weakness. He argued that Chinese companies were not as leveraged as Mexican homebuilders, although the latter offered more recovery value in the case of a bad investment.
On the other hand, “China is just not an area we go into,” stated Cole. Chinese corporates accounted for only a small percentage of the benchmark, and were concentrated in the property sector. Governance issues were a concern, although reforms could lead to greater interest. For now, however, it was “hard to see sustainable cash flows if the music stops,” he advised. Both Steinfeld and Milne concurred that the Chinese property sec tor remained the most vulnerable sector in an EM corporate sell-off.
The issue of liquidity was also debated. “From a HY perspective, this is not anything new,” stated Cole. An investor could address it by lengthening one’s time horizon, demanding higher spreads upfront, and reassessing how comfortable one was with the management team and balance sheet. In Cole’s view, the contraction in liquidity post-2008 seemed much more pronounced in the US IG asset class.
Epee-Bounya expressed concern over “liquidity herding.” The tendency for investors to focus on more liquid names, such as Cemex and Digicel, ironically made them more vulnerable; if the herd moved simultaneously, bond prices could drop significantly.
As for opportunities, Holsberg favored Mexican corporates with strong exposure to the US economy, and Cole favored Latin America generally (“getting the commodity call right will be important”).
In terms of trends, Steinfeld and Milne expected Argentine corporates to take advantage of a potential post-election “honeymoon” period, while noting that the hold-out issue will remain a stumbling block. Epee-Bounya added that Argentine leverage may be increasing, and future shock therapy could cause potential casualties. “These factors should give investors some reason to pause,” he stated.