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EMTA Corporate Bond Forum - London, January 27, 2015

Tuesday, January 27, 2015 

Hosted by BNP Paribas
5 Aldermanbury Square

Topics will include: 

3:45 p.m. Registration 

4:00 p.m. Panel Discussion
Current Prospects for the EM Corporate Bond Market
David Spegel (BNP Paribas) – Moderator
Okan Akin (AllianceBernstein)

Kay Hope (Bank of America Merrill Lynch)
Rebecca Klausen (Moore Europe Capital Management)
Kathleen Middlemiss (UBS) 

5:00 p.m. Cocktail Reception 

Attendance is complimentary for EMTA Members / US$695 for non-members.

Liquidity, Default Ratios, and Issuance Trends Analyzed at EMTA Corporate Bond Event

Speakers at EMTA’s Corporate Bond Forum in London debated liquidity, default ratios, and issuance trends.  BNP Paribas hosted the event on Tuesday, January 27, 2015.  A capacity crowd of 150 market professionals attended.

In opening remarks, moderator David Spegel (BNP Paribas) noted that “2014 proved a volatile year for EM corporate bonds, which broadly underperformed sovereigns, returning just 3.4% vs 5.5% for sovereigns last year.”  Spegel observed that this was largely due to weakness in Russian and Brazilian issues, which represent larger positions in corporate indices than in sovereign.

Spegel opened the conference by asking panelists for the likely trends in EM corporates in 2015.  Rebecca Klausen (Moore Capital Management) observed that major themes in the EM corporate bond market this year were likely to be dollar strength, commodity weakness and Central Bank-induced shocks, such as the recent removal of the cap on the Swiss Franc vis-a-vis the euro.  Kay Hope (Bank of America Merrill Lynch) noted that, for those focusing on Russian issues, the instability in both the rouble and oil pricing would affect performance, with politics dominating fundamentals.

Panelists acknowledged that liquidity remained a concern for the asset class.  In the new regulatory environment, “banks just don’t have the ability to warehouse this amount of corporate issues,” lamented Kathleen Middlemiss (UBS).  Klausen added that the difficulty in selling some corporate issues has paradoxically depressed asset class volatility, although this wouldn’t prevent a “risk-off” turn from leading to market turmoil.  Okan Akin (AllianceBernstein) observed that the growing inclusion of EM corporate into general corporate indices would further tie EM corporates to more general sell-offs.  In his assessment, volatility in the EM corporate marketplace would not be sui generis in nature, but would result from a larger sell-off in other credit markets.

Spegel expressed concern that a huge amount of EM corporate bonds were rated at BBB or BBB- level, representing a threat to portfolios in case of “falling angel” downgrades.  Specifically, sovereign downgrades of Russia, South Africa and Kazakhstan could lead to forced selling...which could potentially be reinvested in higher-grade issuances from countries such as Chile, etc.

The effects of the oil price slide were also debated.  At $65 per barrel or above, most EM oil companies would be able to maintain their ratings, according to a stress test performed by Akin’s firm.  Receipts in dollars help firms such as Petrobras subsidize local markets, Akin added, although Kazakh and Azerbaijani oil companies were of concern.  Hope noted that Turkey was the consensus “winner” from low oil pricing, followed by South Africa “to a lesser extent.”  Middlemiss warned the oil market had not bottomed out.
Most speakers agreed that the expected EM corporate default rate would hover around 3% in 2015, with several notable missed coupon payments in January.  Middlemiss questioned the willingness to pay on Ukrainian corporates, anticipating a domino effect following a widely-expected sovereign restructuring.  Spegel added that, if PDVSA were to default, the default ratio would skyrocket to 9%.

EM corporate issuance estimates ranged from a low of $285 billion (Middlemiss) to $370 billion (Spegel), with Akin noting that Russia would drag down new issuance volumes, and Klausen pointing out that energy sector-heavy Latin American volumes would also be lower.  Panelists concurred that the bulk of new issues in 2015 would be from Asia.