360 Madison Avenue (at 45th Street)
New York City
3:45 p.m. Registration
4:00 p.m. Panel Discussion
Current Prospects for the EM Corporate Bond Market
Anne Milne (Bank of America Merrill Lynch) – Moderator
Jamie Nicholson-Leener (Credit Suisse)
Eduardo Vieira (Deutsche Bank)
Jonathan Prin (Greylock Capital Management)
Katherine Renfrew (TIAA Global Asset Management)
5:00 p.m. Cocktail Reception
Registration fee for EMTA members: US$50 / US$695 for Non-Members.
New York Corporate Forum Panel Addresses Potential Asset Class Bubble
Participants at EMTA’s Corporate Bond Forum in New York City acknowledged potential asset class volatility, while continuing to see opportunities in select credits. The event, sponsored by Debtwire, was held at the EMTA office on Tuesday, October 5, 2016.
Anne Milne of Bank of America Merrill Lynch moderated the panel, and provided context for the discussion. Milne noted that total return for EM corporate debt stood at 11.2% ytd, compared to her own 3% forecast for the year, “so it has outperformed even post-Brexit.” Milne noted that technical factors such as negative yields in DM assets had boosted EM corporates, as had commodity market stabilization, liability management exercises and FX moves. Was there concern of a potential asset class “bubble?”
Katherine Renfrew (TIAA Global Asset Management) observed that, despite strong technical support, geopolitical risks still existed, and, despite some stabilization, uncertainty about the Chinese persisted. In her opinion, Korean (and other Asian) high-grade corporates might be priced too tightly, and some Argentine corporates had been issued at “ridiculous” levels (although, overall, the enthusiasm for a post-Kirchner, newly open-for-business Argentina was not irrational). The stretch for yield had led to some “questionable” and even some “ridiculous” EM corporate credits being priced at overly optimistic levels, she acknowledged.
Credit Suisse’s Jamie Nicholson-Leener cautioned that, “current spreads feel uncomfortable, and we have seen this party before.” Nicholson-Leener also warned of the danger of seeing EM corporates as monolithic, and investors should be selective in their credit selection. Strong performance by Brazilian credits, based on an anticipated economic recovery, could falter should economic data disappoint. On the other hand, sell-offs resulting from disappointments in Brazil or weaker commodity prices could prove to be buying opportunities.
Jonathan Prin of Greylock Capital Management noted that December 2015 performance had set a low baseline for 2016, and agreed that the large stock of negative-yielding debt was supportive. Prin viewed EM sovereigns as more susceptible to a potential “bubble” burst than EM corporates.
The impact of the US elections was addressed by Deutsche Bank’s Eduardo Vieira. A victory by Donald Trump was most likely to impact Mexican issue pricing, and could reduce global trade generally. EM fund flows could also be reduced; and a Trump-appointed FOMC governor could be more hawkish, leading to weaker EM FX. Renfrew expressed her concern that the risk of a Trump victory was not priced in, noting polling had led to false confidence of a defeat of Brexit and a victory for the Colombia peace deal. “A more isolationist US regime could be really bad for EM, if we can rely on Trump carrying out what he says he will,” she concluded.
On Latin American supply, Vieira expressed a cautiously optimistic view. Quasi-sovereigns such as Petrobras, Pemex and YPF were likely to tap the market, as well as Latin American infrastructure credits. Nicholson-Leener noted that the return to the market of Petrobras earlier this year had been a welcome development, and had started a positive cycle.
The panel also reviewed prospects for PdVSA’s debt swap proposal. The offer was more likely to be approved than not, according to Vieira and Prin. Vieira put the odds of passage at “50 to 60 per cent,” while Prin noted that there would likely be holdouts.
Perceptions of changes in sovereign support to quasi-sovereigns was also debated. Renfrew reasoned that, in the absence of an explicit sovereign guarantee, an investor can evaluate the strategic importance of the issuer to the sovereign, especially in countries such as China. “You need to do your own analysis on SOEs because the ratings agencies have such divergent views on sovereign support,” she advised.
Panelists maintained conservative estimates of future performance. Vieira forecast a further 20 bps of tightening in the 4Q, assuming no disappointments in Argentina, Brazil or commodities. Prin added “It’s not hard to imagine that returns next year will be lower than this year.”