Junk borrowers face tough months
OGX’s default, increasing benchmark rates and a turning macroeconomic cycle are set to make borrowing more difficult for sub-investment grade companies this year, say portfolio managers
credits are poised for months of turbulence as investors demand
more compensation for their risk amid rising borrowing costs
and as commodity prices and economic growth moderate across the
comes at a time when fund managers are growing more sensitive
to the hazards of investing in emerging market high-yield debt,
following last November's high-profile bankruptcy - the largest
in Latin American history - of
Brazilian oil firm OGX.
case in a relatively short period of time will establish how
much of a premium one should ask for investing in emerging
market corporate debt, taking into account weaker legal
framework," said Polina Kurdyavko, senior portfolio manager at
BlueBay Asset Management, which is not an OGX
always knew the framework was weaker [in emerging markets], but
it was always difficult to assign a spread pickup," she
troubles are "clearly negative" for perceptions of the asset
class, said Darin Batchman, a portfolio manager at Stone Harbor
Investment Partners, which manages $63 billion in
"the last few years have allowed [high-yield borrowers] access
to the capital markets and long-term financing at attractive
rates," they are now "subject to rising interest rates, as are
companies all over the world," Batchman said.
added that most major companies in the region nevertheless had
solid fundamentals. "The majority of Latin American corporates
are very solid, well positioned, and protected from FX moves,"
Abad, portfolio manager at Western Asset Management, said that
although benchmark rates are likely to rise this year, they
will remain low from a historical perspective. Emerging market
high-yield assets will therefore retain their appeal, he
nevertheless called attention to a range of factors that will
determine investor demand for high yield credit.
risk is still a very opaque area when investing in emerging
markets simply because we haven't seen more natural cycles in
the past five to 10 years which would have aided in the
evolution of bankruptcy and restructuring frameworks," he
opaqueness means that issuer-specific factors - business model,
operating record, and management experience - will tend to
determine risk premiums, he said. Investors must research firms
thoroughly to avoid ending up with defaulted paper.
that bankruptcies and restructurings can be protracted affairs.
This is important, as growing legal costs over time could make
the 'all-in' recovery value much lower than what was initially
anticipated," Abad said.
among high-yield companies in Latin America and the Caribbean,
meanwhile, are on the rise, reaching 2.8% in mid-2013,
according to Standard & Poor's. That was up from 2.45% a
year before and well above the overall emerging market default
rate of 2.3%. LF
High-yield bonds: Balance of power