Emerging Markets Corporate Debt: An Evolving Landscape
TOM BUTCHER: Hello and welcome to Van Eck Outlook. I'm your host, Tom Butcher. I have with me Fran Rodilosso, Portfolio Manager for Market Vectors Fixed Income ETFs and a veteran of fixed income investing. Our focus today is understanding emerging markets (EM) corporate debt. Fran, welcome.
What do you see as the main differences between emerging markets corporates and U.S. high-yield corporates?
RODILOSSO: I'll start with the one similarity. In these bond universes the bonds are structurally very similar. They're usually issued under New York law or under English law. The bonds themselves look very much the same. The companies are also looking more similar in that many of them are now global companies with businesses and assets outside of their home countries. On the other hand, within emerging markets, the bulk of the assets of the issuers are in emerging markets countries. Therefore, in worst case scenarios, i.e., defaults, you are under a different jurisdiction when it comes to enforcing your rights as a creditor. That’s one major risk consideration for investors. Still, another difference is emerging markets corporate high-yield issuers have tended to pay significantly more than U.S. high-yield issuers. Similarly positioned issuers from a credit quality point of view have paid significantly more: Presently about 150 to 200 basis points above U.S. high-yield issuers for about the same spot on the rating scale. Most emerging markets issuers along each spot on the rating scale have less gross leverage than their U.S. high-yield counterparts. In general, the markets are structurally similar. Where the companies are based is obviously different, but EM issuers have offered a little more yield for a little bit better credit quality, at least from some perspectives.
BUTCHER: Can you please tell me about supply and demand for emerging markets corporates and how it has changed over time?
RODILOSSO: Demand has shifted over time in response to supply. What emerging markets corporates offer for global credit managers is a pickup over developed market credits. Much of demand has come from crossover U.S. or developed market-based credit managers who want access to opportunities that offer higher yields and diversification. Demand has also come from traditional emerging markets debt managers, who used to focus purely on the sovereign space and have expanded their portfolios into corporates for yield and diversification reasons. Thirdly, there's a growing class of dedicated emerging markets corporate funds. This is almost a $1.5 trillion asset class. It's as big as the U.S. high-yield universe; actually, by some measures, it is slightly larger than the U.S. high-yield universe. It's diversifiable and it's investable; 66% of it is rated investment grade. By "diversifiable," I mean it hosts more than 600 issuers in 60 countries. That is a growing source of demand.
BUTCHER: Why has the emerging markets corporates universe grown so much faster than the sovereigns universe?
RODILOSSO: It depends on how you look at it. The emerging markets corporate universe has nearly quintupled over the last decade. The emerging markets sovereign universe has grown in absolute terms by just about as much or more, but that growth has mainly been in the local currency sovereign space, and it hasn't multiplied the same way; the corporate universe started from a very small base. Starting near the turn of the century, as emerging markets sovereigns rationalized their balance sheets and started issuing more sovereign debt in their own currencies, they stopped crowding out the private sector. Corporates have therefore had access to international markets that they didn't have 15 to 20 years ago.
BUTCHER: Finally, how have credit ratings changed for emerging markets corporates in the last decade?
RODILOSSO: When you look at the universe as a whole, there are several stages that have taken place. About a decade ago, the emerging markets universe was going through a big wave of upgrades as sovereigns improved their balance sheets and corporates did as well. About ten years ago, the universe was still only 39% high yield and 61% investment grade; today it's about 32% high yield versus 68% investment grade. Over the last couple of years, that ratings trend has been slightly negative; there have been more downgrades than upgrades. Overall, the credit quality of the asset class is stronger than it was five years ago and ten years ago.
BUTCHER: Fran, thank you very much. With Fran's perspective on the growth of emerging markets corporates as an asset class, we come to the end of this edition of Van Eck Outlook.
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