Emerging market corporate debt, explained
- Kate Hollis, Director, Investment Research, Willis Towers Watson
- Gonzalo Borja, Head of Fixed Income Emerging Markets, Credit Suisse Asset Management
- Andreas Fischer, Senior Portfolio Manager & Credit Analyst, Credit Suisse Asset Management
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How do EM corporates making use of bonds for refinancing?
Gonzalo Borja: EM issuers are frequent issuers in the New Issue market and that is one of the reasons the asset class has been growing over the last 15 years. First-time issuers in EM credit are still quite common today as opposed to those from developed markets, where capital markets have been in place for much longer. In reality, EM issuers try to achieve a few things when they come to the market, such as refinancing, which accounts for most of the proceeds. Additionally, most EM issuers aim diversify their funding source from traditional banking or loans towards the debt capital market, which often allows them to refinance at longer tenors and better terms, thereby extending their maturity profile and reducing short-term refinancing risk.
Corporate bonds are often downgraded because of sovereign risk – what opportunities could this present for investors?
Gonzalo Borja: There are multiples examples, but good ones are Russia or Brazil or Turkey more recently. Rating agencies, as a rule, will lower the rating of a corporate bond after its sovereign rating loses the “Investment Grade” status - even though many of the corporates affected may have a sound credit profile and adequate liquidity to retain its investment-grade status. Those issuers often trade at a discount to similar peers within EM or developed markets. In other words, one can say that you get a premium by holding a high yield rated issuer which from a pure fundamental perspective has an investment-grade credit profile.
What are some practical ways that you would engage with issuing companies on ESG factors? How might these conversations play out during the normal course of business?
Gonzalo Borja: ESG is indeed a very important topic and we see it rapidly gaining traction among investors. From a fixed income perspective, it is imperative to have all the data and factors for a proper assessment as part of our overall bottom-up credit review. ESG is a topic in each and every conversation we hold with companies, and in future, it will play a bigger role during our interactions with companies.
When conducting credit research, how much and what kind of data does a manager need to be able to decide whether a bond is worth investing in?
Andreas Fischer: Our assessment of the risk / return trade-off for a specific bond is the core of our analysis. Our credit research covers the risk part, i.e., the fundamental credit assessment. We are looking at different sources of data for our credit research. These include direct calls / meetings with company representatives, research reports from rating agencies as well as communications with dedicated buy-side credit analysts. Once we have a fundamental assessment of a company, we can put this in context with the specific risk premia (credit spread) of the bond offerings. This allows us to build an optimized portfolio that is based on bonds with an attractive risk / return profile.
What other risks specific to emerging markets corporate debt should investors bear in mind?
Kate Hollis: There is a shortage of experienced EM corporate credit analysts who are able to combine country knowledge and context with bottom-up fundamental credit analysis and navigate the lower levels of information and governance standards in some jurisdictions.
Local-currency denominated bonds are a ‘risk-on’ asset class due to the FX exposure. Clients need to be able to tolerate a relatively high level of volatility compared to other FI asset classes. This may go some way to offset the higher returns compared to DM markets. Also, the universe is relatively concentrated by country, so idiosyncratic country risks can also affect returns, as with Argentina or Turkey. A capped index goes some way to mitigating this.
While there are a number of indicators that can be used in assessing country economic fundamentals, they are of limited use in assessing political risk. A change of government can materially change a country’s economic policies and regulations and it is very difficult to quantify this risk, even over the short-term, given that opinion polls can be unreliable.
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