Saturday, July 30, 2016

The coming EM "debt default bulge"?

Bloomberg points to the pace of debt accumulation among emerging economies,
Overall, the external debt of developing economies has tripled in the last 10 years, with the volume growing faster than both gross domestic product and foreign exchange reserves in the last five years
Another article highlights the spectre of non-financial corporate defaults in Asia,
A bulge in Asian defaults is a certainty between now and the end of the decade.
A third article highlights the relative attractiveness of EM, in this case Indian, debt despite their much higher risks,
Glenmark Pharmaceuticals, which sold its first straight dollar bond on Monday. The coupon was 4.5 percent, which translates to a spread of about 325 basis points over Libor, well inside the regulatory limit. The low yield for a company rated two notches below investment grade happened even as the borrower failed to detail its other debts in the prospectus -- "description of material indebtedness," a standard (albeit not mandatory) feature of junk bonds was missing. No worries, the $200 million of notes still received bids equivalent to more than $1.6 billion. With so much cash around, who cares for disclosure, risks or ratings? If it's from India and it pays more than zero, it's good.
All said and done, despite all its risks, given the very low exposure of high-yield Indian corporates to foreign debt, is is tempting to argue that this may be an opportunity to mobilize low-cost capital. But then, in a country with weak general corporate governance standards, high yield corporate offerings are most likely to signal lemons. For a corporate sector already reeling from high levels of leverage, such increased external exposure may tick more negatives than positives.

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