Surge in EM Corporate bond issuance is not cause for concern, says Alliance Bernstein

New bond issuance by emerging-market companies boomed in 2012, leading to fears of a bubble. But according to research released today by Alliance Bernstein, this market growth is positive for investors, rather than a harbinger of soaring debt levels or deteriorating credit quality.

Data reported by the firm showed that emerging-market corporate bond issuance hit a record of more than $300bn in 2012, compared with about $200bn in 2011. The biggest increase occurred in Asia, with issuance more than doubling.

“High issuance can be a symptom of excessive and irresponsible borrowing, but global metrics don’t show obvious signs that companies are leveraging up. For example, as shown in the chart below, total debt levels of EM companies have not risen sharply by historical standards,” Alliance Bernstein said.

The boom was partly driven by favourable bond-market conditions, with strong investor demand and interest rates close to record lows.

Another factor at work saw companies turning to the bond markets instead of the banks for financing.

“This disintermediation is a common feature of evolving capital markets. In this case, it was largely a by-product of the euro-area financial crisis,” the firm added.

As European banks became increasingly risk averse and faced funding constraints, they significantly reduced their activity in the EM trade finance and syndicated loan markets. Global syndicated loan issuance shrank to less than half its 2011 levels, with the bulk of that decline occurring in Asia, where European banks had been big players.

JPMorgan reports that foreign claims by French banks decreased by 40%, accounting for much of the contraction.

As a result, a host of Asian companies refinanced their debt, many of them-notably in Hong Kong-entering the US dollar bond market. Asian banks also started to take a bigger role in providing trade financing, which in turn led them to seek more US dollar funding through bond issuance.

Finally, this has implications for investors.

“In short, we believe this growth is good. The relatively young EM corporate debt market is now large enough to warrant a dedicated EM portfolio allocation. The hard-currency corporate universe today is now over $1 trillion. This scale brings a number of benefits, including greater liquidity and more opportunity to diversify against issuer-specific risk,” Alliance Bernstein said.


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