Maturing bonds worth $111 billion raise default concerns

The large number of emerging market bonds that are due to mature over the next five quarters raises the prospect of high-profile defaults.
The threat of defaults and company closures in emerging markets in the final quarter of 2008 and in 2009 may become a reality, according to a research report by ING Wholesale Banking.

The report warns that over the next five quarters there is $111 billion worth of bonds that need to be refinanced in the emerging market economies and cautioned that some high-profile companies may default as they face shrinking markets and difficulties in rolling over maturing debt.

On the corporate side, there is $80.7 billion worth of bonds that will mature between now and the end of 2009, the ING research report says. Of this, Asian firms account for the single-largest chunk by region with $31.4 billion worth of bonds maturing by end-2009. CIS (the Commonwealth of Independent States, which is made up of former Soviet republics) comes in second with $21 billion, while Latin American bonds represent 12% of total emerging market amortisations over the next five quarters.

David Spegel, global head of emerging markets strategy at ING, says in the research report that many corporates and banks in the emerging markets are highly levered without cash to fall back on. These will struggle should they need to raise money in the markets.

ôThe bond and loan markets are much harder to access now, and it could get worse, which means there will be defaults,ö he points out. A single-A rated bank or financial firm can quickly be forced into default, even in the space of a single working day, as has been the case with Lehman Brothers and Washington Mutual.

A credit analyst warns that the next 12 to 18 months may throw some surprises in the form of sovereign defaults too. He points to Argentina, where the government has nationalised private pension funds, and Pakistan, whose government has formally asked the International Monetary Fund for help in tiding over its international debt obligations.

ôIf Argentina was to go down the tube, it may have a domino effect on the weaker economies of emerging markets like Pakistan and Hungary,ö says the credit analyst.

ôArgentina is a rule to itself,ö says a London-based economist tracking emerging markets, pointing out that Argentina has not minded running a weaker currency in times of crisis and it would continue to follow this rule in the current crisis.

The same economist, however, says that he does not envisage defaults among major emerging markets. ôI would be surprised if any major emerging market was forced to default in the next six months,ö he says, pointing to the huge reserves of economies like China, India, Korea and Mexico.

Likewise, he does not see any problems with Asian economies, which, he says, have learnt their lesson not to be heavily reliant on short-term debt. ôEven Korea, which is in the worst position among other Asian economies, has enough reserves to pay its short-term external debts maturing in the next 12 months,ö the economist says.

The ING research report also warns that $8 billion worth of corporate bonds, which account for 10% of the total corporate bonds due, are not rated by any of the three major ratings agencies.

ôNot only does this mean that the underlying issuer is not monitored, but it makes it difficult to assess the likely funding level for the company and whether the market would be receptive to an issuer,ö says Spegel.

Of the $111 billion in bonds that will mature between now and the end of 2009, $24 billion are issued by junk-rated groups that have almost no hope of tapping a market that has become averse to risk.

Emerging market bond issuance has fallen steadily this year. Only $330 million worth of bonds were issued in September compared with $10 billion in July. In August last year, issuance averaged about $20 billion a month, according to ING.
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