Distressed bonds spread to Asia and Latin America
Posted by agung | Filed under General, World News
The U.S. housing and credit crisis has created eightfold worldwide growth in distressed bonds, which are now breaking into new frontiers in Latin America and Asia.
Distressed corporate bonds - defined as debt whose yields trade at levels more than 1,000 basis points, or 10 percentage points, higher than those of benchmark government bonds - were confined almost exclusively to U.S. shores a year ago. Now credit risk is rising in emerging markets.
In Asia a year ago, only bonds of the largest Chinese tire maker, GITI Tire, traded at levels suggesting rising default risk. Today, the perceived risk as judged by bond investors is growing fastest in Asia, where 32 corporate bonds have reached distressed levels, according to data compiled for Reuters by Moody’s Investors Service.
In Latin America a year ago, only Industrias Unidas, a Mexican metals and mining company, had debt that traded at distressed levels. Today, the list has grown to 18 Latin American corporate bonds, including debt issued by the Mexican fixed-line telephone operator Axtel, and Telefónica and Petrobras Energía in Argentina.
As the United States endures a recession, global credit crisis and the aftermath of a leveraged debt binge, bond prices are reflecting concerns that a wave of expected U.S. corporate bankruptcies may be repeated elsewhere.
“The global marketplace is feeling the ripple effects of the U.S. credit crisis,” said Martin Schulz, an international fund manager at Allegiant Asset Management in Cleveland. “Everything started here. The U.S. was the epicenter, and now it’s moving on to Asia and other developing markets.”
Distressed debt trading does not necessarily always lead to default or bankruptcy, although such risk is increasing.
“The perceived risk is high but the actual risk of default may not be that high,” said Peter So, head of research for CCB International, a subsidiary of China Construction Bank.
Globally, there are nearly 650 companies with corporate bonds trading at distressed levels, versus 82 companies a year ago. They include hundreds of U.S. companies, ranging from Ace Hardware to Zions Bancorporation.
The bonds of the Chinese developer Shimao Property now yield about 20 percent, and spreads on the Korean companies SK Energy and LG Electronics, Softbank in Japan and ICICI Bank in India are all trading at distressed levels of more than 10 percentage points above their respective benchmark government bonds.
In October the yields on many corporate bonds around the globe were even higher. But yields fell rapidly in recent weeks, after governments worldwide took action to provide more liquidity to financial markets and banks loosened some lending standards.
“Many banks are willing to support large property companies, as they believe the prospects are good and demand is buoyant,” So said. “Many banks are willing to extend loans and the bankruptcy risk on Chinese property companies is less than perceived.”
Diane Vazza, an analyst at Standard & Poor’s, said defaults would climb in 2009. U.S. high-yield default rates may rise to 7.6 percent in the next 12 months, more than double the 3.15 percent observed in November, she said. Through December, 108 companies globally defaulted, affecting $302 billion of debt in 2008 and nearly five times as many companies as in 2007, according to Standard & Poor’s. Of the 108 defaults, 86 came from the United States, 7 from Europe, 5 each from Asia and Canada, 3 from Latin America, and 2 from Russia.
Allegiant’s Schulz agreed that a wave of corporate bankruptcies in Asia or Latin America might not hit, even if warning signs were flashing. “The risk is, we see banks keep freezing up lending to the companies, and that would add more pressure, which we’re seeing in the U.S. Some companies may not survive.”
Some analysts said corporate debt trading levels in Latin America reflected investors’ concerns about the financial health of a country as a whole rather than that of a specific company.
“The Argentine debt market is more complicated by the sovereign situation and the lack of access to international markets,” said Paula Premrou, director of Portfolio Personal, a brokerage in Argentina.
Taken From,
http://www.iht.com/articles
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Tags: Asia, Bonds, Distrssed, Latin America, Spread
