Emerging markets distressed debt loss worst since ’08 crisis

Bloomberg

Singapore

Emerging markets’ distressed debt losses are the worst this month since the global financial crisis.

Bank of America Merrill Lynch’s Distressed Emerging Markets Corporate Plus Index fell 13.4% through December 26, set for its worst performance since October 2008, as a tumble in the price of oil sparked a currency crisis in Russia. That brought this year’s decline to 19.7%, the most in six years. High-yield distressed securities in the US lost 8%, the indexes show. Emerging markets accounted for 14 of the 56 global defaults this year in Standard & Poor’s coverage.

Crude reached the lowest in five years earlier this month and is heading for its largest annual decline since 2008 as members of the Organisation of Petroleum Exporting Countries resist production cuts to defend market share. A supply glut has also pushed metal and coal prices deeper into a bear market.

“With many moving parts to the equation, could there be a point where investors begin to interpret the circumstances as contagion?” said David Tawil, co-founder of New York-based Maglan Capital. “What happens if we need to add Venezuela and Russia to the mix? Contagion is good for no one.”

Oil accounts for 95% of Venezuela’s exports and its government bonds have suffered as President Nicolas Maduro said he has no plans to curb fuel subsidies. Economic sanctions are also hurting Russia, pushing the country toward a recession, while corruption probes induced bond losses in Brazil and China. In Indonesia, the Bakrie family group of companies put its coal unit, PT Bumi Resources, under court protection.

The rouble has weakened 37% this half, the worst among 24 emerging market currencies tracked by Bloomberg. Russia has pledged funds for lenders including Gazprombank and VTB Group to shore up capital as the central bank said on December 16 the economy may shrink as much as 4.7% if oil averages $60 a barrel over the coming 12 months.

Russian Standard Bank’s 10.75% 2018 notes are down 51.6% this month while Promzvyazbank’s 10.2% 2019 bonds have lost 18.9%. Gazprombank’s dollar- denominated notes, while not part of the Bank of America Merrill Lynch index, are trading near distressed levels. Its 7.875% perpetual debentures, sold to investors at par in October 2012, touched 49.5 cents on the dollar on December 16.

Such levels don’t necessarily mean the debt’s worth buying, according to Peter Schottmueller, who helps manages $17bn as head of emerging market debt in Frankfurt at Deka Investment GmbH.

“It’s not worth picking up fallen angels just because their bonds have become cheap,” Schottmueller said. “I wouldn’t touch commodity-related stuff and I don’t expect any significant turnaround for Russia and Ukraine.”

Among December’s worst performers, the 8.25% 2019 bonds of OAS SA declined 12.38 cents to 34.25 cents December 26. The Sao Paulo-based oil contractor is the subject of an investigation into alleged corruption involving contracts with state-run oil producer Petroleo Brasileiro that’s engulfed Brazil’s biggest construction companies.

In Asia, Honghua Group Ltd’s 7.45% 2019 debt has plunged 19.7% since November 30, also putting it among the index’s biggest losers in December. The Chengdu, Sichuan-based maker of rigs for the oil and gas industry warned last month its 2014 profit will “decrease significantly” due to exchange-rate fluctuations and market volatility.

Haitong International Securities Co cut its 2014 earnings forecast for Honghua Group by almost half earlier this month, citing rouble-related losses tied to Russian orders.

Bumi Resources’ 10.75% 2017 debentures, already in default, have dropped 19.1% in December, bringing losses for the year to 62.8%. The Jakarta-based miner missed a coupon payment on the $700mn of debt in November and then on December 1 filed for Chapter 15 US bankruptcy protection.

Notes of Brazilian sugar producer Grupo Virgolino de Oliveira SA have lost the most this month in the Bank of America Merrill Lynch index, which tracks 108 bonds. Its 11.75% 2022 securities have plunged 49.8%, bringing declines for the year to 85.4%. The company is considering a debt-for- equity swap that could see creditors end up with a majority share, people familiar with the matter said Dec. 12.

The coming 12 months may spell more bad times for emerging market debt, considering the US Federal Reserve is expected to start increasing interest rates from near zero in the third quarter. That would increase the cost of raising new funds.