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Business News/ Market / Stock-market-news/  Global corporate default rates seen rising significantly this year
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Global corporate default rates seen rising significantly this year

Debt levels across the corporate sector in Asia have risen substantially since the recession and may mean increased vulnerabilities

Bond credit rating agency Moody’s does not see a scenario where refinancing of existing overseas debt or raising fresh overseas debt will be an issue across all emerging market issuers. Photo: AFPPremium
Bond credit rating agency Moody’s does not see a scenario where refinancing of existing overseas debt or raising fresh overseas debt will be an issue across all emerging market issuers. Photo: AFP

Mumbai: Global corporate default rates will rise significantly this year, although they are likely to remain concentrated among commodity companies, top credit experts at Moody’s Investors Service predicted Wednesday.

“Default rates have been averaging around 2%. We expect that this year, it will go up to about 3.8%. It’s a significant rise, although still a little below the long-term average of 4-4.1%, but in that range," Richard Cantor, chief credit policy officer at the ratings agency, said in an interview.

“We may, in fact, find that it will sit at near those levels for a year or two. At the moment, we expect to see defaults coming through the energy, (and) mining sectors and not spread through other indirectly related sectors," he said.

Since the beginning of 2015, yields on bonds issued by sub-investment grade firms have risen considerably on fears of rising stress in a subset of these firms.

For instance, the Bloomberg US Dollar High Yield Bond Index has jumped to 9.10% from 7.01% at the start of the year.

The difference between the yield on such bonds and the yield on risk-free US treasuries, known as the high-yield spread, has also widened. Historically, a widening of this spread is seen as a leading indictor of stress in the market.

Cantor, however, said that so far, the increase in these spreads is driven by a few firms, which may limit contagion.

“There is a relatively small number of firms whose ability to borrow in the market has dropped off very suddenly due to the low energy prices and they are driving the high-yield spread average. Other firms in the same rating category but different sectors are facing a little more difficulty in borrowing but not nearly as much as what is implied by the spread," said Cantor, adding that if the stress remains concentrated, the widening of high-yield spreads may not have the broader implications that are associated with it.

Rising defaults and high debt on corporate balance sheets is not an issue restricted to the US.

Debt levels across the corporate sector in Asia have risen substantially since the global financial crisis and may mean increased vulnerabilities for the region, said Michael Taylor, chief credit policy officer for the Asia Pacific region at Moody’s.

“Leverage in the corporate sector across Asia has risen substantially since the global financial crisis. We don’t see that much in our rated portfolio, but the build-up of leverage has been outside of that," said Taylor, adding this could have negative feedback effects on sovereigns across the region.

“It’s not our base case that there will be a major event but it certainly increases vulnerabilities," Taylor said.

Since 2008, dollar credit has grown faster overseas than in the US, the Bank of International Settlements (BIS) had pointed out in a report earlier this month. A third of this debt has gone to emerging markets such as India.

Some investors and analysts have expressed fears that higher US interest rates, and a consequently stronger dollar, could increase repayment and refinancing pressures for companies that have borrowed heavily in foreign currency.

Moody’s, however, does not see a scenario where refinancing of existing overseas debt or raising fresh overseas debt will be an issue across all emerging market issuers.

They expect investors to be more selective this time around and differentiating between emerging markets based on fundamentals and the impact of lower commodity prices.

“2016 refinancing risk seems contained, maturities are fairly well-spread; so, there won’t be a big bunching of refinancing. I think for most of the investment grade corporates that we rate in the region, we still see them maintaining good access to international market," said Taylor.

Ahead of the US Federal Reserve’s interest rate hike, junk bonds issued by some Indian issuers saw a surge in yields, Mint reported on 16 December.

Yields on bonds of JSW Steel Ltd maturing in 2019 jumped 155 basis points to 11.91% within a fortnight.

Vedanta Ltd’s bonds maturing in 2019 were quoted at a yield of 18-19% compared with the 6% coupon at which they were issued in May 2013.

One basis point is one-hundredth of a percentage point.

“Certainly in the high-yield space, there is a possibility of credit stress, but that’s concentrated in certain pockets like commodities," Taylor said. “It’s not an across-the-board thing."

Cantor doesn’t see a broad “risk-off" sentiment towards emerging markets as investors recognize the impact of lower commodity prices will vary sharply across different economies.

This differentiation may help Indian companies retain their access to global markets. At the same time, foreign inflows into domestic debt may remain strong as well.

“The main drivers of overseas investors in rupee-denominated bonds are going to be the same as in other markets. So essentially, they are looking at exchange-rate stability, predictability in terms of the regulatory environment and also just the yield. So, if those conditions are met, overseas investor interest will remain high," said Taylor.

Foreign investors have bought $7.7 billion in Indian debt so far this year, after buying $26.25 billion in 2014. Most of this money, however, has gone into government bonds.

Indian companies borrowed $21.9 billion overseas until October compared with $30.5 billion borrowed last year.

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Published: 24 Dec 2015, 12:56 AM IST
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