Sep 15, 2014

    Bond risks seen with company debt in emerging markets up


    INTERNATIONAL borrowing by companies in some emerging markets now matches the output of their economies, leaving bondholders more vulnerable to interest-rate or currency shocks, according to the Bank for International Settlements (BIS).

    Borrowers from Brazil to China may need to refinance about US$90 billion (S$114 billion) next year and as much as US$130 billion by 2017-2018, economists Michael Chui, Ingo Fender and Vladyslav Sushko wrote in the BIS Quarterly Review. That may be challenging should the dollar strengthen and domestic economies slow, they said.

    Companies in developing countries issued almost US$375 billion of international debt between 2009 and 2012, more than double the amount sold in the four years before the 2008 financial crisis, according to the Basel-based BIS.

    Higher rates or weaker currencies could push up bond yields, which in turn would hold back growth, damaging issuers, economies and bondholders, including international investors and local banks.

    "Rising interest rates and depreciating exchange rates will tend to raise the cost of servicing these debts, denting profits or depleting capital cushions unless appropriate hedges are in place," the BIS economists wrote.

    "Stress on corporate balance sheets could rapidly spill over into other sectors, inflicting losses on the corporate debt holdings of global asset managers, banks and other financial institutions."

    The BIS, known as the central bankers' bank, hosts the Basel Committee on Banking Supervision, which sets global capital standards.

    Low interest rates have spurred investor demand for higher-yielding assets, allowing companies in developing markets to boost leverage. Corporate debt grew faster than earnings in one third of major emerging economies between 2008 and 2012, according to the report.

    Part of the borrowed money was probably used to fund capital expenditure, which has increased by almost a third in recent years, the economists wrote, citing a report from Bank of America Merrill Lynch.

    While cheap funding can boost the economy by supporting viable investment projects, it also increases the borrower's interest-rate, rollover and currency risks, they said.