Bonds of distressed firms in emerging markets take a dive

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David Yong Singapore

The distressed debt of companies in emerging markets had the worst month in more than a year in August amid banking turmoil in South Africa and Turkey, a coal price rout and the Ukraine conflict.

The bonds tumbled 5 percent, the biggest decline since a 6.54 percent loss in June last year, according to Bank of America Merrill Lynch’s Distressed Emerging Markets Corporate Plus index. That leaves the gauge, which was little changed in July, poised for its first quarterly retreat since the second quarter of last year.

African Bank Investments Limited (Abil), the biggest local provider of unsecured loans, was rescued by the Reserve Bank on August 10, while Islamic lender Asya Katilim Bankasi of Turkey faces more rating cuts after depositors pulled their money. Notes sold by the two lenders were among the biggest losers that included Czech coal producer New World Resources and Ukrainian farm group Mriya Agro Holding.

The emergency support given to Abil “was a big shock because it was the first investment-grade credit event we had in South Africa”, Bronwyn Blood, a money manager at Cadiz Asset Management, said.

“It makes people more sceptical of credit as an asset class here, and that may last for a couple of more months before it blows over.”

Abil would be investigated for evidence of fraud, reckless lending and lack of disclosure, the Reserve Bank said on Tuesday.

“There were questions about Abil’s financing model and it highlights the need to understand the business models as a matter of course” in emerging markets, said Rian le Roux, the chief economist at Old Mutual Investment Group.

The incident further heightened credit risks in developing countries after Argentina defaulted on its debt for a second time since 2001 in July.

Tensions in Russia remain elevated on speculation that the US and Europe will expand economic sanctions to punish Russian President Vladimir Putin for backing rebels in Ukraine. Credit default swaps on both nations surged last month to the highest levels since May.

The economic outlook for eastern Europe was “under pressure from the sanctions and counter-sanctions from Russia”, Vladimir Miklashevsky, an emerging market economist and trading desk strategist at Danske Bank, said. “There is no visible growth there.”

Abil’s $350 million (R3.7 billion) of 8.125 percent notes due in February 2017 fell 29.5c on the dollar in August to 69.2c, sending the yield up to 25.9 percent from 10.39 percent, according to Bloomberg data. They were cut to junk by Moody’s Investors Service on May 29 before the lender collapsed.

The yield on Istanbul-based Asya Bankasi’s $250m sukuk climbed to 14.72 percent from 9.79 percent in the same period, according to Bank of America’s prices. Moody’s cut its deposit rating three steps to B2 on August 22 and another two steps to Caa1 a week later after “significant outflows” of deposits this year.

At New World Resources, bondholders approved a restructuring last week that helps the Czech coal producer with e810m (R11.4bn) of debt avert bankruptcy. Mining houses worldwide have faced a cash crunch following a 17.2 percent slump in coking coal prices this year, adding to a 47 percent slide in the previous three years. – Bloomberg


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