Junk-Bond Boom Opens U.S., Europe to Emerging-Market Borrowers

Some of the companies and governments in the developing world hardest hit by pandemic shutdowns are racing back to debt markets in the U.S. and Europe, seizing on surging demand that has driven junk-bond yields to record lows.

Among them is Pegasus Hava Tasimaciligi AS, the discount Turkish airline that racked up larger-than-expected losses as the number of passengers fell by more than half last year. On Tuesday, the carrier kicked off a $300 million junk-bond sale to help refinance bank loans, according to a person with knowledge of the matter.

A Colombian airline bankrupted by the travel industry’s collapse may follow suit. And Kenya, which the International Monetary Fund considers at high risk of lapsing into financial distress, is planning to borrow $12.4 billion abroad through next June.

The flood of debt issuance marks a major shift from last year, when many borrowers in the developing world were left on the sidelines as others raised cash to ride out the economic slowdown. That’s largely changed with investors willing to take on more risk as growth rebounds in the U.S. and Europe, rising commodity prices helps exporters and the vaccine rolls out steadily -- if unevenly -- around the globe.

“Some of the higher-risk borrowers that had to pull back deals in third and fourth quarters are returning and are able to execute deals,” said Alexei Remizov, head of Latin American debt capital markets at HSBC Holdings Plc.

Emerging-market debt issuers with below investment-grade ratings have borrowed about $81.2 billion in the U.S. and European markets this year through Tuesday, according to data compiled by Bloomberg. That’s close to a record $88.7 billion raised in the same period in 2018, according to data compiled by Bloomberg.

“Nothing tells me we are cooling off at this point,” Remizov said. “Borrowers realize these windows typically don’t last for too long.”

Junk-Bond Boom Opens U.S., Europe to Emerging-Market Borrowers

More are likely to join in as borrowing costs continue to fall. Yields on U.S. junk bonds rated CCC, the riskiest tier, fell to 5.88% on Monday, the lowest ever. That narrowed the gap between those yields and benchmark debt -- a key measure of the perceived risk -- to less than 5 percentage points, a level not seen since before the 2008 credit crisis.

The debt build-up may increase the risk for some borrowers since the bonds will need to be repaid in euros or dollars, which would be burdensome if their currencies or foreign earnings drop. But Atsi Sheth, global head of emerging-markets credit research at Moody’s Investors Service, said it depends heavily on the particular issuers and whether they’re refinancing or piling on more debt.

“Sectors hardest-hit by the pandemic will likely see a slower recovery and some sovereigns and companies reliant on these sectors might have to take on more debt to address their pandemic-related issues,” said Sheth. “That’s a risk for investors.”

Deutsche Bank AG, Bank of America Corp. and HSBC are among top bond underwriters expecting more governments -- including those in Sub-Saharan Africa -- and companies to borrow in the U.S. and Europe.

“There are good opportunities for investment-grade issuers to bring new deals, but the bias remains toward high-yield credit,” said Jake Gearhart, head of emerging-market syndicate and Latin American debt capital markets at Deutsche Bank.

In March, Ghana sold Africa’s first zero-coupon dollar bond as part of a $3 billion Eurobond deal, highlighting how credit markets have opened up to borrowers that would have historically not been able to issue debt that doesn’t repay anything until maturity.

This month, an arm of Central American conglomerate Corporacion Multi Inversiones, owner of Pollo Campero restaurants, tapped the international debt market for the first time with the sale of $700 million of bonds. The securities went on to gain in secondary trading.

Colombian airline Avianca Holdings SA may look abroad for financing, too. It’s seeking $1.8 billion to repay debt and provide new financing after the travel collapse drove it into bankruptcy.

“The bulk of the Middle East issuance is still to come and we will probably see plenty more issuance from African sovereigns,” said London-based Karim Movaghar, head of debt capital markets in Central and Eastern Europe, the Middle East and Africa at Bank of America. “Even though governments’ budget deficits may not be as extreme as last year, there are still going to be significant gaps to plug with debt.”

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