Huge Maturity Wall Seen Boosting Emerging-Market Junk Bond Sales

The surge of junk-bond sales in the U.S. by emerging-market companies appears poised to continue with roughly $72.7 billion of such debt set to come due next year, promising to spur a wave of refinancing.

The scale of those payments is nearly twice what companies faced this year and gives them a strong incentive to seize on low U.S. interest rates to extend the maturities on the bonds.

That could add to what’s already a record borrowing spree in the U.S. by below investment-grade emerging-market corporations, which have sold a record $74.1 billion of dollar-denominated debt so far this year, according to data compiled by Bloomberg. More are planning new deals in the second half of the year as the U.S. economic rebound increases the risk that interest rates will rise from near records lows.

Huge Maturity Wall Seen Boosting Emerging-Market Junk Bond Sales

In the U.S. junk market, issuers are refinancing at the fastest rate in 20 years, according to a report from Barclays Plc. Average junk-bond yields are at a record low of 3.53% as investors continue to look to the market for returns. Yields on CCC tier, the riskiest part of the market, plummeted to another record low of 5.15%, down 44 basis points, the biggest one-day decline in almost eight months.

“The U.S. high-yield issuance to date has been on a tear, which is very indicative of the demand for corporates in emerging markets and Latin America,” said Max Volkov, head of Latin America debt capital markets at Bank of America Corp. “If the buy side likes to buy credit and likes to go down in high-yield, it’s fairly likely that the conditions for corporates are going to be similarly favorable.”

The hunt for higher yields has made the U.S. a receptive market for low-rated companies abroad, including those that struggled to raise cash at the height of the pandemic.

Most of the debt maturing next year comes from the financial sector, accounting for about $55.2 billion, followed by issuers in the materials sector at $4.63 billion and industrials at $4.58 billion. Chinese companies, meanwhile, account for nearly half of the debt due next year, at $34.9 billion, followed by those from Brazil with about $9.4 billion.

Huge Maturity Wall Seen Boosting Emerging-Market Junk Bond Sales

China Evergrande Group, a heavily indebted real estate company that was recently cut deeper into junk by Fitch Ratings and has seen several banks restrict its access to credit, has about $3.5 billion coming due next year, more than any other company, the data compiled by Bloomberg shows. Itau Unibanco Holding SA, Latin America’s biggest lender by market value, is second with about $2.6 billion.

A representative of China Evergrande didn’t respond to a request for comment. Itau didn’t respond immediately to a request for comment.

JPMorgan Chase & Co., the biggest underwriter in the region, expects refinancing, mergers and acquisitions, and borrowing to pre-fund 2022 obligations to drive issuance of Latin American corporate junk bonds in the U.S. during the second half of the year. In that region, countries and corporations may borrow another $50 billion in foreign debt markets by the end of 2021, according to Lisandro Miguens, head of Latin America debt capital markets at JPMorgan.

Huge Maturity Wall Seen Boosting Emerging-Market Junk Bond Sales

The window for borrowing at ultra-low rates is narrowing, said Brian Jacobsen, multi-asset solutions senior investment strategist at Wells Fargo Asset Management.

The Federal Reserve in June signaled that it’s expecting two rate increases by the end of 2023, a faster than previously anticipated pace of tightening, and that it is poised to start debating when to begin pulling back on its purchases of Treasuries and mortgage-backed securities.

“The second half might be a good time to issue more debt because emerging markets should also be experiencing accelerating growth and central banks are likely to be on pause,” said Jacobsen. “The market should be able to absorb the maturities just fine and probably won’t require a massive price concession.”

U.S.

Credit investors will be digging through minutes of the Federal Reserve’s June meeting for any fresh hints on when the central bank is likely to pare back its unprecedented support for the economy.

  • Pacific Investment Management Co. has raised about $7 billion for two credit strategies from investors hunting for yield, according to a person familiar with the matter.
  • BlackRock Investment Institute strategists downgraded high yield to neutral after the asset class’ strong performance and prefer to take risks in equities, according to the firm’s 2021 midyear outlook report published on Wednesday
  • MatlinPatterson Global Advisers LLC, a distressed-debt and credit opportunities fund that bet big on Puerto Rico debt and the Brazilian airline industry, filed for bankruptcy in order to liquidate
  • Six issuers are marketing new deals in the U.S. investment-grade bond market on Wednesday. Xiaomi Best Time International is readying a two-tranche benchmark offering consisting of a 10-year note and a 30-year green bond while Prosus is selling 10-year U.S. dollar bonds as part of a multi-currency offering
    • The leveraged loan market has five meetings scheduled on Wednesday, and commitments are due for a $200 million loan from baseball card maker Topps

Europe

Deutsche Lufthansa, Romania and the AA are among 16 issuers raising at least 7.8 billion euros in Europe’s primary debt market Wednesday

  • Russian energy giant Gazprom is offering about $1 billion bonds maturing in 10 years
  • Lufthansa is offering 3-year and 8-year notes
  • Among financials, Arion Bank tapped the market for a 300-million euros green bond
    • The Dutch bank ING Groep raised its 2021 supply expectations for sustainable bond sales from financial companies to EU62b from EU35b

Asia

Chinese junk dollar bonds have been suffering the worst selloff since the pandemic roiled markets last year, as investor concerns about China Evergrande Group drag on the sector

  • At least four borrowers were looking to price their dollar debt offerings in the Asia primary market on Wednesday; Xiaomi Corp. is seeking to raise as much as $1 billion in a dual-tranche deal that includes a 30-year green bond
  • Metals and oil firm Vedanta Resources Ltd. is seeking to relax some of the covenants on two of its dollar-denominated notes in order to allow the guarantors to borrow more
  • China’s Tsinghua Unigroup Co. bonds are on a tear as traders bet on a resolution to the chip maker’s credit woes

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