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Emerging market corporate credit takes off, says Western

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Rajeev de Mello, Head of Asian Investments at Legg Mason affiliate Western Asset Management believes the external hard currency borrowing space will no longer be dominated by sovereign debtors and

Rajeev de Mello, Head of Asian Investments at Legg Mason affiliate Western Asset Management believes the external hard currency borrowing space will no longer be dominated by sovereign debtors and has dramatically opened for emerging market corporate issuers…
 
As emerging market governments increasingly finance themselves in their own domestic currency via local investors, the external hard-currency borrowing market has opened dramatically for corporate issuers. Indeed, 2010 saw record new issuance from EM corporates, which was met with strong investor demand. Liquidity across the corporate credit sector has improved dramatically, helped by the inclusion of some emerging market corporate issuance in global benchmark bond indices.
 
EM hard-currency-denominated corporate issuance significantly outpaced that of sovereign issuance for the first time in 2005, a trend that has continued every year since then. Last year marked a record for corporate issuance. Following the trend of previous years, the majority of issuance was rated investment grade, although we expect future issuance in EM corporate debt to include an increasing number of high yield issuers. At the same time, we expect regional issuance to remain well diversified throughout 2011.
 
During 2010, EM corporate issuers took advantage of low absolute yields (due to the rally in US Treasuries) to refinance older, more expensive debt, to execute expansionary business plans, and to expand balance sheets, while also improving financial flexibility. Issuance has been particularly strong in the financial and commodity sectors. With local economic growth remaining robust, EM banks expanded their balance sheets to take advantage of domestic opportunities, while deep global demand for commodities has encouraged their producers to build out operations to meet this demand.
 
Heavy EM corporate issuance in 2010 was met with strong investor demand, as higher relative spreads, improving fundamentals and ever-improving liquidity attracted a global investor base. Higher spreads compared with similarly rated developed-country issues attracted traditional EM investors looking to expand their former, sovereign-dominated mandates. But the market also attracted non-traditional participants – mainly global investment grade buyers – as some EM corporate issuance met the requirements for inclusion in global benchmark bond indices. The broad reach of these indices has allowed for larger issuance sizes alongside multiple tranches from EM debtors. During 2010, the typical "benchmark size" issue for EM corporates was USD500 million to USD1.0 billion, well within the range of developed-economy, benchmark-sized issues. Along with volume and tradable issuance size, liquidity across the EM corporate credit sector has improved dramatically. And looks set to continue doing so.

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