A $13 Billion Plunge In Bond Sales Hints At Pain For Emerging Market Credit

The pipeline of company debt from emerging markets is running dry as major central banks continue to raise borrowing costs and investors grow increasingly wary after a series of high-profile corporate blowups.
A $13 Billion Plunge in Bond Sales Hints at Pain for EM Credit
A $13 Billion Plunge in Bond Sales Hints at Pain for EM Credit

The pipeline of company debt from emerging markets is running dry as major central banks continue to raise borrowing costs and investors grow increasingly wary after a series of high-profile corporate blowups.

Businesses from developing economies have sold just $60 billion of global bonds so far this year — a drop of about 18%, or $13 billion, from the same period of last year, according to data compiled by Bloomberg. That’s the smallest sum to start any year since 2016, just after the Federal Reserve embarked on its last rate-hiking cycle.

This time, the world’s most-influential monetary authority is sounding even more aggressive as it seeks to tame runaway inflation. That, and Wall Street’s waning conviction in emerging markets following corporate meltdowns at India’s Adani Group and Brazil’s Americanas SA, have analysts flagging the risk of a second-straight year of limited capital markets access — and the trouble that could cause for highly-indebted firms.

“The market isn’t open to most of our issuers,” said Siby Thomas, a portfolio manager specializing in emerging-market corporate debt at T. Rowe Price. “You’re seeing this bifurcation in the market where the companies that want to issue can’t because it’s too expensive, and the higher-rated ones that can issue don’t want to because they can afford to wait.”

Issuance from both emerging-market firms and US high-yield companies had soared in the first years of the pandemic as policymakers pushed down borrowing costs to prop up their economies. But that trend ended as the Fed and other major central banks embarked on a fight against persistent price pressures last year.

“Corporates tend to pro-actively manage their upcoming maturities a couple of years in advance, and took advantage of the low yields during 2020 and 2021,” said Sara Grut, an analyst at Goldman Sachs Group Inc. “On some level, the current environment is just the flip side of that issuance.” 

While junk-rated US firms have been able to maintain some access to the bond market, with total issuance up roughly 5% this year from the same period of 2022, similarly-rated companies from developing nations haven’t been so fortunate.

That’s left some companies in a tricky situation. While investment-grade borrowers can often carry on without the help of foreign bondholders, there are fewer options for junk-rated firms with higher leverage ratios and generally riskier outlooks. 

Companies in need of cash may have to turn to domestic debt markets, private placements or multilateral financing sources, according to Lisandro Miguens, head of debt capital markets for Latin America at JPMorgan Chase & Co.

“Financial markets are very volatile as a result of Fed rates uncertainty, and EM corporates are no exception,” he said. Firms “need to adapt their financing strategy to this reality and be ready to act accordingly.”

Wall Street has already begun to take a more cautious approach to developing-market assets as an early-year rally fades and a soft landing for the global economy appears. Sentiment has soured in developed markets, too, after Silicon Valley Bank became the biggest US lender to fail in more than a decade.

Emerging-market dollar bonds tumbled 2.2% in February, paring their year-to-date returns to just 0.6%, according to data compiled by Bloomberg. In comparison, a gauge of US high-yield debt is up 2.2% this year. 

With juicy yields available in more-mature markets, the incentive is lower for investors to take on extra risk, according to Akbar Causer, a portfolio manager at Eaton Vance Management focused on emerging-market debt.

“The bar for everything else is high” when US Treasuries offer attractive yields, he said. 

And while a meltdown in assets tied to Adani’s sprawling business empire after a short-seller report and an accounting scandal at Brazilian retailer Americanas aren’t indicative of the asset class overall, they certainly raised eyebrows among some money managers in emerging-market corporate debt.

A whopping 77% of new corporate bond deals from the developing world this year have come from investment-grade issuers, according to data compiled by Bloomberg. Companies from China have been the most active in global debt markets, followed by those in Saudi Arabia and South Korea, the data show.

From here, the question is when the spigot for emerging-market corporate debt will reopen. An eventual end to the Fed’s tightening efforts will make borrowing easier, said Omotunde Lawal, a portfolio manager at Barings Ltd. The timing, of course, is still uncertain.

In the meantime, only the most well-prepared emerging issuers will be able to sell debt in the brief periods of market respite, said Andres Copete, a director for Latin America in the debt capital markets business at Deutsche Bank AG.

“We are not super optimistic about overall volumes for the year,” he said. “It’s going to be very chunky, very uneven and very concentrated in specific windows for the remainder of the year.”

What to Watch 

  • Indian inflation is expected to linger above target, bolstering the case for the central bank to tighten further in April.
  • Bloomberg Intelligence expects the People’s Bank of China to keep its one-year interest rate steady in March, even though it will likely opt for further easing over the course of 2023.
  • In Argentina, February inflation may finally top 100%, according to Bloomberg Intelligence.
  • A reading of Sri Lanka’s gross domestic product may show a deeper year-on-year contraction in the final stretch of 2022.
  • Bank Indonesia will likely keep its key rates on hold, according to economists surveyed by Bloomberg.
  • Policymakers in Russia are seen keeping the policy rate steady at 7.5%, though Bloomberg Intelligence says they may signal an intention to hike in April.
  • Brazil will report employment data for January, which will offer one of the first major data readings since President Luiz Inacio Lula da Silva’s third inauguration.

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