Emerging-market firms are still operating in high-growth economies. To take advantage of that, their strategies continue to be aggressively expansionary. Furthermore, an unusually large amount of emerging market short-term debt is reaching maturity.
Refinancing is therefore much in demand, whether from collapsed banks in Kazakhstan, or real estate companies in Hong Kong keen to grow while market conditions are still propitious.
Fund managers, on the other hand, are beginning to demand higher yields for emerging market corporate debt, especially in central and eastern Europe. Internationally, banks’ access to credit is constrained, and the availability of leverage to hedge funds has declined.
Local banks in developing countries are small in global terms, so it is difficult to use domestic loans to refinance emerging market bonds that were sold internationally. Similarly, emerging equity markets often lack the liquidity to finance a big rights issues, a concept that is, in any case, relatively unfamiliar to many emerging markets.
Compared with bigger companies in more established markets, emerging-market companies expect higher growth rates, and are therefore prepared to pay higher yields.
Private placements, however, are attractive because they provide a backdoor to the credit market. They can protect these companies’ equity prices by concealing the terms of the debt, which can include higher rates, and, for less versatile borrowers, equity sweeteners.
It is difficult to obtain accurate figures on private placements. However, analysts at last month’s Emerging Market Trade Association Corporate Bond Forum said the tool had become an increasingly popular source of credit over the past six months, especially among financial institutions and in the corporate sector in emerging markets.
Of the $10 billion to $15 billion of emerging market corporate debt needing to be refinanced this year, up to 40% might be placed privately, one analyst estimated. That would compare with an estimated 10% before the credit crunch.
In the present environment, the trend for private placements is likely to persist for at least the next six months, possibly longer. It shows one of the ways in which emerging markets are affected by the credit crunch but it also shows one of the ways in which debt can still be extracted from the global market.