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Emerging markets: Corporates fight off default mode

Emerging market investors who gorged on an increasing array of corporate debt products face uncertain times as companies’ balance sheets come under pressure. Default and recovery rates will vary greatly by country, writes Sudip Roy.

Loans market under stress

THIS YEAR MEXICAN glassmaker Vitro reaches its centenary. Sadly for the Monterrey company it will not be celebrating in style. Instead it is fighting for its future after announcing in late January that it had failed to make a payment of $293 million in derivatives contracts. The company also served notice that it did not intend to make scheduled interest payments on three bonds, leaving it potentially open to claims of $1.2 billion by investors.

Although Vitro’s biggest shareholder, the Sada family, is trying to restructure its debt in a transparent way, that is not enough for one counterparty. On February 5, Vitro announced that Credit Suisse had filed a lawsuit in New York against one of the company’s subsidiaries demanding payment of $85 million after the company’s default on its derivatives contracts. In a rather cryptic response Vitro said on its website that it was "analysing alternatives".

Those alternatives are unclear, as is the outcome for bondholders of Vitro’s debt restructuring. Fitch Ratings reckons the recovery rate could be anything between 31 cents on the dollar to 50 cents. Vitro’s debt is trading at about 20 cents.

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