Why distressed debt is a major concern for EM investors
Rapidly rising Treasury yields have brought back fears of a potential wave of defaults across emerging markets, with investors questioning which countries struggling with heavy debt loads will miss payments or be forced to restructure first.
A total of 21 emerging-market nations have sovereign dollar debt trading near distressed levels, as measured by their sovereign dollar bonds trading around a 1,000 basis-point premium to Treasuries, according to data compiled by Bloomberg. The number could go up this week as the weekend attacks in Israel, with its potential to spark conflicts across the the region, could undermine risk appetite further.
Ethiopia is seen by investors as one of the most likely to default next, with a yield spread over Treasuries of almost 50 percentage points. Tunisia, Pakistan, Argentina, Bolivia and Egypt are also seen at risk.
Now with US yields near 5% and the dollar at the highest in a year, the ripple effects of what Bank of America Corp. strategists call “a bond shock extraordinaire” are becoming clear. And while junk debt markets have been relatively calm recently, optimism is fading for the countries with the most fragile balance sheets.
Hopes for quick recoveries from defaults have also been dashed. Restructuring negotiations in Sri Lanka and Ghana are dragging on, and Zambia plans to sign a deal to restructure $6.3 billion in debt by the close of International Monetary Fund meetings this week.
“In a higher-for-longer rates environment, it is inevitable that vulnerable issuers will have difficulty accessing primary markets and be forced to re-profile their debt load,” said Jennifer Taylor, head of emerging-market debt at State Street Global Advisors, a $3.6 trillion asset manager.
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