Analysis: Emerging borrowers face rollover risk, default threat

Fri Dec 16, 2011 10:58am EST
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By Sujata Rao

LONDON (Reuters) - Scarce dollar funding and a retrenchment in bank lending will force up premiums for emerging market countries and companies refinancing debt next year, adding to strains on public finances and potentially triggering a surge in corporate defaults.

JPMorgan calculates that emerging sovereign debtors will need to find $63.6 billion to cover coupon and redemption payments in 2012 while corporates must raise $107 billion. Total issuance should be around $245 billion, the bank forecasts.

Such volumes would not usually portend difficulty -- even this year, emerging bond issuance has been over $250 billion, not far off last year's record. But with markets still awaiting a solution to the euro zone's debt crisis, 2012 could be tough for entities that need to refinance debt or secure new money.

That is especially true for weaker names, both sovereign and corporate, with many of the latter already seeing their debt trading at levels that imply default.

Few expect any emerging sovereigns to default on debt next year. But fears are growing of a "crowding out" effect, as many borrowers -- from developed as well as emerging economies -- compete for limited funds on international capital markets.

Cash-starved European banks are actively shrinking non-core lending, with emerging markets a particular target. Dollar funding costs have surged to three-year highs in recent weeks as investors, keen to hold onto scarce dollars, pull back from making loans not secured by assets.

And within emerging markets, growth is slowing, making the investment story less compelling. That is reflected in a deterioration in credit ratings, especially in eastern Europe.

"The main theme in 2012 will be that quality matters. Given the uncertainty over the global outlook, investors will either look for quality or ask for a significant premium," said Nicolas Schlotthauer, who oversees $2.5 billion in emerging markets debt at DB Advisors in Frankfurt.   Continued...