EM corporate debt comprises bonds issued by EM-domiciled corporates or quasi-sovereign entities, which are partially or wholly owned by the sovereign, and denominated in either hard or local currency. The standard EM corporate benchmark,the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI), tracks total returns of U.S. dollar-denominated debt instruments issued by corporate entities in emerging market countries and encompasses bonds from more than 600 corporate issuers in over 50 different countries.
The emerging corporate debt markets have transformed in recent decades from representing primarily issuers who are commodity producers to now a much more diversified issuer base that includes a broad range of industries, such as financials, utilities, transport and technology. The types of companies issuing debt are also broad and include state-owned enterprises, multinational companies, and domestically-focused companies. Today, hard currency corporate debt continues to expand, driven by broad, global investor demand. For investors seeking diversification benefits, EM corporates offer an opportunity set of diverse issuers from security, company, industry, and sovereign perspective.
Credit quality improvements in emerging market sovereigns have created opportunities for companies to access the market for USD denominated financing. Despite superior growth and improved credit quality in emerging markets, spreads in the emerging markets corporate sector tend to be wider than in other credit sectors when comparing similar credit quality. We believe historical skepticism about emerging markets credit
quality, accounting transparency issues, market size and participants, individual country bankruptcy laws, combined with the sovereign ceiling concept, contribute to consistently wider spreads in the emerging markets corporate sector.
We believe EM corporate debt is a growing, attractive asset class supported by sustainable EM growth. The key characteristics of the asset class include:
- Credit quality, as represented by the broader hard currency indices, is strong;approximately 60% is rated investment grade and is broadly diversified by region,country, and industry
- A Large investable corporate universe allows for credit-based fundamental research under different risk profile strategies
- Valuations of EM high grade and high yield corporate debt are compelling relative to developed market peers
- Spreads adjusted for leverage are attractive compared to developed markets counterparts across all rating categories
- EM corporates have historically provided excess yield over both US investment grade and high yield
- EM high yield corporates exhibit lower default rates and comparable recovery rates as US high yield
- EM high yield corporates have higher spread per turn of leverage relative to US high yield
- EM corporates have historically shown significantly lower volatility with higher total return
Stone Harbor has been managing EM corporate debt since 2007.