LONDON: Default rates for speculative grade emerging market bond issuers are likely to rise next year, ING Bank said on Monday, citing data showing corporate debt worth $82 billion is already trading at distressed levels.
David Spegel, ING's global head of emerging markets strategy, said that while default rates currently are running well below 2010 levels, the recent rise in borrowing costs could create difficulties next year for many issuers.
A total of 201 bonds worth $82 billion and representing 145 corporate issuers now are trading at distressed spread levels above 1,000 basis points, the ING study found. Banks and energy companies had the greatest amount of debt trading at distressed levels, ING said.
"The 2008-09 history shows that prohibitive borrowing costs can lead to higher incidents of default within three to six months," Spegel told clients.
"Highly levered companies are already facing difficulty in capital markets, with speculative-grade issuance just 10 percent of the total so far in the fourth quarter of 2011 versus the 20-35 percent norm." But Spegel said that current levels of market distress did not seem justified.
The study found $1.48 billion worth of external bond defaults so far in 2011, half of them from Latin America. That is significantly lower than the $5.5 billion recorded in 2010. Defaults on local bond markets totalled $415 million compared to last year's $1.4 billion, ING said.
"We forecast the speculative-grade corporate default rate will end 2011 at 0.62 percent, but start rising in January 2012 to 1.4 percent and end 2012 at a rate of 1.66 percent," Spegel said. "This does not warrant such broad-based levels of EM bond distress."