Latin Finance - April 2008 - 63

Parting shot Robert L. Rauch Unearthing Stressed Debt Opportunity A significant number of LatAm corporate bonds show signs of stress, mainly due to contagion from developed markets. Investors must be selective and disciplined to exploit the opportunity. by Robert L. Rauch n December, the US corporate default rate fell to 0.9%, the lowest Opportunities, Today and Tomorrow level Moody’s had recorded in 26 years, and there was not a single Where are the LatAm opportunities for a distressed or opportunistic default during the month, leaving the total for the year at 16. This investor in this environment? In the near term, we are seeing a marked a clear inflection point for financial players, since in the first significant number of bonds that are clearly exhibiting signs of stress. quarter of 2008 liquidity and solvency concerns have caused credit and This has less to do with deteriorating fundamentals or looming default money markets in the developed world to all but abruptly seize up. risk and much more to do with contagion from the US and European What had begun in August 2007 as a problem in the US securitized markets. mortgage markets has now spread to the municipal bond market and the This is both due to the pulling back of repo financing by global monoline insurers, and to financial institutions of all types, culminating financial institutions as well as the relative investment yields offered in to date with the liquidation of those developed markets – where nearly a dozen large hedge funds five year BBB rated paper provides Latin American Bond Issuance 2003-2007 ($ billions) and with the surprising bail-out spreads of 430 basis points and Corporates dominating the mix and forced takeover of Bear single B corporates are at 855 55 Stearns. Moody’s predictions from basis points. In defining a Sovereign Corporate mid-January that the US speculative- 50 “stressed” performing bond, we grade default rate would rise to 5.3% 45 screen for bonds priced at 90 or now appear optimistic, as prospects less and/or a yield-to-worst of 40 9 for a recession in the US appear 12% of more. 29 35 17 nearly certain. As of March 17, 2008, we found 21 30 Against this backdrop, emerging a total of 57 LatAm corporate 20 markets are being touted as the safe bond issues with a face value of 25 haven for investing. As the story $19.8 billion (including $7.5 20 34.6 goes, fundamental changes in the billion of PDVSA bonds), at an 15 26 economies and politics of the average price of 74% of par and an 21 21 10 17 countries previously known as third average spread over treasuries of 5 world, together with support from 1,046 basis points. Interesting the long-term boom in commodities, bonds include those issued by 0 2003 2004 2005 2006 2007 have caused EM to decouple from Durango, Vitro, Province of Source: ING Emerging Markets Strategy Group, Gramercy Advisors the US and Europe and insulate it Buenos Aires, Transportadora de from the developed world’s Gas del Sur, and Transtel. With economic cycle. proper credit work, there will be a number of attractive opportunities for There was $20.2 billion in face of defaulted LatAm corporate debt the selective investor over the next several months, despite the fact that across 68 issuers in mid-2002, while today we estimate there is just $4.2 the broad EMBI+ index has to date only widened out to around 320 billion in face amount across 15 corporate issuers. Of that, $1.8 billion is basis points. from Mexico’s AHMSA. These figures exclude the defaulted Argentine Over the next 12-24 months, we expect to see a number of LatAm sovereign debt, which ESEADE estimates at $28.1 billion in external corporate defaults. Although we expect a macro-level recoupling with bonds with an additional $20 billion of ICSID claims. developed economies leading to a slowdown in growth, we view this as a I 2008 April LATINFINANCE 63

Latin Finance - April 2008

Table of Contents for the Digital Edition of Latin Finance - April 2008