New Sovereign-Default Wave Threatens Developing World
The role of China — a large creditor to many emerging market nations — will be key in debt negotiations
Welcome to The Brink. It’s Netty Idayu Ismail in Dubai and Maria Elena Vizcaino in New York, where we’ve been covering emerging market nations struggling to pay their debts amid rising interest rates. We also have news on private equity firms’ interest in US regional banks, Dish Network and hedge funds seeking to sue a Russian-owned company in Ireland. Follow this link to subscribe. Send us feedback and tips at nismail3@bloomberg.net or Tweet/DM to @NettyIsmail.
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. . .The Latest on… US Regional Banks
Private equity firms could soon find it easier to bid for assets and loans of collapsed banks, Lisa Lee reports.
The Federal Deposit Insurance Corp. is now considering whether to offer loss-sharing agreements to non-bank firms that acquire parts of failed lenders. FDIC has a $60 billion portfolio of Signature Bank's loans left to sell.
Non-banks haven’t been able to easily scoop up discounted assets from the regional US lenders that failed. So far the FDIC has entered into loss-share agreements only with bank bidders. First Citizens, which bought Silicon Valley Bank, will only be responsible for half the losses exceeding $5 billion on commercial loans for the next five years. JPMorgan Chase also got a loss-share provision on certain loans when it bought First Republic earlier in May.
Read more: FDIC’s McKernan Says Failed-Bank Auctions Aren’t Competitive
A review of loss-sharing agreements rules for non-banks could increase participation by private equity firms on assets an sale and their prices.
Meanwhile, the selloff on US regional bank shares resumed on Tuesday. PacWest’s shares dropped as much as 8.7% and Western Alliance fell 7.2% after two days of gains.
Overlooked Risks
The world’s most vulnerable economies are at risk of falling deeper into the danger zone as US borrowing costs hit the highest in 16 years just as economic angst mounts.
While developing-nation debt is trading higher than the extreme lows notched in last year’s everything-selloff, Wall Street is prepping for a fresh bout of old-school sovereign defaults — with Pakistan, Egypt and Kenya among those potentially on the brink.
Debt From 18 Developing Nations Trades at Distressed Levels
Source: Bloomberg
Note: Data as of May 8, 2023
All in, about $210 billion of emerging-market bonds denominated in dollars, euros and yen are trading with yields of more than 10 percentage points above that of similar-maturity Treasuries — levels that typically suggest investors reckon default is a real possibility. That accounts for 15% of the $1.4 trillion of outstanding sovereign external bonds, according to data compiled by Bloomberg.
While Suriname reached a deal with creditors last week, debt revamp talks are underway in Ghana and Zambia and Sri Lanka plans to release its restructuring plan to investors this month. Meanwhile Tuesday's arrest of former Pakistan premier Imran Khan threatens yet more political and economic dysfunction.
“My bias is to think we will see further defaults in the distressed bucket as market access remains a long way off at the moment,” said Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments. “The market overlooked a lot of fiscal issues when risk-free rates were pinned at zero, but at 5% the market becomes much more selective.”
Emerging-market history is famously littered with debt meltdowns and currency mismatches. But this is no Asia-crisis redux either in size or scope, with market access still open to stronger borrowers while an index of local currencies has strengthened against the dollar this year.
What complicates this cycle this time around is the role of China as an opaque creditor with geopolitical interests of its own. Meanwhile across emerging markets, debt burdens are likely to rise again this year just as the cost of servicing debt (the interest-to-government revenue ratio) jumps sharply, according to Wells Fargo, citing International Monetary Fund data.
Time is running out for some. Pakistan, which is struggling to restart a $6.5 billion IMF bailout, has seen its foreign-exchange reserves shrivel to $4.5 billion. The nation has about $1.8 billion in Eurobond principal and interest payments coming due through next year, with a $1 billion note due April 2024 trading around 50 cents on the dollar, according to Bloomberg data.
“Due to a lack of resolution among a number of recently defaulted EM sovereigns, it is hard to get excited about current distressed valuations, however tempting long-end current cash prices are,” said Mohammed Elmi, a portfolio manager at Federated Hermes in London.
In the Middle East, the cost to insure Egypt’s debt against default has almost doubled this year to a record of 1,723 basis points on Monday. The Arab world’s most populous nation — whose debt is projected at more than 90% of economic output this year — has about $8 billion in principal and interest payments on its external bonds due through 2024, Bloomberg data show.
In a bid to ease market concerns, the Egyptian prime minister said at the end of April that the nation is fully able to meet its international debt obligations as it expects at least $2 billion from the sale of state assets by the end of June. Prices of the nation’s battered bonds correspond to an almost 9% chance of default over the next six months and about 25% over the next year, according to calculations by London-based Tellimer, a provider of research and data on emerging markets to investors.
Elsewhere, the spread on Kenya’s eurobond remains near 1,000 basis points even though the IMF’s chief expressed confidence last week that the cash-strapped nation would keep servicing its debts. Eastern Africa’s second-largest economy has a $2 billion bond maturing in June 2024. Kenya plans to return to the international capital markets next year to refinance the security — though no country in Sub-Saharan Africa has been able to borrow on international markets for more than a year.
The good news: Two of the riskiest nations in Latin America — Argentina and Ecuador — have light debt repayment schedules in the near term.
Based on current macro imbalances, Wall Street analysts see 2025 or so as the crunch time for Argentina’s big external debts. And while the weakening mandate of Ecuadorian President Guillermo Lasso has sent dollar bonds into a tailspin, the nation’s debt-servicing capacity isn’t in peril for now. . .[ ]
By the Numbers
Dish's Notes Have Dropped Dramatically
Bonds have sold off following cyber attack, weak performance
Source: Trace
Note: Prices as of May 8. Shows net change over three month period.
The chairman of Colorado-based satellite TV company Dish Network sees a “narrow window” to address the company’s capital structure, which includes $14.7 billion of distressed debt that has been sliding further into troubled territory for the past few months, Michael Tobin reports. Charlie Ergen told analysts during an earnings call Monday that the debt market is challenging and effectively closed to the company. That has Dish considering assets — particularly airwave licenses — as either collateral on new loans or some other option to help it handle its debt. The company has started a costly transition to become a wireless broadband provider to halt a decade-long decline in subscribers. The firm is also reeling from the impact of a cyber-security attack that disrupted its payment system. "
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