Fixed Income Opportunities In a Deleveraged Banking Environment Emerging Markets Private Debt Adrian Petreanu - Portfolio Manager Ashmore Investment Management Limited March 2014
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EM Corporate Credit – A Sizeable Universe Already • As a whole, Corporate Debt has assumed a much greater stake in Emerging Markets debt: from 2011 to 2013; Corporate Debt grew Emerging Market Debt Universe roughly 10% to US$6.75trn and is approaching US$7.77trn 1 20 • Emerging Markets Corporate Debt is the fastest growing asset class Total Corporat e Debt 16.1 in Emerging Markets for the last 5 years 14.0 Total S overeign Debt 15 12.7 11.9 US$ trillion • Corporate Debt has grown at a CAGR of c. 16% since 1993 to today, 10.1 10 reaching 50% of Emerging Markets debt universe in 2012 8.0 8.2 1.0 1.2 1.4 1.7 1.7 2.1 2.2 2.5 2.6 3.3 3.9 4.7 5.4 6.4 • Total Emerging Markets debt outstanding increased 16% in 2013 to 5 reach a new high of US$16 trillion 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (est.) • Growth in 2010-2013 was due mainly to increased issuance by Investment Grade rate corporates maintaining the relative high credit quality of the EM corporate debt universe Historic Emerging Markets Corporate Debt issuance Issuance by Rating 400 350 324 350 302 100% 300 250 80% US$bn 203 183 200 153 60% 137 150 121 Non-IG 93 40% 100 71 58 IG 50 20% 0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2010 2011 2012 2013 (est.) (F) Source: Size and Structure of Global Emerging Markets Debt (July 2013) , Merrill Lynch, BIS, JP Morgan, Bond Radar, Dealogic, Deutsche Bank., JP Morgan, Bloomberg. (1) Based on Ashmore estimates. 3
Emerging Markets Environment Emerging Market fundamentals continue to demonstrate the attractions of the asset class Superior Economic Growth Outlook 1. Driver of global growth 8% • Emerging Markets (EM) expected to grow at 5.5% in 2014 compared to 7% Developed Markets (DM) growth rate expected to average only 2.2% Real GDP Growth • EM is generating around 50% of global GDP (PPP basis) 6% 5% 2. Favourable demographics 4% • Over 75% of world’s landmass and 85% of global population 3% • Growing middle class with high proportion of savings (household savings rates of over 30% in most EM countries vs. less than 10% in most developed countries) 2% 1% 3. Reduced dependency on developed world 0% 2005-2010 2011E-2015E • Over 90% of oil and gas reserves and 70% of coal reserves • Approx. 67% of the world’s total foreign exchange reserves Emerging Markets Developed Markets • EM countries now export more to China than to the United States • EM countries have not only fared much better in the credit crisis but have an increasing global economic presence Increasing Global Economic Presence GDP based on PPP % of world 100% 4. Developing capital markets • EM Fixed Income market US$11.7 trillion expanding by over 7% in 2011 80% 46% 52% • EM sovereign debt issuance of US$75bn and corporate issuance of US$280bn in 63% total 69% 2010 60% • EM stocks represented 32% of the market cap of stocks worldwide at end of 2010 40% but only 13% of the MSCI • EM IPO volume made up 69% of global volume in 2010 54% 48% 20% 37% 31% 0% 1990 2000 2010 2016E Emerging Markets Developed Markets Sources: IMF, Bloomberg, Ashmore, BIS, UBS, JP Morgan. 4
Current State of Play Emerging Markets proved convincingly in 2012 and 2013 that they do not rely on growth in Developed Markets to fuel their own growth. NOW that growth in DM is picking up EM is well positioned to benefit with cheaper local currencies and already adjusted interest rates Drivers of growth in Emerging Markets • Growth in EM is now fuelled by local consumption, which is supported by demographics and wealth accumulation over the last decade • EM countries are trading with each other, financing each other more directly and through local banks • Leverage is lower in EM for both sovereign and corporate balance sheets, which gives more flexibility to EM central banks • DM monetary policy backdrop remains supportive, while EM interest rates have already adjusted to a large extent • Risk taking is better compensated in EM credit which trades at historical wide levels compared to DM credit Strong fundamentals of Emerging Market • Relatively strong economic growth in Emerging Markets vs. Developed Markets • Less export dependency on Developed Markets Corporate Debt • Lower debt to GDP at consumer, corporate and government levels • Reduced fiscal deficits and higher levels of reserves • Improving economic and political fundamentals and stability • Banking systems are much better capitalized • Increasingly better corporate governance and transparency 5
Private Debt in Emerging Markets What is Private Debt? • Wide range of deals, including: ― debt financing ― loans ― private placements ― club/mezzanine deals ― less-liquid securities ― trade receivables Advantages of Private Debt • Higher expected returns • Stronger covenants and senior creditor status • Lower volatility • Stronger relationships with issuers, better information flow • Stronger negotiating position compared to investing in public bonds Disintermediation of the banks • International and local banks deleveraging, especially European Banks • Asset Managers can originate better deals; not constrained by bank’s syndicate desk budgets • Direct access to management, information is not “interpreted” by bankers • Cutting out structuring fees (2.0% - 2.5%) benefits the investor No competition for a percentage of the allocation • • Strong current need for term-funding drive premium to new all time highs Current opportunity of dedicated strategy • Relative fundamentals compared to Developed Markets are highly attractive ― continued growth in Emerging Markets corporate debt theme ― strong balance sheets of issuers ― superior credit metrics • Opportunity for lock-up product to match liquidity profile of assets • Western Europe has been the biggest international lender to EM and has been the worst hit by the financial crisis Why banks are not coming back soon • Capital constraints reduce ability of Western European banks to sell assets in EM, clogging up balance sheets • Basel 3 adoption and new rules for risk waited assets (RWA) calculation constrains ability of banks to underwrite loans • Banks focus on safest possible loans, with little appetite for the High Yield market 6
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