Fitch urges vigilance amid emerging markets exuberance

By Aaron Hochman-Zimmerman

New York, June 5 - Fitch Ratings offered its view of the world, or at least the emerging world, to bond investors and analysts during a morning-long conference - and emphasized the importance of the conference's title, "Know Your Risk."

Speakers during the event at Manhattan's Pierre Hotel examined the degrees and nuances of risk and emphasized the value of comprehensive information.

"Dig," said Peter Shaw, a managing director in Fitch Ratings' financial institutions group, when asked what was the most valuable lesson of the conference. "Go beyond the numbers. The faster a place is growing the less the numbers say.

"The pace of growth in Kazakhstan is mind-boggling," Shaw said, but he was also quick to note "people forget, these things work in cycles."

If the market does turn for the worse, "it'll be messy," he said.

Latin American markets, which have lagged behind other regions, according to Daniel Kastholm, a managing director in Fitch Ratings' Latin American corporate finance group, still offer plenty of opportunity.

"Economically, the region is sound; it's growing at 4%," Kastholm said.

But he warned investors not to be blinded by the numbers.

"Before we get too happy ... we have to keep in mind that market sentiment can turn very quickly."

Many of the speakers returned to the theme of understanding both the entities issuing debt and the environments in which they exist.

Irregular legal systems

Foreign legal systems are frequently subjected to many irregularities. Political pressures can leave laws unenforced, or enforced more upon some than others. Judges are often unqualified to handle major corporate deals and can be influenced by their own communities where these emerging companies are their neighbors. Local lawyers know how to exploit backlogged courts to stall for time. These factors call for justified caution on the part of investors, the speakers said.

The legal system in Mexico shows the most promise to overcome these hurdles according to both Joseph Bormann, a senior director in Fitch Ratings' Latin American corporate finance group, and Douglas Doetsch, partner and co-head of Latin American practice at Mayer, Brown, Rowe & Maw, LLP.

"Secured debt is always better than unsecured," said Doetsch. The interest not collected by unsecured debt holders during lengthy or even stalled legal proceedings can be very damaging.

Daniel Hitchcock, executive director of credit risk management for the Americas at WestLB AG, attended the conference and said he is "cautiously optimistic" about the emerging markets.

Part of his concern comes from what he considers "untested" emerging markets and how they will react to economic crisis he told Prospect News.

A JP Morgan analyst in attendance said he appreciates the need for understanding of the foreign markets and is glad to see that interest from others during the presentation.

"The market is growing faster than the capacity of [the investors] to keep up," he said.

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