Emerging Markets: bond markets churn amid U.S., European rate hikes; Kookmin plans green bonds

By Rebecca Melvin

Concord, N.H., June 17 – Some European central banks moved to hike interest rates on Thursday, marching to the drumbeat set by an aggressive U.S. Federal Reserve, which raised the fed funds rate by 75 basis points on Wednesday, the first time an increase of that size has been seen since 1994.

The fed funds rate range now stands between 1.5% to 1.75%, and all 18 officials at the latest policy meeting projected rates would need to rise to at least 3% by December. Most projected rates would need to rise to 3.75% next year as a game of catch up settles in amid spiking inflation.

Ethan Harris, global economist at BofA Securities head of global economics research, wrote in a recent report that his firm’s worst fears around the Fed have been confirmed: namely that the central bank fell far behind the curve and is now playing a dangerous game of catch up.

On Thursday, the Bank of England lifted its key rate 25 bps to 1.25%, and the Swiss National Bank lifted its rate 50 bps, its first increase since 2007.

Lowered global growth projections, the war in Ukraine and Covid-related lockdowns in China are also contributing to the markets’ downturn.

Emerging markets bond funds chalked up their 10th straight outflow and 28th in the past 30 weeks, according to an EPFR update published on Friday.

Redemptions from local and hard currency emerging markets bond funds were roughly equal during the week ending June 15, and funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates posted their biggest outflow since mid-March 2020.

At the country level, China bond funds extended their current run of outflows to 19 weeks and $19 billion, while flows into Turkey bond funds climbed to a 13-week high.

Meanwhile, redemptions from all bond funds have hit their highest level since the initial Covid-19 pandemic shock in the first quarter of 2020. Redemptions year to date now stand at $260 billion, which is close to triple the full-year outflow record set in 2018, EPFR reported.

Against that backdrop, the secondary emerging markets bond market was weak this past week, and the primary was close to nonexistent. The daily total return for J.P. Morgan U.S. dollar emerging markets bond index iShares security is down 18.96% year to date.

Korea Electric Power Corp. issued $800 million of notes in two tranches (Aa2/AA) on Tuesday, according to listing notices and the base prospectus for its global medium-term note program.

The utility sold $500 million 3 5/8% senior notes due 2025 and $300 million 4% notes due 2027.

Citigroup Global Markets Inc. is the arranger.

Joining Citigroup as dealers are JPMorgan Securities (Asia Pacific) Ltd., Merrill Lynch International, Mizuho Securities Asia Ltd. and Standard Chartered Bank.

Citibank NA, London Branch is the issuing and paying agent, calculation agent and registrar and transfer agent.

China’s Coastal Emerald Ltd. issued $500 million of 4.1% guaranteed green notes due June 15, 2025, according to a Singapore Exchange listing notice.

Coastal Emerald is an indirectly wholly owned subsidiary of China Shandong Hi-Speed Financial Group Ltd., which is an investment holding company based in Hong Kong.

The notes will be listed on the Exchange on Thursday.

And Bank of Nova Scotia sold HK$550 million 4.1625% notes due 2027, which were issued on June 16 and listed on June 17.

Looking ahead

Meanwhile, South Korea’s Kookmin Bank is planning to offer a euro-denominated 3.5-year sustainability covered bond (expected ratings: AAA/AAA), according to a market source on Wednesday.

The lender has selected BNP Paribas, Citigroup, Credit Agricole CIB, ING, LBBW and Societe Generale as joint bookrunners and joint lead managers to arrange a series of fixed-income investor conference calls regarding the bond beginning Wednesday.

Completion of the sale of the Regulation S notes, backed by Korean residential mortgages, is subject to market conditions.

China’s Dangdai defaults

But Wuhan Dangdai Science & Technology Industries (Group) Ltd. subsidiary Dangdai International Investments Ltd. did not make the interest payment on its $200 million of 9¼% guaranteed notes due 2022 (ISIN: XS2408455553) that was due on May 16 within the 30-day grace period permitted by the indenture, according to a notice.

The non-payment caused an event of default under the notes. As a result, holders of the outstanding notes may demand immediate repayment of the principal and accrued interest. The company said as of Thursday it had not received any notice regarding acceleration action by holders of the 2022 notes, and no event of default has occurred in respect of any of its 10½% notes due 2023 or its 9% notes due 2023.

The company said during the second half of 2021, there were dramatic changes to the Chinese high-yield sector. Reduced bank lending and other forms of financing resulted in reduced access by companies to onshore capital.

In addition, the macro-economic environment and the Covid-19 pandemic and containment policies have had a material adverse effect on real estate, culture and tourism sectors where the group operates its business, resulting in the group’s ability to generate cash flow from operations to satisfy debt obligations being significantly undermined.

The company said it is likely to come under continued pressure to generate sufficient cash flows to meet its obligations and intends to communicate actively with its creditors to address its liquidity issues.

Based in Wuhan, China, Dangdai is a conglomerate with a substantial medical and pharmaceutical portfolio.

© 2015 Prospect News.
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