High Yield Shines Among EM Corporate Bonds
25 June 2019
Relative to the U.S., emerging markets corporate bond markets are exhibiting healthier and improving credit metrics. This is illustrated by the dramatic decline in net leverage over the past three years, compared to U.S. levels that have not shown the same improvement.
Emerging Markets vs U.S. Net Leverage
Source: Bank of America Merrill Lynch. Data as of May 2019.
This decline has been driven by lower debt levels and higher revenue growth, particularly in the high yield segment of the market. High yield total debt has declined 5% versus one year ago, with Latin America and EMEA posting the highest declines.1 Total debt among Asian high yield issuers showed a small increase of 3% and EBITDA growth among those issuers in 2018 was the strongest versus other regions, although all regions posted increases.2
For emerging markets high yield bond investors, the ultimate question is whether there is adequate compensation for the risk being taken, both on an absolute basis and relative to other asset classes. The recent widening in credit spreads in conjunction with improved fundamentals has resulted in what we believe is a potentially attractive risk/reward tradeoff in emerging markets high yield corporate bonds.
Spread per Turn of Net Leverage
Source: Bank of America Merrill Lynch. Data as of May 2019.
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