Emerging market borrowers struggled to roll over debt and secure bank financing this week, heaping up concerns that abrupt credit contraction will imperil stability next year.
Bank Nadra, Ukraine’s fourth largest bank, was forced on Wednesday to seek emergency support from the central bank, receiving a 1.5 billion hryvna ($280 million) one-year loan at 12% after external funding sources dried up.
This liquidity support has been provided to refinance Nadra’s borrowings including $230 million of debt that has to be repaid this year.
Russia’s largest bank, state-owned Sberbank, battled market conditions to raise a $1.2 billion syndicated loan, priced at Libor + 85 basis points (bps). In a $750 million deal last year, the banking giant secured a rate of Libor + 45 bps.
The chronic shortage of global bank capital is now putting at risk the refinancing of a vast backlog of corporate bonds that mature in 2009, as global illiquidity premiums spike. The cost of money has substantially increased, with three-month Libor soaring to 4.70% from 2.80% in August.
Michael Ganske, head of emerging markets research at Commerzbank, said: “Market liquidity for new bonds issuance and for syndicated debt markets has literally dried to zero.
“The change in the financial environment has been just too aggressive for some of the companies out there, which leads to our projection for significant pressure for corporate defaults over the next 6-10 months.”
As Western authorities prop up the financial system partly in a bid to stem a liquidity run on the short term debt liabilities for even the most solvent of corporates, deficit nations have limited resources.
Emerging market borrowers have to refinance $111 billion of maturing debt, including $24 billion of securities below investment grade, and $59 billion of financial institution paper subject to monumental risk aversion towards the sector, ING Wholesale Banking estimates. The prospect places significant contingent liabilities on emerging market sovereigns.
Primary fixed income markets are only open for sovereigns and highly rated corporates that have an existing bond curve.
Alan Roch, EMEA debt capital markets banker at RBS, said: “To consider new bond issues in emerging markets, you need to see building blocks, the first one being a return to stability in Equity, Credit and FX markets. Clearly, in days during which equity volatility is at its all time high, we are some way from that.”
Nevertheless, bankers say good-quality Russian borrowers are able to weather the storm through government loans: Lukoil, the oil company, is seeking $5 billion to refinance debt.
The increase exposure of global banks to emerging market counterparties has sky-rocketed in recent years, triggering current account deficits in several emerging markets where growth has been primarily driven by credit expansion.
Credit expansion by developed-world banks in emerging markets has ballooned, according to statistics from the Bank of International Settlements (BIS). It jumped 989% to Ukraine, 412% to Vietnam, 395% to South Africa, 326% to UAE, 306% to Russia and 300% to Saudi Arabia between June 2005 and March 2008.
Moreover, convertible currency denominated debt has increased significantly in relation to foreign exchange reserves, as global banks deleverage this place further downward pressure on emerging currencies.