China, Russia to drive 10% default pain for ‘junk-rated’ EM firms: JPMorgan

CHINA'S property crisis and the West's sanctions on Russia will drive a respective 20 per cent and 66 per cent of these two countries' "junk-rated" companies into default next year, analysts at JPMorgan have estimated.

Their woes will also mean emerging markets (EM) overall will see a more than 10 per cent "high-yield" corporate default rate for another year, keeping it at more that triple the historical average.

"We expect another high default year in 2023 focused on specific segments," JPMorgan's analysts said in a research note on Tuesday (Nov 8) that describes China and Russia as the "trouble spots".

With Western sanctions making it increasingly difficult for Russian companies to make US dollar-denominated bond payments, "we project another US$28 billion of Russian corporate defaults next year or 66 per cent of the remaining non-defaulted bond stock," the JPMorgan note added.

China's battered property sector is forecast to have another eye-watering 46 per cent default rate next year. The figure is already 52 per cent this year with even state-backed builders now starting to topple.

"We still see the possibility of an elevated default rate for the sector in 2023, albeit less so than in 2021 and 2022, if the sector does not receive any direct government support," the note said.

The overall emerging market corporate default rate, once financially healthier "investment grade" companies are also included, is forecast to be 3.8 per cent.

Excluding China property, Russia and also Ukraine, where companies are still being affected by the war, even the "high yield" rate is expected to be a more manageable 2.6 per cent.

This is because the last few years of ultra-low interest rates meant EM corporates came into 2022 with some of the strongest credit metrics since the global financial crisis.

"As much as fundamentals are now weakening, they still remain robust and far from deteriorating rapidly," the JP Morgan research said, pointing to positive factors such low near-term debt payment bills and bonds having fixed interest rates.

Regionally, the Latin American default rate is expected to jump to 5.7 per cent next year from 2.2 per cent YTD, driven by Argentina, repeat defaulters, and idiosyncratic stories, although some "bulky" restructurings could even happen as soon as this year.

Distressed bonds, classed as those trading below 70 cents on the US dollar - or 30 per cent below their face value - currently total US$178 billion or 27.7 per cent of EM corporate high yield outstanding bonds.

Those ratios are second only to 2008, when 69 per cent of high-yield companies traded at distressed levels. For context, that was followed by a 10.5 per cent default rate in 2009, which JPMorgan's analysts pointed out was close to the 10.6 per cent forecast for next year. REUTERS

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