Two developments over the past week – a court ruling in Dallas regarding the U.S. enforcement of a Mexican corporation’s bankruptcy and an announcement out of Argentina regarding the change of control put on the bonds of a major oil company – have been encouraging for investors in emerging markets corporate debt, according to Market Vectors’ high-yield corporate debt portfolio manager, Fran Rodilosso.
“No matter the level of sophistication of the investor, one of the first questions we are typically asked concerns the jurisdiction for enforcing claims against issuers of emerging markets debt, should a credit event occur,” says Rodilosso. “While both developments pertain to the specifics of each situation, I believe that the key takeaway is that issuers need to consider more and more the negative consequences of breaking a contract.”
Rodilosso notes that while there is still no single answer to the question of jurisdiction, there is a long history of negotiated, out-of-court settlements between debtors and creditors. “There are certainly cases where the playing field has worked against creditors, but I believe that is one reason there is still more risk priced into emerging markets credit versus that of developed markets,” says the Market Vectors portfolio manager. “As these markets grow, and their companies do more cross border business, I would expect that creditors will have more tools with which to enforce their rights in the face of credit events.”
As evidence of this, Rodilosso cites a June 13 ruling in Dallas denying Mexican issuer Vitro’s attempt to enforce its Mexican bankruptcy plan in the U.S.-a decision that is being lauded by some as a victory for creditors and one that could potentially lead to lower borrowing costs for issuers if lenders gain more confidence that they can enforce their rights. “I would not make such a blanket statement,” says Rodilosso, “but it is encouraging. In this instance, Vitro has subsidiaries in the U.S. that are guarantors of the company’s debt and which are not in bankruptcy.” If upheld, the decision could allow creditors to pursue those assets.
“Emerging markets creditors have tended to favor circumstances where borrowers have assets in other jurisdictions, especially ones where creditor rights are typically enforced,” Rodilosso says. “For this reason, the Dallas ruling is important. While I believe it will be appealed, in my opinion, I would expect it to be upheld although there is no guarantee of what the outcome will be.”
Rodilosso further pointed out that while Vitro’s restructuring plan was rightfully deemed unfair by creditors, and ultimately the judge, the deal approved in Mexico represented roughly a 50 percent recovery on claims.
In a second piece of encouraging news, Argentine oil company YPF announced that it would make good on the change of control put on its bonds, after the government expropriated 51% of the company two months ago. In this case, the market had priced in a fairly high probability of the government making good on this $100 million bond issue.
“Perhaps it has less to do with the rule of law domestically than with the practicalities of having commercial interests outside one’s borders, but nevertheless, in this case, bondholders are being made whole,” Rodilosso says.
Mr. Rodilosso joined the Market Vectors team earlier this year bringing with him more than 20 years of senior level experience in emerging markets, high-yield debt research and portfolio management.
Mr. Rodilosso currently co-manages three Market Vectors high-yield corporate bond ETFs: Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), International High Yield Bond ETF (NYSE Arca: IHY) and the most recent addition to this fund family, Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM).
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Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family currently totals $25.1 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of March 31, 2012.
Market Vectors ETFs are distributed by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and manages approximately $34.8 billion in investor assets as of March 31, 2012.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
The Funds, as they invest in high-yield securities, may also be subject to a greater risk of loss of income and principal than higher rated securities. The prices of high-yield securities are likely to be more sensitive to adverse economic changes or individual issuer developments than higher rated securities. The secondary market for high-yield securities may be less liquid than the market for higher quality securities and, as such, may have an adverse effect of market prices of certain securities. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currency, changes in currency exchange rates may negatively impact the Fund’s return. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. Investors should be willing to accept a high degree of volatility and the potential of significant loss. For a more complete description of these and other risks, please refer to the Fund’s prospectus and summary prospectus. The Fund may loan its securities, which may subject it to additional credit and counterparty risk.
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