Business & Money | Monday 15 July, 2019 10:15 am |

Alongside solid investment grade companies, which can be benchmarked against the best de- veloped market peers, there are also less established – but equally as impressive – smaller companies. Some of these are from newer geographies or making their bond market debut. Together, these varied credit profiles provide emerging market debt investors with a uniquely dynamic risk/reward opportunity for their portfolios. 

Togo, Ecuador and Moldova are just some of the countries from which issuers have recently joined the benchmark universe for corporate debt. The asset class continues to grow both in depth and breadth, offering investors new ways to access higher returns in a yield-starved bond universe, where globally around USD 13 trillion of debt is trading at yields below zero. Companies based in these so-called ‘frontier’ countries often pay coupons in the high single digits or even double-digit territory, providing a welcome yield boost to a well-diversified port- folio. 

EM corporate debt is a young asset class, but has already outgrown major peers In comparison to more mainstream asset classes, emerging market corporate debt is relatively young. A small core of issuers has been around for approximately 20 years, mainly from the Americas (Brazil, Argentina and Mexico) and Asia (e.g. Thailand, Indonesia and the Philip- pines), see exhibit 1. Since then, a steady stream of issuers from countries as diverse as South Africa, Saudi Arabia, India, China and Russia have joined, boosting the value of outstanding debt from less than USD 100 billion in 1999 to almost USD 1,500 billion in 2019, according to Bank of America Merrill Lynch data. As such, the value of outstanding debt has surpassed both the US high yield and emerging market sovereign debt segments, with the latter standing at around USD 1,000 billion, having been outgrown by its corporate peers over 10 years ago.

Stronger fundamentals and better value than developed markets On a bottom-up basis, companies based in emerging markets continue to outstrip their devel- oped market peers. For example, they have less leverage, i.e. lower debt to EBITDA ratios (see exhibit 3). This is a highly relevant factor for investors when it comes to determining a com- pany’s risk and resilience. Looking at the past year, the relative difference between the net leverage in US companies and emerging companies widened, in favour of the latter. At the same time, for the same unit of risk, you are paid more to be invested in a given emerging market credit vs. a given developed market credit. For example, US companies rated BBB pay a spread of 47 basis points per turn of leverage, versus 106 basis points in emerging markets