Emerging Market Bonds Attract Greater Attention

Argentina looks to avoid a U.S. court ruling that forced the nation into default while the Bank of China announced a sale of $5 billion worth of subordinated bonds. Both markets have seen a flood of liquidity and attention from investors as low yields in developed markets urge bond buyers to invest further afield.

Argentina looks to avoid a U.S. court ruling that forced the nation into default while the Bank of China announced a sale of $5 billion worth of subordinated bonds. Both markets have seen a flood of liquidity and attention from investors as low yields in developed markets urge bond buyers to invest further afield.

Tier 1 Bonds

China’s Bank of China has began choosing underwriters for the debts, which will not be senior loans, but will still be classified as Tier 1 notes. According to banking rules in China, the bonds will be issued in various currencies, and not just in the renminbi.

The Bank of China has seen its stock price suffer in recent years, hitting an all-time low in April. The stock has since recovered, but remains in a bearish trendline for the year. The stock has fallen 64% from its pre-crisis peak in late 2007. The Bank of China is the fourth largest back in the nation.

The Bank of China has recently faced criticism for the quality of its loans, as its portfolio included more bad loans in the first half of 2014, which some analysts argue is a harbinger of greater defaults in the future, and possibly a liquidity crisis for the bank and the nation.

Recently, the Bank announced that outstanding nonperforming loans had risen by more than 17%, comprising 86 billion yuan ($14 billion).

At the same time, the bank has been exhibiting yield-chasing behavior that analysts have warned is becoming commonplace in Europe and the U.S. In its recent announcement to shareholders, Bank of China President Siqing Chen said higher capital costs were causing the bank to look overseas to improve margins. “The Bank of China has actively improve its liability structure and strived to boost business revenues from overseas operations,” Mr. Chen said.

Argentina Payments

In early 2014, Latin American markets were spooked by fears that Argentina would default for the second time in 13 years. The fears loomed large as hedge fund Elliot Management Corporation sued Argentina to demand full payment of debts it had acquired after Argentina defaulted in 2001.

Although a New York court has ruled that the nation has defaulted, Argentina is ignoring that ruling and plans to begin issuing payments in Argentinian pesos in a move that would allow overseas bondholders to swap their old bonds, which are issued in U.S. dollars, for new peso-denominated bonds.

The move is the most recent in a series of events that is designed to allow Argentina access to international credit markets, which it has been unable to tap before the U.S. district court judgment was made. While many creditors had settled with Argentina on the defaulted debts, Elliott Management Corp., which owns 7.6% of the debts from 2001, has refused to accept peso-denominated debts for its bonds. The Argentinian move will force Elliott to accept peso-denominated bonds in a forced swap.

Argentinian debts have fallen in value over the past month, losing about 7% in August despite a broader appreciation of bonds globally. Meanwhile, the Bloomberg USD Emerging Market Sovereign Bond Index has risen by over 9% in 2014.

Elliott Management and other hedge funds holding Argentinian debts have failed to agree on repayment terms with the nation, and banks working with the nation’s government have failed to find buyers for a bond buyback who can buy at a price that bondholders are demanding.

Argentina president Cristina Fernandez de Kirchner has said she refuses to accept the bondholders terms because the country cannot afford that level of indebtedness. “If I signed what they’re trying to make me sign, the bomb wouldn’t explode now but rather there would surely be applause, marvelous headlines in the papers. But we would enter into the infernal cycle of debt which we’ve been subject to for so long.”