Emerging Markets Risky Credits: Issuance Activity And Deleveraging Plans

The number of issuers rated 'CCC+' and lower has decreased to 13 as of September 2024, or 9.6% of the speculative-grade universe. Four of the 13 risky credits have a negative outlook.

Financing conditions loosened further in the second quarter, spurring some 'CCC+' and lower rated issuance for the first time since November 2021. Risky credits tapped the market for refinancing purposes, and should be able to keep doing so provided macroeconomic and political uncertainties and geopolitical risks do not worsen.

Forecasted financial ratios point to gradual deleveraging and a pick-up in liquidity profiles and interest coverage ratios. But this will be to the detriment of capital expenditure in 2025-2026.

Uncertainty Looms After U.S. Elections

Following the U.S. elections, we are closely monitoring the potential impact of tighter financial conditions and a stronger dollar. Once the next administration takes office, potential policy changes may weigh on EM growth and heighten credit vulnerabilities.

EM currencies have depreciated sharply after the U.S. elections, especially in Central and Eastern European economies and Latin America, driven mainly by concerns over the Federal Reserve’s potentially slower pace of rate cuts and increased tariffs risks. This may delay rate cuts in some EMs due to heightened currency volatility.

The number of issuers rated ‘CCC+’ and lower has decreased to 13 as of September 2024 from 15 in Q2 2024. Risky credits tapped the market for refinancing purposes for the first time since November 2021. Forecasted financial ratios point to a gradual deleveraging and a pick-up in liquidity profiles and interest coverage ratios. However, this will be to the detriment of capital expenditure in 2025-2026.

Over the next 10 years, supportive demographics, technology, energy transition, and supply-chain shifts may enhance growth opportunities, despite challenges from evolving geopolitical tensions and disruptions.

Corporate spreads remained tight, preserving the solid bond market activity in EMs, especially for speculative-grade entities, while both benchmark and corporate yields ticked up on U.S. election uncertainty. With two months until the year-end, all EM regions have surpassed their 2016-2023 average issuance volumes, except for EM Asia.

Mexican Structured Finance Market Update: Spotting Opportunities Amid Economic Challenges

Demand for financing in the industrial, retail, and office sectors--coupled with a growing real estate market--is creating opportunities for CMBS (commercial mortgage-backed securities) transactions, primarily in the northern region.

There's also potential for cross-border transactions, which encompass various financial assets, properties, future flows, remittances, etc. However, foreign exchange exposure and a potential sovereign rating ceiling could be roadblocks.

Demand for data centers' data storage and processing capabilities has been growing globally, and Mexico is no exception, translating to an opportunity for structured finance transactions in that sector.

Repackaged ABS securities are widely used in Latin America to finance mainly infrastructure and related projects. With the Mexican government's significant need for infrastructure funding, we believe repackaged securities are a potential alternative to tap the international markets.

Saudi Private Healthcare: Vital Signs Are Strong

We anticipate sustainable strong demand for private healthcare providers in Saudi Arabia, thanks to favorable demographics, ambitious national transformation program targets, and relative under-penetration.

While the private healthcare sector is fragmented in Saudi Arabia, most providers plan to expand, and we expect this to boost their profitability margins and market share.

We expect that private domestic players' credit quality will depend on their cash-collection trends, the flexibility of their cost structures, and their financial-policy commitments.

Paving The Way: Efficient Infrastructure Key To Emerging Asia's Growth

A marked improvement in infrastructure and logistics will support the next leg of growth for the emerging markets of Asia.

Economies can unlock higher growth rates through accelerated investment in infrastructure assets on top of infrastructure efficiency gains.

The pandemic eroded budget capacity, which will constrain public capital spending. Improving so-called soft aspects of infrastructure such as the regulatory environment can support faster economic growth.

What Would An Escalation Of The War In The Middle East Mean For GCC Banks?

We continue to assume a protracted, direct Israel/U.S.-Iran conflict will not emerge. However, the recent further cycle of escalation means we now think it is likely that the conflict will persist into 2025, with a higher potential for developments that could weigh on regional sovereign and banks credit ratings.

We have outlined our four scenarios--from modest to severe stress--on how the current regional stress level could evolve and what implication this could have on banking systems in the Gulf Cooperation Council (GCC) region.

Under high and severe stress, banks appear capable of handling potential funding outflows by using their liquid assets. Government support could be necessary if assets are less liquid than we expect. If asset quality stress is as severe as we project, many of the top 45 banks in the region could display losses.