Buyer-beware guide to emerging-market debt, from Brazil to China

By Ye Xie

As the US prepares to start raising interest rates for the first time in almost a decade, speculation is brewing that emerging-market corporate borrowers could be among the hardest hit.

The concern stems largely from the growth of the market: There's $1.3 tril ion worth of developing-nation dollar bonds today. Five years ago, that figure was just $444 billion. With so many new names tapping the market, the argument goes that surely some of them must be suspect.

Throw in the weakening of economies across much of Latin America, Asia and Eastern Europe -slowdowns that will cut into companies' sales and government tax revenue -and the worries only mount. Not that anyone is expecting a fulllown crisis. Emerging-market debt has blown crisis. Emerging-market debt has actually held up well over the past month, preserving gains this year of 5%, as the global bond market swooned.Here's a quick look at some of their findings:

CHINA'S PROPERTY DEVELOPERS

Homebuilders, which account for 21% of the country's $241 billion of dollar debt, have come under pressure after housing prices posted declines in every month since September.

Kaisa Group Holdings became the first Chinese developer to default on overseas bonds last month after being caught up in an anti-corruption probe.

While policy makers have provided some relief in recent months by easing housing curbs and lowering borrowing costs, Standard & Poors said on April 16 that more defaults `are in the cards' as their profitability deteriorates.

Kaisa's default also underscores the risk that the clampdown on graft may ensnare more developers, who often rely on personal connections to secure land from the government.

COMMODITY PRODUCERS

With raw-material prices down 24% over the past year, some producers with high debt levels may struggle to pay their bills, said Shamaila Khan, a portfolio manager at AllianceBernstein.

Commodity companies account for 63% of the $73 billion in distressed debt in emerging markets, according to data compiled by Bank of America and Bloomberg. Russian, Ukranian and Venezuelan borrowers, including state oil company Petroleos De Venezuela SA dominate the market for distressed debt, trading at yields above 19% that indicate traders are bracing for the real possibility of default. Others such as Nigerian oil firm Seven Energy International, Indonesian coal miner PT Bumi Resources Tbk and Brazilian sugar producer Tonon Bioenergia SA have seen their bond prices tumble this year.

TURKISH AND RUSSIAN LENDERS

Banks are tightly regulated in most emerging markets and are often required by regulators to put up enough dollar-based assets to cover their debt.Still, an economic slowdown coupled with currency declines may increase their bad loans.

About 30% of Turkish bank loans are denominated in foreign currency, according to Irakli Pipia, an analyst at Moody's Investors Service.