By Fiona Law
As banks world-wide rush to sell a new type of high-yield hybrid
security to bolster their cash buffers in response to tightening
global standards, one of the biggest buyers is staying away from
those issued by emerging-market lenders.
Pacific Investment Management Co. runs one of the largest funds
dedicated to buying these securities--contingent convertible bonds,
or Cocos--and has been buying from European lenders but not from
lenders in developing countries like Russia and China. Cocos carry
higher yields than regular debt but holders are among the first to
lose money if the issuer's capital cushion falls too low or it
needs a taxpayer bailout.
"If you look at some big bank issuers [in emerging markets],
there is some deterioration in their fundamentals," said Pimco's
global head of financial research, Philippe Bodereau, who manages
$5.5 billion of funds focused on debt issued by banks and insurers.
By contrast, "in Europe and the U.S., [banks have] spent the last
six years deleveraging. They have made a lot of efforts to clear
debts and what are left on their balance sheets are relatively
low-risk assets."
The rejection by a large fund manager of emerging-market
offerings is notable given the surge in these securities: Issuance
globally jumped to $138 billion last year, about five times the
2013 total, and two-thirds came from banks in emerging markets,
according to Dealogic. This year, sales in emerging markets total
$16.3 billion, surpassing the $10.7 billion in sales in the
developed world.
While Pimco holds back, other money managers are tiptoeing in,
drawn by juicy returns at a time of rock-bottom interest rates
world-wide.
"There's nothing cheap about fixed income in the world
today...and it makes sense to own some bank capital securities (to
enhance returns)," including those issued by Chinese banks, said
Rick Rieder, chief investment officer of fundamental fixed income
at BlackRock Inc., which oversees $4.8 trillion in assets.
He said contingent convertible bonds have been attractive,
"especially in an environment where regulators are [building up]
safety to the banking system...It will continue to be a good place
to generate yield."
Early this month, China Construction Bank's sale of $2 billion
in these hybrid securities drew more than three times the amount on
offer from sovereign-wealth funds, insurers and other banks,
according to a person close to the deal. Last year, Banco do Brasil
SA sold $2.5 billion, while Sberbank of Russia OAO raised $1
billion in February.
Mr. Bodereau is careful of Chinese banks, though rising bond
prices show that other buyers are jumping in.
"In general, we are skeptical on the reporting of [nonperforming
loans] in China, and our credit analysts spend a great length
stress testing balance sheets," he said.
In their latest report, China's big banks revealed their
nonperforming loans surged, while they have become more active in
disposing of mounting bad debts.
Grappling with mounting bad debt, a slowing economy and tighter
regulations, Chinese banks are on track to become the biggest
issuers of such risky securities in Asia, following a
government-led credit binge to stimulate the economy during the
global financial crisis.
Still, Pimco sees "better valuation in DM [developed market]
banks alongside better liquidity and stronger fundamentals," and
favors capital securities offered by the likes of a Swiss bank and
a British bank--it didn't name the issuers--over those from Chinese
banks. "The price level of the Chinese deals did not meet our
pricing targets," he said.
Write to Fiona Law at fiona.law@wsj.com
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