NEW YORK (Reuters) - The U.S. housing and credit crisis has created eight-fold worldwide growth in distressed bonds, which are now cracking new frontiers in Latin America and Asia.
Distressed corporate bonds, defined as debt whose yields trade at levels of more than 1,000 basis points higher than those of benchmark government bonds, were confined almost exclusively to U.S. shores a year ago. Now credit risk is rising in emerging markets.
In Asia a year ago, only bonds of China's largest tire maker GITI Tire (600182.SS) traded at levels suggesting rising default risk. Today, the perceived risk as judged by bond investors is growing fastest in Asia, where 32 corporate bonds have reached distressed levels, according to Moody's Investors Service data compiled for Reuters.
In Latin America a year ago, only Mexico's Industrias Unidas, a metals and mining company, had debt that traded at distressed levels. Today, the list has grown to 18 Latin American corporate bonds, including debt issued by Mexico's fixed-line telephone operator Axtel (AXTELCPO.MX), and Telefonica and Petrobras Energia in Argentina.
As the United States endures a recession, global credit crisis and the aftermath of a decade-long leveraged debt binge, bond prices are reflecting concerns that a wave of expected U.S. corporate bankruptcies may be repeated elsewhere.
"The global marketplace is feeling the ripple effects of the U.S. credit crisis," said Martin Schulz, an international fund manager at Allegiant Asset Management in Cleveland, Ohio. "Everything started here, the U.S. was the epicenter, and now it's moving on to Asia and other developing markets."
GAUGING RISK
Distressed debt trading does not necessarily always lead to default or bankruptcy, although such risk is increasing.
"The perceived risk is high but the actual risk of default may not be that high," said Peter So, head of research for CCB International, a subsidiary of China Construction Bank.
Globally, there are nearly 650 companies with corporate bonds trading at distressed levels, versus 82 companies a year ago. They include hundreds of U.S. companies, ranging from Ace Hardware to Zions Bancorporation.
Chinese developer Shimao Property's (0813.HK) bonds now yield about 20 percent, and spreads on Korea's SK Energy and LG Electronics, Japan's Softbank Corp and India's ICICI Bank Ltd are all trading at distressed levels of more than 1,000 basis points more than their respective benchmark government bonds.
In October the yields on many corporate bonds around the world were even higher. But yields fell rapidly in recent weeks, after governments around the world took action to provide more liquidity to financial markets and banks loosened some lending standards.
"Many banks are willing to support large property companies as they believe the prospects are good and demand is buoyant," So said. "Many banks are willing to extend loans and the bankruptcy risk on Chinese property companies is less than perceived."
Standard & Poor's analyst Diane Vazza said defaults will climb in 2009. U.S. high-yield default rates may rise to 7.6 percent in the next 12 months, double the 3.15 percent observed in November, she said.
Through December, 108 companies globally defaulted, impacting $302 billion of debt in 2008, nearly five times more companies than in 2007, according to S&P.
Of the 108 defaults, 86 came from the U.S., seven from Europe, five each from Asia and Canada, three from Latin America, and two from Russia.
Allegiant's Schulz agreed that a "tsunami" of corporate bankruptcies in Asia or Latin America may not hit, even if warning signs are flashing.
"The risk is we see banks keep freezing up lending to the companies, and that would add more pressure, which we're seeing in the U.S.," Schulz said. "Some companies may not survive."
Some analysts said corporate debt trading levels in Latin America reflect investors' concerns about the financial health of a country as a whole rather than that of a specific company.
"It's not about the fundamentals of these companies," said Paula Premrou, director of Portfolio Personal, a brokerage in Argentina. "The Argentine debt market is more complicated by the sovereign situation and the lack of access to international markets."
(Additional reporting by Umesh Desai in Hong Kong and Fiona Ortiz in Buenos Aires, Editing by Chizu Nomiyama)
