Thursday, January 1, 2015
When everyone thought the low dollar was an issue, it lulled issuers into a false sense of security and made them forget about the foreign exchange risk. Aivars Lode
From Brazil to Thailand, Firms That Sold Bonds in Dollars Now Face Steep, Even Staggering Costs
By Ian Talley and Anjani Trivedi
The soaring U.S. dollar is squeezing companies in emerging markets from Brazil to Thailand that now face higher costs on roughly $1 trillion in bonds sold to investors before the greenback’s surge.
For 2014, the dollar is on track to gain more than 7% compared with a group of emerging-market currencies tracked by the Federal Reserve Bank of St. Louis. As the rise ripples through economies around the world, it is causing particular pain at firms in emerging markets that issued bonds in dollars instead of local currency.
The dollar’s rise means it costs more to make regular bond payments and pay off outstanding bonds as they mature. That is starting to hurt earnings at many companies, will likely force some to dip into emergency reserves and could trigger defaults on some corporate bonds, analysts warn.
To some economists, the mounting pressure evokes memories of currency crises in Asia and Latin America during the 1980s and 1990s, when the strong U.S. dollar helped trigger slides in economic growth and prices for real estate, commodities and other assets.
“The investor community is becoming very much one-way or crowded toward retrenching to the U.S.,” says Nikolaos Panigirtzoglou, global markets strategist at J.P. Morgan Chase & Co.
Many of the same countries are vulnerable again now, but few analysts and investors foresee a full-blown crisis.
More than two-thirds of the outstanding corporate bonds in emerging markets are considered high-quality by major rating firms, meaning they carry a low default risk.
Meanwhile, some companies have been trying to shield themselves from possible harm by issuing at least some bonds in their home country’s currency. “I don’t think it’s a systemic issue,” says Samy Muaddi, a portfolio manager at mutual-fund giant T. Rowe Price Group Inc.
In 2014, companies in emerging markets issued a record-high $276 billion of dollar-denominated bonds as of Tuesday, according to Dealogic. Such sales soared after the financial crisis as borrowers took advantage of rock-bottom interest rates set by the Federal Reserve and other central banks.
Countries also have flocked to dollar-denominated bonds, saddling those governments with higher debt-service costs as the dollar rises. Analysts say many countries generally are in a stronger position to withstand the dollar’s pain because their reserves are larger than in previous crises.
Overall, companies and sovereign-debt issuers have $6.04 trillion in outstanding bonds, up nearly fourfold since the 2008 financial crisis, according to Dealogic, a financial-data provider.
Fourth-quarter results due in January from companies throughout the world will begin to show how much the soaring U.S. dollar is hurting companies in emerging markets.
Earnings at many companies in Latin America will likely be hit, says Eduardo Uribe, who oversees corporate-debt assessments there for bond-rating firm Standard & Poor’s Ratings Services, a unit of McGraw Hill Financial Inc.
Many emerging markets also are being pummeled by falling prices for commodities such as oil and slower economic growth. Bond markets in emerging-market countries recently suffered one of their worst selloffs since the financial crisis, based on a Barclays PLC index of emerging-market debt in dollars.
The Indonesian rupiah, Chilean peso, Brazilian real and Turkish lira are near multiyear lows. Mexico’s central bank bought pesos earlier this month to keep the depreciating currency from pushing the economy into a funk.
More pressure will come if the Fed raises interest rates next year for the first time since 2006. Luca Paolini, chief strategist at Pictet Asset Management, says the firm reduced its exposure to emerging-market corporate bonds a few months ago on concerns about a potential slide. “There may be a lot more volatility next year, and we can’t rule out some credit event that can generate a lot of panic,” he says.
Fears are swirling about Russia, where the ruble has swung sharply as the economy struggles under the weight of Western sanctions and lower oil prices. Lubomir Mitov, chief European economist at the Institute of International Finance, a banking trade group, forecasts “a widespread wave of corporate defaults” in Russia next year.
As investors shift from currencies, stocks and bonds in emerging markets to dollars, the move threatens to depreciate local currencies even more.
A Christmas tree in front of the Petronas Twin Towers in Kuala Lumpur, Malaysia. The landmark includes the headquarters of state-run oil and gas company Petroliam Nasional Bhd., or Petronas, which is being hurt by the U.S. dollar's rise against the ringgit. About 70% of the company's debt is denominated in U.S. dollars. European Pressphoto Agency
The stronger dollar also pushes the cost of new borrowing higher. Prices for bonds issued by Russia’s OAO TMK, one of the world’s largest pipe makers, that are due in 2018 are down by more than 30% since late October. Bond prices move in the opposite direction from borrowing costs.
In the U.S., the stronger dollar hurts exporters by increasing their production costs compared with foreign rivals and shrinking their non-U.S. profits when converted into dollars. The dollar’s rise makes imports more attractive to American consumers.
Top officials at the International Monetary Fund and the Bank for International Settlements, two of the world’s leading financial institutions, have warned that the exchange-rate turmoil could lead to corporate defaults and asset-price busts around the globe. Some analysts expect the IMF to lower its five-year growth forecast for emerging markets.
Brazilian sugar producer Virgolino de Oliveira SA is struggling with its debts as sugar prices fall. Ratings firm Fitch Ratings, a unit of Hearst Corp. and Fimalac SA, warned this month that the Brazilian company will likely default in the coming months on debt that includes dollar-denominated notes. The company didn’t respond to requests for comment.
Malaysia’s state-run oil and gas company, Petroliam Nasional Bhd., or Petronas, said in its third-quarter results that the dollar’s rise against the ringgit was partly to blame for lower quarterly revenues. About 70% of the company’s debt is in U.S. dollars, and its bond yields spiked as the ringgit fell nearly 9% in the past six months.
The financial hit was bad for Malaysia’s government, which collects major revenue from oil and gas sales.
Shweta Singh, a senior economist at research firm Lombard Street Research, expects the dollar to keep climbing as the U.S. economy strengthens and emerging markets keep struggling to rev up economic growth. As a result, “the debt burdens of emerging markets will intensify,” she says.
If problems deepen, they could bruise investors who poured money into emerging markets and are still holding on to those investments. The bond-sale boom was fueled by investors who roamed the world seeking higher returns after the financial crisis, including from dollar-denominated bonds.
But overall investments in emerging markets by outsiders have grown so huge that it would be hard during a jolt for investors to sell without pushing those markets sharply lower, many analysts say.
—Nicole Hong contributed to this article.
Amazing to watch the seesaw of gold and the panic that ensued following 2008 and the buying of gold. Oh well, now no need for that hedge. Aivars Lode
Cheaper energy means there are no signs that inflation is approaching the Fed's 2% target, says Bill Gross
By Bloomberg News
Gold, the ultimate inflation hedge, isn't much use to investors these days.
Oil is in a bear-market freefall that began in June, spearheading the longest commodity slump in at least a generation. The collapse means that instead of the surge in consumer prices that gold buyers have been expecting for much of the past decade, the U.S. is “dis-inflating,” according to Bill Gross, who used to run the world's biggest bond fund.
A gauge of inflation expectations that closely tracks gold is headed for the biggest annual drop since the recession in 2008. While bullion rebounded from a four-year low last month, Goldman Sachs Group Inc. and Societe Generale SA reiterated their bearish outlooks for prices. The metal's appeal as an alternative asset is fading as the dollar and U.S. equities rally, and as the Federal Reserve moves closer to raising interest rates to keep the economy from overheating.
“Forget inflation — all of the talk now is about deflation,” Peter Jankovskis, who helps oversee $1.9 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments, said. “Obviously, oil prices dropping are adding to deflationary pressures. We may see a rate rise next year, and we could see gold come under pressure as the dollar continues to move higher.”
Even though there's been little to no inflation over the past six years, investors have been expecting an acceleration after the Fed cut interest rates to zero percent in 2008 to revive growth. Those expectations, tracked by the five-year Treasury break-even rate, helped fuel gold demand and prices, which surged to a record $1,923.70 an ounce in 2011.
Now, inflation prospects are crumbling, undermining a key reason for owning the precious metal.
Crude-oil futures in New York have tumbled 43% this year, dropping below $54 a barrel last week, as global output surged. The five-year break-even rate is down 33% this year, the most since 2008. In November, the cost of living fell 0.3%, the most since December 2008, government data show, and economists surveyed by Bloomberg predict the annual gain in consumer prices will slow in 2015 to 1.5% from an estimated 1.7% this year.
Cheaper energy means there are no signs that inflation is approaching the Fed's 2% target, Mr. Gross, who used to run the world's largest bond fund at Pacific Investment Management Co. before joining Janus Capital Group Inc. in September, said.
Investor holdings in exchange-traded funds backed by gold last week were the lowest since 2009, and about $7.68 billion has been wiped from the value of the funds in 2014, according to data compiled by Bloomberg. Open interest in New York futures and options dropped 5.3% this year, set for a second annual loss and the longest slump since 2005, U.S. government data show.
After rebounding 4.5% from a four-year low in early November, prices will average $1,175 next quarter, below the Dec. 22 close of $1,179.80, according to the median of 31 analysts tracked by Bloomberg. Goldman forecasts a drop to $1,050 by next December, while SocGen expects $950 in 2015's fourth quarter.
Since touching a six-week high on Dec. 9, futures fell 4.6% to $1,181.40 on the Comex in New York Tuesday, heading for a second straight annual decline, down 1.7%. The Bloomberg Commodity Index dropped 15% this year, while the Bloomberg Dollar Spot Index climbed 11%. The Standard & Poor's 500 equity index is up 12%, after touching a record high Dec. 5.
Speculators haven't given up on gold. Money managers remain bullish, increasing their net-long position to 103,738 futures and option contracts as of Dec. 16, more than doubling bets since early November, according to Commodity Futures Trading Commission data.
Signs that central banks in China, Europe and Japan will add to stimulus efforts have increased speculation that global inflation could rise, even as U.S. consumer costs stay stable. While dollar-denominated gold is down this year, bullion is up 12% priced in yen and 10% in euros.
“It's confounding that inflation is not rampant on a worldwide basis, based on the amount of liquidity that has been pumped into the system,” Michael Mullaney, chief investment officer of Fiduciary Trust Co. in Boston, which oversees $11.5 billion, said. “We are not there yet, but once this starts to percolate, we will see headlines on inflationary pressures” that can support gold prices, he said.
Gold climbed 70% from December 2008 to June 2011 as the U.S. central bank bought debt and held borrowing costs at a record low. Prices slumped 28% last year, the most in three decades, after some investors lost faith in the metal as a store of value.
The Fed's benchmark interest rate will be 1.125% at the end of next year, quarterly estimates from U.S. central bankers showed Dec. 17. Chair Janet Yellen said in a press conference that day that inflation will eventually reach the Fed's target, allowing the central bank to raise borrowing costs.
Bullion's link with inflation dates back more than 2,000 years, with the first use of coin currency in 550 B.C., according to the World Gold Council. While countries from the U.S. to the U.K. adopted a gold standard by the 19th century to limit inflation, no nation links currencies to the metal anymore. The Fed cut the dollar's ties to gold four decades ago.
“Gold as an inflation hedge is unnecessary,” Atul Lele, who helps oversee $5.1 billion as the chief investment officer at Bahamas-based Deltec International Group, said. “We think inflation in the U.S. could rise, but nothing that should be a cause of worry.”