LONDON, Nov 10 (Reuters) - Debt default rates among emerging market companies could hit 7 percent by the end of 2016, almost double this year’s levels, because of a tougher global funding backdrop, according to investment bank Barclays.
Companies that have gone on a borrowing binge during the easy-money years after 2009 face a rise in borrowing costs as the U.S. Federal Reserve prepares to raise interest rates. The rise in rates will come just as debts taken out around 2010 start to fall due.
In a note received on Tuesday, Barclays said the trailing 12-month default rate for junk-rated emerging market companies now stands at 3.8 percent, having climbed steadily since hitting a record low 0.7 percent in 2011.
The bank sees this rising to 6.5-7.0 percent by the end of next year.
“The Fed lift-off is likely to keep FX volatility elevated; commodity prices are set to remain under pressure; and EM bank lending conditions may tighten further. We believe that these factors, alongside the higher cost of funding, will contribute to higher EM defaults in 2016,” Barclays said.
Default rates at U.S. junk-rated companies too are set to surge in 2016 to 5.0-5.5 percent. Barclays forecast, double this year’s 2.5 percent rate but staying well below EM levels.
That is a departure from recent years when U.S. high-yield default rates were typically higher than in emerging markets. The U.S. rate was 2.1 percent back in 2011.
“Historically EM defaults have risen above those in the United States only during sovereign crises,” Barclays warned.
Historically, debt default in emerging markets has gone lock-step with episodes of dollar strength. So companies that borrowed in dollars while earning revenues in fast-depreciating domestic currencies are finding repayments becoming costlier.
Currencies such as the Turkish lira and Brazilian real have fallen 20-30 percent this year .
This year’s high-profile defaults this year include Chinese developer Kaisa Brazil’s OAS and Ukraine’s Ukreximbank
Reporting by Sujata Rao Editing by Jeremy Gaunt