Emerging market lending falls by a fifth

It’s not just European corporates that are feeling the pinch. Companies in emerging markets are also finding credit hard to come by, as research by private debt fund manager Cordiant shows.

The firm, which specialises in emerging markets lending, found new syndicated loan issuance by western banks to emerging markets companies last year fell by $67 billion to $276 billion, a reduction of 20 percent.

Even in Asia, which has traditionally attracted most lending in global emerging markets, suffered a 14 percent reducted to $122 billion, Cordiant said.

“Recent volatility triggered by events in Cyprus show that the European banking sector is not yet out of the woods,” said Cordiant chief executive David Creighton in a statement. “Regulators will continue to pressure Western banks to keep their balance sheets under control and politicians will pressure banks to use any spare lending capacity within their home markets. It may be years before Western banks return to their position as a reliable source of funding for emerging market businesses.”

Demand for debt financing has grown, Cordiant argues, creating a funding gap for growing businesses in these markets.

“From the number and quality of loan requests that we are getting from emerging market businesses, the demand is definitely there,” Creighton added. “That means that spreads on emerging market loans have remained high – exceptionally high given the corresponding fall in yields on emerging market bonds.

“Spreads on private loans are at least 200 basis points higher than in 2008 whilst emerging market bonds have moved in  the opposite direction – with yields compressing so rapidly that many investors are concerned that bond yields are overheated.”

Strong appetite for corporate bonds issued by emerging markets corporates has had little impact on the overall market, Cordiant believes, because investors typically gravitate towards only the best-known companies. Often, these are businesses in the energy, mining and telecoms sectors, the report added. 

Lending by western banks to emerging markets-based companies fell by $67 billion last year as the banking crisis in Europe reduced appetite for riskier credits.