Emerging markets (EM) corporate debt comprises bonds issued by EM-domiciled corporates or quasi-sovereign entities, which are partially or wholly owned by the sovereign, and denominated in either hard or local currency. The standard EM corporate benchmark, the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI), tracks total returns of U.S. dollar-denominated debt instruments issued by corporate entities in emerging market countries and encompasses bonds from more than 600 corporate issuers in over 50 different countries.
The emerging corporate debt markets have transformed in recent decades from representing primarily issuers who are commodity producers to a much more diversified issuer base that includes a broad range of industries, such as financials, utilities, transport, and technology. The types of companies issuing debt are also broad and include state-owned enterprises, multinational companies, and domestically focused companies. Today, hard currency corporate debt continues to expand, driven by broad, global investor demand. For investors seeking diversification benefits, EM corporates offer an opportunity set of diverse issuers from security, company, industry, and sovereign perspective.
Credit quality improvements in emerging market sovereigns have created opportunities for companies to access the market for U.S. dollar-denominated financing. Despite superior growth and improved credit quality in emerging markets, spreads in the EM corporate sector have tended to be wider than in other credit sectors when comparing similar credit quality. We believe historical skepticism about EM credit quality, accounting transparency issues, market size and participants, and individual country bankruptcy laws, combined with the sovereign ceiling concept, contribute to consistently wider spreads in the EM corporate sector.
Stone Harbor has been managing EM corporate debt since 2007.