The Potential Allure of Russian Corporates

ETFtrends.com

Emerging markets corporate bonds may not be the first destination investors in corporates head to, but the asset class is growing.

Although emerging markets bonds, including sovereigns, quasi-sovereigns and pure corporates, have come under pressure this year due to fears of Federal Reserve tapering and the subsequent strengthening of the U.S. dollar, issuance has been robust. Emerging markets companies have already sold $235 billion in debt this year, surpassing 2012’s total, reports Robin Wigglesworth for the Financial Times.

Russian corporates could be among the developing world’s most alluring, but as is usually the case with investing in Russia, there are risks. Perhaps in a sign of growing interest in Russian corporate debt, Bank of America Merrill Lynch recently included the country “in its new Diversified Local Emerging Markets Non-Sovereign Index, which covers more than two-thirds of the bonds settled by the main international clearing houses,” Reuters reported.

Russia, which defaulted on its sovereign debt obligations in the late 1990s, said last year it plans to sell around $50 billion in government bonds per year through at least 2014, indicating some investors have the stomach for Russian sovereigns. [Your EM Bond ETF Might Add This Country]

Russia represents nearly 15% of that index, making a major component, according to Reuters. The country accounts for nearly 31.6% of the actively managed WisdomTree Emerging Markets Corporate Bond Fund’s (EMCB) weight. [Emerging Markets Bond ETFs to Consdier]

The 30-day SEC yield on EMCB is 4.9%, or nearly 150 basis points above what is found on the largest corporate bond ETF, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) . Nearly 60% of EMCB’s holdings are rated BBB, A or AA, according to issuer data. The rival iShares Emerging Markets Corporate Bond ETF (CEMB) allocates less than 9% of its weight to Russian corporates while the SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (EMCD) has an almost 17% weight to Russia.

Backstopping some Russian corporate issues and mitigating default risk is the fact that many of the country’s largest issuers of corporate debt, including banks and energy producers, are state-controlled. That puts Russian corporates more in the quasi-sovereign category than in pure corporate territory.

In a sign that Russian issuers are looking to attract deeper foreign investment, companies have issued “$47 billion in Eurobonds in the year to date versus some $31 billion of bonds on the domestic market,” according to Reuters.

EMCB is down 7.8% this year while LQD is lower by 6.6%.

WisdomTree Emerging Markets Corporate Bond Fund

Tom Lydon’s clients own shares of LQD.