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Concern, but not panic over rising quasi-sovereign debt levels

Although emerging market quasi-sovereign debt levels are increasing, positive steps to mitigate risk are evident in certain sovereigns’ intervention in their entity’s debt management, as in the Brazilian government’s shake up of Petrobras’ executives. Although many quasi-sovereigns such as Pemex and Petrobras have high debt ratios, only some like Ematum have precarious financial positions.

Jun 6, 2016 // 5:24PM

The amount of debt sold by large state-owned companies, known as quasi-sovereigns, within emerging markets has overtaken the total amount of outstanding EM sovereign debt, reaching US$600bn according to analysts at Bank of America Merrill Lynch.

The amount of Brazilian quasi-sovereign debt has almost quadrupled and that of Mexico’s state-owned entities has nearly doubled.

The analysts predict that quasi-sovereign issuance now constitutes nearly half of the euro and dollar-denominated corporate bond market for developing economies, which stands at between US$1.6tn and US$1.8tn.

State-owned entities in the commodities and energy sectors have been the main forces behind the rise in quasi-sovereign debt levels, with recent issuances from Pemex in March with a €2.25bn bond, Petrobras in May with a US$6.75bn issuance and Gazprom with a CHF500mn (US$514mn) bond, also in March.

In China alone, state-owned entities account for a quarter of the total amount of quasi-sovereign debt, which stood at around US$150bn mid-2015. The sovereign itself in comparison has remained relatively under-leveraged in FX debt, with only US$65bn of foreign government debt outstanding at the end of last year.  

State support has been provided to some financially pressured quasi-sovereigns, such as for Pemex, when the Mexican government announced in April that US$4.2bn in fresh capital would be made available for the company. However the majority of quasi-sovereigns are not dangerously pressured financially.

“Pemex and Petrobras may be highly leveraged companies, but they are not in severe trouble,” said Greg Saichin, Chief Investment Officer of Emerging Market Fixed Income at Allianz Global Investors.

Government intervention and management on the debt front can have a positive effect on a quasi-sovereign’s finances despite its debt ratios.

“Such sovereigns are able to place competent managers in charge to clean up the books and organise the company’s finances.” Such a move has recently happened in Brazil, with Petrobras’ CEO Aldemir Bendine being replaced with Pedro Parente by acting President Michel Temer.

Saichin noted that risk premiums on quasi-sovereign debt fall if a government takes positive action on the management front.

However, certain sovereigns struggle to support their state-owned corporates, as in the case of Mozambique’s Ematum, the tuna fishing company which restructured its outstanding dollar-denominated debt in April.

This highlights that not all governments are able to support certain entities. Although quasi-sovereign bond defaults are uncommon, they can occur; Ematum’s restructuring caused S&P Global Ratings to lower Mozambique’s rating to selective default.

Saichin however noted that the Ematum issue in Mozambique should be regarded differently to other quasi-sovereigns such as Pemex.

Macro Global

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