Two developments over the past week – a court ruling in Dallas regarding the U.S. enforcement of a Mexican corporation’s bankruptcy and an announcement out of Argentina regarding the change of control put on the bonds of a major oil company – have been encouraging for investors in emerging markets corporate debt, according to Market Vectors’ high-yield corporate debt portfolio manager, Fran Rodilosso.
“No matter the level of sophistication of the investor, one of the first questions we are typically asked concerns the jurisdiction for enforcing claims against issuers of emerging markets debt, should a credit event occur,” says Rodilosso. “While both developments pertain to the specifics of each situation, I believe that the key takeaway is that issuers need to consider more and more the negative consequences of breaking a contract.”
Rodilosso notes that while there is still no single answer to the question of jurisdiction, there is a long history of negotiated, out-of-court settlements between debtors and creditors. “There are certainly cases where the playing field has worked against creditors, but I believe that is one reason there is still more risk priced into emerging markets credit versus that of developed markets,” says the Market Vectors portfolio manager. “As these markets grow, and their companies do more cross border business, I would expect that creditors will have more tools with which to enforce their rights in the face of credit events.”
As evidence of this, Rodilosso cites a June 13 ruling in Dallas denying Mexican issuer Vitro’s attempt to enforce its Mexican bankruptcy plan in the U.S.-a decision that is being lauded by some as a victory for creditors and one that could potentially lead to lower borrowing costs for issuers if lenders gain more confidence that they can enforce their rights. “I would not make such a blanket statement,” says Rodilosso, “but it is encouraging. In this instance, Vitro has subsidiaries in the U.S. that are guarantors of the company’s debt and which are not in bankruptcy.” If upheld, the decision could allow creditors to pursue those assets.