insights from matched firm-bond level data: market of

INTERNATIONAL AFFAIRS

Insights from matched firm-bond level data: Market of issuance and credit quality Alberto Fuertes (Banco de España)

José María Serena (Banco de España)

WARSAW, 15 DECEMBER 2015

*THIS PRESENTATION IS THE EXCLUSIVE RESPONSIBILITY OF THE AUTHOR AND DOES NOT NECESSARILY REFLECT

THE OPINION OF BANCO DE ESPAÑA, OR THE EUROSYSTEM.


OUTLINE

I. MOTIVATION

II. DATA AND CONSOLIDATED ANALYSIS

III. SECURITIES REGULATION AND DEBT CHOICE

2


MOTIVATION

• International markets transition towards market-based financing. Financial disintermediation and search for yield stand as drivers.

• Most studies use aggregate data that only include information about bond characteristics from sources such as Dealogic or SDC Platinum New Issues Database from Thomson Reuters (amount issued, coupon, maturity, currency…).

• BIS debt securities statistics provides comprehensive aggregate data.

• Some studies also use balance-sheet data, mainly from S&P Capital IQ or Worldscope.

• We construct a comprehensive data set for bonds guaranteed by EM firms and balance-sheet characteristics of the issuers using Bloomberg to analyze potential vulnerabilities of the corporate sector.


DATA

• Bond level information: 3,943 bonds issued in 2000-2014, guaranteed by 1,585 EM firms, from 36 countries (exc. China). 1.2 USD trn, overwhelmingly in hard currency. We construct the data base using Bloomberg.

• Balance-sheet information: match bond CUSIP with ticker of fundamental company, firm liable in case of distress.

• We conduct analysis with firm-year observations (to prevent biases of MTNs).

4


• Non-financial corporations as consolidated entities. Defining boundaries by firms 'guarantees on their affiliates debt.

5

DATA

Issuer of Debt

Guarantor of debt

Source: own elaboration.

Parent

Company

Supported affiliate

Standaloneaffiliate

Debtguaranteed by parent

Debt guarantedby affi liate

Consolidated firm: defined by the risk of affiliates debt for the parent

company


• Dependent affiliates: Organizational structure of Petrobras.

6

Issuer of the debt

Guarantor of the debt

Source: Bloomberg, Standard&Poors, Fitch Ratings, Petrobras annual report 2013, own elaboration.

Note: the chart shows only outstanding debt (not loans).

Petrobras SABrazil

Petrobras International Finance Company (PIFCO)

Cayman Islands

Petrobras GlobalFinance BV(PGF)

Netherlands

Other Subsidiaries Brazil and offshore

1.2 Global Notes 20150.3 Japan Yen Bonds 20160.9 Global Notes 20161.75 Global Notes 2017 1.66 Global Notes 20181.75 Global Notes 20180.75 Global Notes 20182.75 Global Notes 20191.67 Global Notes 20205.25 Global Notes 20210.8 Global Notes 20220.9 Global Notes 20231.1 Global Notes 20260.7 Global Notes 20291.5 Global Notes 2040

26.9 mm US$

15 mm US$

2 25 Global Notes 20163.0 Global Notes 20171.5* Global Notes 20183.5 Global Notes 20191.3*Global Notes 20192.0 Global Notes 20200.75* Global Notes 20213.5 Global Notes 20230.7* Global Notes 20232.5 Global Notes 20240.8* Global Notes 20250.45**Global Notes 20290.6**Global Notes 20341.75 Global Notes 20431 Global Notes 204436.5 mm

US$

DATA


• Firms have independent affiliates, typically large –non-random distribution.

7

Guarantor of the debt

Issuer of the debt

Parent company

Source: Jaguar Land Rover Overview, November 2014; own elaboration.

Tata Motors LtdINDIA

TML Holdings PTE Ltd(SINGAPORE)

Jaguar Land Rover Automotive PLC

UNITED KINGDOM

Jaguar Land RoverHoldings Limited

UNITED KINGDOM

Jaguar Land RoverLimited

UNITED KINGDOM

$700m Notes due 2018£500m Notes due 2020$410m Notes due 2021£400m Notes due 2022$500m Notes due 2023$500m Notes due 2019

£1,325mn Revolving credit facility (RCF)

Jaguar Land Rover -NSC (CHINA)

National Sales Companies

Jaguar Land Rover North America LLC and Jaguar Land Rover Exports Ltd

Jaguar Land Rover Russia

(NSC)

Chery Jaguar Land Rover Automotive

Co.Ltd

DATA

INTERNATIONAL AFFAIRS 8

DATA

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Latin America Emerging Asia Africa & Middle East Emerging Europe BIS Gross Flows UB

USD bln

Source: Bloomberg, own elaboration.

INTERNATIONAL DEBT-GUARANTEED BY EMERGING ECONOMIES FIRMS

BREAKDOWN BY REGION


SOURCE: Bloomberg, own elaboration.

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2000 2002 2004 2006 2008 2010 2012 2014

LEVERAGE

-0.5

1.5

3.5

5.5

7.5

9.5

11.5

2000 2002 2004 2006 2008 2010 2012 2014

RETURN ON ASSETS (ROA)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2002 2004 2006 2008 2010 2012 2014

INTEREST COVERAGE RATIO (ICR)

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2000 2002 2004 2006 2008 2010 2012 2014

CURRENT RATIO

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

2000 2002 2004 2006 2008 2010 2012 2014

%

COUPON

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

1999 2001 2003 2005 2007 2009 2011 2013 2015

years

MATURITY (WEIGHTED AVERAGE)

• Fuertes and Serena (2014) find that NFCs from EMEs do not show worst financial conditions that in the past and they access capital markets with better conditions.

• They also find that the credit risk distribution among issuers is heterogeneous, identifying “pockets of risk”.

9

INTERQUARTILE RANGE MEDIAN

DATA


SECURITIES REGULATION AND FIRMS ‘BOND MARKET CHOICE

• Firms have a menu of options, conditional on their decision to issue a bond overseas :

• Compliance with regulation has a widespread benefit –liquidity. Its costs are mostly firm-specific.

Type of

International

Market

Description Type of Regulation

Low: no material requirements of financial

disclosure

High: ongoing disclosure of high-quality

financial information

Mild: partial disclosure of financial

information, uncertain quality.

Note: foreign bonds are left aside; they are rare in the sample under analysis.

US Institutional

[US144A]

Eurobond

Global

US private placement, with Rule 144A rights:

trade in the secondary among QIBs.

ICMA-exempted from Prospectus Directive

Simultaneous issuance in two markets,at least a

local one; enchances liquidity, but assuming US

tranche, fully-subject to SEC regulation



0

20

40

60

80

100

120

140

160

180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US bn TOTAL VOLUME BOND ISSUANCES (GUARANTEED) BY EM FIRMS

Global Bond Foreign Bond US144A Bond Eurobond


• Univariate analyses -kernel, tests equality distributions, stochastic dominance- show statistical difference and ranking.

Global US144A Eurobond

A. Firm-level information

Total Assets ($ mm) 11,620 4,295 936

Fixed Assets to Total Assets 58% 46% 38%

Altman Score 1.93 1.82 1.92

Leverage 2.46 2.58 2.35

Return on Assets (%) 4.38 3.19 3.39

Current Ratio 1.34 1.29 1.36

Interest Coverage Ratio 3.47 2.88 2.55

Local GAAP (%) 6% 20% 27%

US ADR (%) 48% 25% 13%

Number observations 110 193 1251

B.Firms' financing conditions (in a given year)

Amount Issued ($ mm) 650 300 55

Maturity (years) 9.38 6.69 5.00

Bond Holder Rights (%) 9% 23% 33%

Sinking Fund (%) 4% 18% 6%

Convertible Rights (%) 6% 6% 29%

Call option (%) 32% 38% 15%

Put option (%) 3% 4% 35%

Rating (%) 86% 76% 34%

Number observations 142 311 2163

Descriptive statistics (median values)



1. Total assets 2. Ratio fixed assets

0

0.00005

0.0001

0.00015

0.0002

0.00025

Global Eurobond US144a

0

0.002

0.004

0.006

0.008

0.01

0.012

0.014

0.016

0.018

0 16 32 48 64 80 96


3. Maturity

0

0.025

0.05

0.075

0.1

0.125

0.15

0.175

0.2

0.225

0 3 6 9 12 15 18 21 24


4. Leverage

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.55

0.6

0.65

1 2 3 4 5 6 7 8


5. Return on assets 6. Interest coverage ratio

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

-20 -17 -14 -11 -8 -5 -2 1 4 7 10 13 16 19 22 25 28


0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0 3 6 9 12 15 18 21




US144A Eurobond US144A Eurobond

Amount Issued (1) / Total Assets (2) 1.082 0.742*** 0.794** 0.794**

[0.112] [0.070] [0.086] [0.079]

Term 0.945*** 0.925*** 0.953** 0.927***

[0.015] [0.015] [0.020] [0.021]

Local GAAP 3.375*** 3.144*** 3.323** 2.867**

[1.388] [1.206] [1.603] [1.297]

ADR 0.410*** 0.408*** 0.591* 0.489***

[0.103] [0.094] [0.164] [0.119]

MOVE Index 0.996 0.988*** 0.998 0.990*

[0.004] [0.004] [0.006] [0.006]

Rated Security 0.824 0.311*** 0.477 0.148***

[0.324] [0.109] [0.273] [0.077]

Bond Holder Right 2.325** 1.682 3.776** 2.845*

[0.813] [0.543] [2.318] [1.679]

No Financial Info 1.143 1.098

[0.296] [0.264]

Market Based 1.633* 1.553* 1.794* 1.816**

[0.412] [0.365] [0.567] [0.534]

Fixed Assets/Total Assets 0.996 0.996

[0.007] [0.006]

Altman score <1.21 1.264 0.589*

[0.420] [0.184]

Observations 2,579 2,579 1,193 1,193

Multinomial Logit. Odd Ratios. Base outcome is access to global

No Balancee-Sheet Data

Note: no time dummies, includes constat (not reported). Robust standard errors in brackets*** p<0.01, ** p<0.05, * p<0.1

Balancee-Sheet Data



THANK YOU


APPENDIX

• Different metrics of international debt issuances: by country.

16

0

50

100

150

200

250

300

BRAZIL RUSSIA MEXICO INDIA

COUNTRY OF RISK

COUNTRY OF ULTIMATE PARENT COMPANY COUNTRY (nationality)

COUNTRY OF DOMICILE ISSUER (residence)

USD bln



• International debt securities issuances by offshore financial vehicles.

17

Company Name Parent CompanyCountry of

Incorporation

Country of

RiskCUSIP

Amount

(USD bln)

Petrobras Global Finance BV PETROBRAS - PETROLEO BRAS-PR Netherlands Brazil 71647NAF6 3.5

Lukoil International Finance BV LUKOIL OAO Netherlands Russia EJ6431419 1.5

Gazprom Neft OAO Via GPN Capital SA GAZPROM NEFT OAO-CLS Luxemburg Russia EJ9515473 1.5

Russian Railways via RZD Capital PLC RUSSIAN RAILWAYS JSC Ireland Russia EJ6158582 1.3

AngloGold Ashanti Holdings PLC ANGLOGOLD ASHANTI LTD Isle of Man South Africa 03512TAD3 1.3

Metalloinvest Finance Ltd METALLOINVEST HOLDING CO OAO Ireland Russia EJ8456547 1.0

SABIC Capital II BV SAUDI BASIC INDUSTRIES CORP Netherland Saudi Arabia EJ8456547 1.0

EXAMPLES OF BONDS ISSUED BY FINANCIAL SPECIAL PURPOSE VEHICLES

SOURCE: Bloomberg

APPENDIX


APPENDIX

Company Name Parent CompanyCountry of Incorporation/Country

of Risk

Country of Ultimate Parent

CompanyCUSIP

Amount

(US bn)

Jaguar Land Rover Automotive

PLCTata Motors Ltd. United Kingdom India EK0498676 0.65

Novelis Inc. Hindalco Industries United States India 67000XAL0 1.1

Rain CII Carbon LLC /CII

Carbon Corp.Rain Industries Ltd. United States India EJ4718106 0.4

Moy Park Bondco PLCMarfrig Global

FoodUnited Kingdom Brazil EK2879899 0.33

Springs Industries Inc. Cia de Tecidos do

Norte de MinasUnited States Brazil 851783AB6 0.47

WPE International Cooperatief UA Venti SA Brazil Luxembourg 92935NAA4 0.39

Pilgrim's Pride Corp. JBS SA United States Brazil 72147KAB4 0.49

BONDS ISSUED BY AFFILIATES AND NOT GUARANTEED BY PARANT COMPANIES


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