US$100 billion of debt from emerging-markets is now distressed

The bonds of emerging-market nations are entering distressed territory at an alarming rate as the soaring dollar raises the prospect of government defaults.

Fifteen nations with more than US$100 billion of Eurobonds outstanding now have average spreads of at least 1,000 basis points over US Treasuries, which many investors consider to be the threshold for debt to be classed as distressed.

And that doesn’t even include Lebanon, which defaulted this month, and Argentina, which has begun restructuring talks with bondholders.

At the beginning of the year, only Lebanon, Argentina, Zambia and Suriname had spreads of 1,000 basis points. But that was before fears over the coronavirus and the crash in oil prices roiled global markets, sending the dollar into orbit.

Ecuador and Zambia are the countries investors appear most concerned about. The former, whose Eurobonds due in March 2022 yield more than 70 percent, was hit by popular protests last year.

The decline in crude prices and delays to International Monetary Fund (IMF) disbursements from a US$4.2 billion loan have only added to the worry.

Zambia has been battered by weakening copper prices and drought, which has led to power cuts caused by low water levels at its hydroelectric dams.

Many investors have said it could default without an IMF program, though the government has shown little willingness over the past year to negotiate one. Yields on its US$750 million of notes due in September 2022 rose above 50 percent for the first time this week.

The list includes several other African countries, such as Angola, Gabon, Nigeria and Cameroon. Iraq is the only Middle East nation in the distressed zone, though Oman’s spreads are nearing 1,000 basis points too. Asian nations barely feature.

Given the collapse in US Treasury yields this year as investors pile into havens, a dollar spread of 1,000 basis points more or less equates to a yield of 10 percent.