The EM corporate asset class has grown to $1.3 trillion, putting it on par with the EM sovereign credit asset class. Using the JP Morgan Corporate Emerging Markets Bond Index as a proxy for the asset class, the number of EM corporate issues has ballooned from 332 a decade ago to 810 as of mid-August. The number of countries in the index has almost doubled—from 35 to 60—over the decade.

The average credit quality rating for EM corporates sits at BBB; EM sovereign issues average a BBB- rating. The higher rating for corporates may result from the defensive posture taken by many EM-based exporters that generate large revenue streams from outside their home countries. “Brazil, South Africa, and Indonesia have a number of world-class exporters with conservative balance sheets which would likely have much higher ratings if they were located in a developed-market country,” Magash Chetty said in the research paper. Chetty is a senior emerging-market corporate credit analyst at Vanguard.

EM corporates’ net leverage is at its lowest in nearly 10 years, as measured by net debt to earnings before interest, taxes, depreciation, and amortization. Interest coverage is also healthy as financing costs for existing debt remain low.

A recent rise in defaults and rating downgrades has been driven particularly by Chinese property companies and by Ukrainian and Russian corporates. Even so, EM corporate defaults remain below long-term levels. In the research paper, Johnny Will, a credit analyst based in London, said: “There are reasons to believe default levels away from these two areas will remain below historical levels. Liquidity measures such as interest coverage and cash to short-term debt are at healthy levels, thanks in part to support from low financing costs on existing debt and strong earnings.”

Vanguard active managers regularly hold corporate positions in their taxable funds. Particularly in the current market, EM corporates offer attractive potential for outperformance in the fixed income market.

Learn more. Read Emerging markets corporates at a crossroads. (6-page PDF)

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