JPM EM Corporate Fundamentals Checkup_watermark

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Regional dynamics

In Asia, revenues rose 9% from 2017, representing a modest acceleration from last year (+8%). Oil & gas credits across China, India and Thailand saw the largest gains (note that a sizable portion of Indian credits still reflect LTM figures through March 2018) but in aggregate 82% of companies saw a rise in revenues versus 2017 figures. Larger scale declines were more idiosyncratic/name specific including Baosteel, Bharti, Chalco, and Li & Fung. While revenues were up 9%, EBITDA was up a touch lower at 8%, driven by KORELE and select TMT issuers where EBITDA declined. As such, EBITDA margins were down modestly to 16.3% (-0.2%), driven by utilities and to a lesser extent TMT. Gross and net debt moderated, in line with the trend we have seen in the external primary market, which has been down 22% y/y. While overall debt levels declined, this was driven by the larger capital structures, as a slightly larger portion of companies actually saw gross and net debt levels pick up (56% and 61%, respectively). Capex picked up 6% from 2017 levels, driven by oil & gas credits.

Latin America corporate revenues pickup up for the majority of issuers and declines were generally limited to low single digits, resulting in 5% gains from 2017 levels in aggregate (in line with 2017 growth). EBITDA picked up 8%, which enabled margins to improve +0.8% to 24.8%. Still, only 65% of companies in the region posted an increase in EBITDA with underperformance by locally focused segments including consumer/utilities whereas larger commodity players/exporters had stronger trends. The improvement in revenues was broader based at 74%. Gross debt moderated further, declining -5% LTM versus 2017. This was disproportionately driven by larger Brazilian corporates, which continued liability management programmes, while elsewhere, the share of companies increasing and reducing debt was balanced. Net debt moderated -3% after dropping -1% last year. Given the rise in EBITDA and decline in debt, gross and net leverage in the region declined 0.4x and 0.2, to 2.7x and 2.1x, respectively. Interest coverage increased for over 60% of issuers, with the ratio improving +0.5x to 4.8x. Capex picked up a touch (+1%) in LTM figures after declining -31% last year with the Brazilian commodity/exporting companies once again seeing more outsized reductions while other sectors have been more balanced. One of the exceptions was TMT, where expansions throughout the region resulted in a pick-up in capex.

The improvement in EM Europe credit metrics and profitability was driven by higher oil prices and benefited from RUB depreciation. Overall, EM Europe net leverage dropped -0.5x to 1.3x as EBITDA surged +25% on higher oil prices and still solid Turkish growth for the LTM period. The depreciating RUB led to improved profitability for exporting credits. On the debt side, the RUB portion of Russian companies' debt declined in USD terms as RUB depreciated. All else equal, the RUB portion of Russian companies’ debt declined in USD terms by -12% from 2017 levels. Assuming half of Russian companies’ debt is RUB denominated, that would translate into -6% decline in debt from RUB depreciation specifically. This is particularly the case for Rosneft, whereas other companies’ RUB denominated debt is likely much lower. Nevertheless, we have been hearing that Russian issuers have focused on de-dollarizing, so incrementally, weaker RUB should have led to lower debt in USD terms. Specifically for Rosneft, around half of net debt decline could have been due to RUB depreciation this year. Notably, Rosneft is a significant contributor to overall EM European metrics given its size, but even excluding the name, overall net leverage for EM European HY companies declined by -0.3x to 1.8x from 2017 (versus -0.8x decline with Rosneft). Turkish companies have continued to show strong EBITDA growth in local currency terms, which was still positive when

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translated to USD. Overall, Turkish companies have been able to increase prices and pass on inflation in their costs, so EBITDA margins have not been come under pressure just yet.

In Middle East & Africa, the improvement in metrics appears more muted due to select issuer specific drivers. Overall, net leverage for the region remained about flat at 1.8x although interest coverage continued to improve given still modest interest costs and 8% rise in EBITDA. Some one-off drivers in the region included SECO, which is a disproportionate contributor to the region's metrics given its size. The issuer had a one off impact in 2017, which inflated margins and EBITDA, with 2018 figures reflecting more normalized trends. SECO has also been posting increases to debt levels on the back of ongoing capex for the past few years, which combined with lower EBITDA resulted in leverage picking up y/y. Others such as Kosmos Energy had leverage go up somewhat on acquisitions.

For more color on fundamentals trends in each of EM regions, please see the regional sections of our EM Corporate 2019 Outlook report.

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