The report explores the scale and nature of the risks involved with debt issued by offshore subsidiaries in the context of its rapid growth in some emerging markets in recent years and concerns raised in some quarters about difficulties in obtaining aggregate information.
"The significant depreciation of some emerging market currencies, forecasts for prolonged muted growth in some economies and an expected tightening of US monetary policy imply that debt issued by offshore subsidiaries, which is typically issued in foreign currency and owned by foreign investors, may become more expensive to service and refinance," said Marie Diron, a Senior Vice President at Moody's and co-author of the report.
At the end of 2014, there were $800 billion of developing countries' bonds outstanding issued by offshore subsidiaries -- some 2.5 times as much as five years earlier. China, India, Russia, Brazil and South Africa account for 85% of such bonds by developing countries which make up 14% of these countries' total bond debt. With 80% of debt issued by Brazilian and Indian offshore subsidiaries in US dollars and a large proportion in euros for Russian subsidiaries, the significant depreciations of some emerging markets' currencies over the past year imply that the cost of servicing that debt has risen significantly for parent issuers from these countries. However, given its size in relation to the whole economy and foreign exchange reserves, taking this type of debt into account does not change our assessment of these economies' external vulnerability.
Instead, the risks are issuer specific. In India, Russia and Brazil, the top 10 bond issuers through offshore subsidiaries account for more than 70% of total issuance of such debt during the last five years. These concentrations suggest that risks relate to issuer-specific factors
"A small number of issuers concentrated in only a few sectors, such as oil and gas and the Chinese property market, account for the bulk of issuance through offshore subsidiaries, exposing these markets to sector-specific risks" , observes Michael Taylor, Moody's Chief Credit Officer for Asia-Pacific and another of the report's authors. For example, the ongoing correction in China's property sector could raise the perceived riskiness of investing in debt issued by overseas subsidiaries of Chinese real estate companies. Protracted energy price decreases could also dampen investor appetite for debt issued by the oil and gas sector. "Nonetheless, Moody's ratings of corporates and financial institutions already factor in the these issuer specific risks, including the debt issued through offshore subsidiaries", Taylor adds.
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