Question

1. Why has the cost of borrowing dropped for emerging market companies and debt issuance become so attractive?

2. Based on the article, what are the risks associated with investing in these debt issues?

Answer 1

1. Cost of borrowing has dropped considerably especially after the Corona pandamic. Even before Kovid, most of the countries were falling in to an economic slowdown. To outlive the economic slowdown, the different governments, by law, were reducing the rate of interest so that funds for economic and developmental activities would be available at resanable rates.

Since the average rate of interest has droped considerably, and emerging markets are flushed with funds, it is easier for the companies in emerging markets to obtain funds from the debt market at very attractive interest rates. This way the companies are able to raise the required funds without unnecessarily broadening their equity base.

2. Due to the general economic slackness and shut down and resultant loss of business, majority of the companies are in economic distress. To overcome the present precarious position, these companies, which are already in a bad shape, are raising funds from the debt market. Since many of these companies are financially in a bad position, unless the general economic trend picks up strongy, they may end up in huge losses and liquidation. In the event of wind up and liquidation, the investorsin the debt market will loose their entire or major portion of their investment.