Introduction
Bond giant PIMCO has significantly increased its lending to emerging market borrowers, providing almost $6 billion this year, primarily to government entities, to secure higher returns and improved protections for lenders.Context
This year's lending is approaching the approximately $8.5 billion PIMCO extended in 27 deals last year, according to Pramol Dhawan, head of emerging markets portfolio management. Over recent years, PIMCO has provided a total of around $25 billion in loans to various borrowers.Developments
For emerging markets concerned about adverse shifts in investor sentiment, private credit—rapidly expanding in developed economies—is considered a more adaptable yet less transparent borrowing alternative. Countries that have benefitted from PIMCO's funding include Panama, the Dominican Republic, Saudi Arabia, and Qatar, as shared by Dhawan during a conference in London.PIMCO utilizes a variety of methods for lending, including loans, private bonds, and buying existing public bonds at undisclosed discounts. The firm usually opts for borrowers with low investment-grade or high sub-investment grade ratings. Dhawan revealed that PIMCO could achieve a 150 basis-point advantage over public investment-grade bonds from the same borrowers, while the high-quality end of the high-yield market could see advantages of up to 300 basis points.
One major benefit of off-market transactions is PIMCO's ability to create its own lender protection terms, known as covenants, offering enhanced security compared to public debt deals. According to Dhawan, many emerging market governments are willing to pay a premium for private debt to maintain flexibility, particularly after the disruptions caused by the COVID-19 pandemic, which left several emerging markets, especially smaller and riskier frontier markets, unable to access capital markets.
Some issuers are also hesitant to devalue their Eurobonds through a public debt issuance. Dhawan noted that, for instance, the higher-cost private credit ranks as only a small part—about 3%—of the overall debt burden for countries like Panama and Egypt. The demand for this method of lending to investment-grade governments is largely driven by insurers; Dhawan commented that nearly every U.S. insurance company approached about this opportunity is receptive, particularly as they grow increasingly concerned about volatility in the U.S. equity market.