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BofA Merrill Lynch Global Research Launches Emerging Markets Local Currency Non-sovereign Bond Indices

Unique New Indices First to Address Rapidly Growing Asset Class

Wednesday, October 30, 2013 11:15 am EDT

Dateline:

NEW YORK

Public Company Information:

NYSE:
BAC
"The introduction of local currency credit market indices does more than just add currency exposure to the credit risks already tracked through existing external emerging market corporate indices"

BofA Merrill Lynch Global Research (NYSE: BAC) today announced the launch of four emerging markets local currency bond indices, the first of their kind, designed to track the performance of local currency non-sovereign emerging markets fixed rate debt. Development of these new indices has been driven by the growth of interest in this market segment following the rapid increase in local currency sovereign and external corporate debt markets.

“With more than $4 trillion in outstanding debt, including non-Euroclear issues, the local currency non-sovereign market is larger than the local currency sovereign market,” said Anne Milne, head of Global Emerging Markets Corporate Credit Research. “With a unique combination of risk characteristics, this asset class is rapidly gaining the attention of emerging markets fund managers, but to date there has been no index coverage to shed light on market structure and performance. These new indices provide an established performance benchmark in order to facilitate a comprehensive investment process.”

The new series includes four flagship indices:

  • The BofA Merrill Lynch Broad Local Emerging Markets Non-sovereign Index (ticker LCCB) – the broadest measure of the local currency emerging markets non-sovereign debt markets. LCCB constituents are capitalization weighted with no caps on country or issuer exposures.
  • The BofA Merrill Lynch Diversified Broad Local Emerging Markets Non-sovereign Index (ticker LCCD) – a more liquid, diversified version of LCCB. There are larger minimum bond sizes in addition to caps on country and issuer exposures.
  • The BofA Merrill Lynch Local Emerging Markets Non-sovereign Index (ticker LOCM) – the same as LCCB but excludes Sukuks. LOCM constituents are capitalization weighted with no caps on country or issuer exposures.
  • The BofA Merrill Lynch Diversified Local Emerging Markets Non-sovereign Index (ticker LOCL) – a more liquid, diversified version of LOCM. There are larger minimum bond sizes in addition to caps on country and issuer exposures.

“The introduction of local currency credit market indices does more than just add currency exposure to the credit risks already tracked through existing external emerging market corporate indices,” said Phil Galdi, head of Global Bond Index Research. “While there are some similarities between our external emerging markets non-sovereign index (EMCB) and the new local index (LCCB), they are different in one key aspect – name exposures. Less than half of the names that appear in the local index are also in the external index and only a quarter of the names in the external index also appear in the local index.”

The four alternatives address two primary considerations in index construction: diversification and investibility. All four indices focus solely on securities that settle on Euroclear, the portion of the market that is most readily accessible to offshore investors.

The broad, market cap-weighted index (LCCB) is an important tool to help investors understand and analyze the asset class. But based on its natural capitalization weight, the market is dominated by Asian currencies and has issuers with market cap exposures well in excess of limits typically imposed in policy guidelines for most mandates.

Exposure concentrations are addressed in the diversified version of the index (LCCD), designed for performance measurement purposes. The higher bond size filters used in the diversified index also serve to narrow the universe to the more liquid issues in the market, thus improving investibility.

Finally, while Sukuks (Islamic finance certificates similar to bonds) are an important component of the Asian market, they are generally less liquid than the rest of the market; hence versions of the indices without Sukuks are offered in the LOCM and LOCL. In addition to improving diversification, the currency/issuer capped indices have significantly higher yields as index allocations are shifted from lower yielding Asian currencies into higher yielding EMEA and Latin American currencies.

Key statistics as of September 30, 2013

Index

 

Market

Value

(USD)

  # issuers   # bonds  

Yield to

Worst

 

Effective

Duration

LCCB $168bn 284 625 5.28 4.37
LCCD $142bn 199 389 7.69 4.27
LOCM $139bn 253 513 5.50 4.16
LOCL $118bn 177 321 7.68 4.20

The four primary indices are complemented by an extensive suite of 33 sub-indices that segment the market by currency, rating and sector and offer investors a granular view of the market. This flexibility allows customized analysis to meet specific portfolio strategy needs.

Index rules
The Emerging Markets local currency non-sovereign indices include fixed rate debt of emerging markets non-sovereign issuers that is denominated in an emerging market currency and that settles on Euroclear. Debt issued by central governments, central banks and supranationals is excluded from the indices. The indices are rebalanced monthly. Detailed criteria and weighting methodologies for each of the four indices are provided below.

    LCCB LCCD LOCM LOCL
Description   The broadest index of the series. LCCB includes Sukuks and has bond size filters that are roughly $75-100mn USD equivalent. LCCB is market cap-weighted LCCD is a large cap, diversified version of LCCB. Minimum bond size filters are doubled and issuer/currency limits are set at 2%/10%, respectively (issuer limits take priority when both cannot be met) LOCM is the same as LCCB but excludes Sukuks LOCL is a large cap, diversified version of LOCM. Minimum bond size filters are doubled and issuer/currency limits are set at 2%/10%, respectively (issuer limits take priority when both cannot be met)
Settlement   Only includes bonds that settle on Euroclear
Issuer type   Includes Corporate and Quasi-Government issuers (other than central banks and supranationals)
Country of risk   Excludes issuers with a Developed Markets country of risk (FX G10, Western Europe, Western European and U.S. territories)
Currency of denomination   Excludes FX G10 and Western European currencies. Also, excludes currencies with less than $10bn USD equivalent in outstanding nominal local currency sovereign debt. Qualifying currencies are selected annually. “Dual currency” bonds (bonds denominated in an EM currency but that settle in a hard currency, such as USD) are included
Maturity   Time to maturity at issuance >= 18 months; remaining time to maturity >= 1 month. Callable perpetual securities are included provided they are at least one month from the first call date
Bond size   Set by country in local currency terms at roughly $75-100mn USD equivalent Set by country in local currency terms at roughly $150-200mn USD equivalent Set by country in local currency terms at roughly $75-100mn USD equivalent Set by country in local currency terms at roughly $150-200mn USD equivalent
Coupon type   Only includes fixed rate securities (fixed-to-floating and fixed-to-variable coupons included)
Excluded   Excludes inflation-linked securities and Certificates of Deposit
Sukuks   Includes Sukuks Excludes Sukuks

BofA Merrill Lynch Global Research
The BofA Merrill Lynch Global Research franchise covers nearly 3,500 stocks and over 1,100 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named Top Global Research Firm of 2012 by Institutional Investor magazine; No. 1 in the 2013 Institutional Investor All-Asia survey for the third consecutive year; No. 1 in the Institutional Investor 2013 Emerging Market & Fixed Income Survey; No. 2 in the 2013 Institutional Investor All-America survey; No. 2 in the All-Japan survey for the second consecutive year; No. 2 in the 2013 All-Latin America survey; No. 2 in the 2012 All-China survey; and No. 3 in the 2013 Institutional Investor All-Europe survey. The group was also named No. 2 in the 2013 Institutional Investor All-America Fixed Income survey for the second consecutive year; and No. 3 in the 2013 All-Europe Fixed Income Research survey.

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