LONDON — Most developing nations have been absolved of the “original sin” that blocked them using their own currencies to raise money abroad, but their companies’ sins have still not been forgiven, as the huge debt they have racked up in “hard” currency attests.

Original sin, which is how economists Barry Eichengreen and Ricardo Hausmann described the dilemma for emerging market (EM) economies that were unable to borrow abroad in their own currencies, is now largely a thing of the past for sovereign debt.

Corporate borrowing in local currencies has not taken off, however. For one thing, much of the debt is not easily accessible to foreign investors; for another, borrowing in dollars, pounds or euros is usually cheaper, especially since the crash in Western interest rates after 2009.

Above all, investors see these securities as inherently riskier than government debt.

“Sovereigns can issue debt in hard currency or local currency, but that’s a luxury which is not there yet for most corporates,” said Abhishek Kumar, lead portfolio manager for emerging markets at State Street Global Advisors.

Outstanding emerging corporate debt denominated in hard currencies has doubled since 2007 to $7 trillion, according to the financial industry body, the Institute of International Finance (IIF), nearly 7 times than EM governments’ at around $1.1 trillion.

Governments are now using currencies such as the rand and rouble for more than 80% of their borrowing. Hard currency movements still affect the price at which they borrow but their vulnerability to exchange rate swings is far less than it was.

The shift towards greater acceptance of emerging currencies was highlighted recently when several central banks confirmed they now hold China’s yuan in their forex reserves.

Like emerging markets economies that suffered currency crises in the 1990s, companies risk a strengthening in the dollar or euro against the currencies in which they earn revenues, which can make debt repayment significantly costlier.

Also, with US interest rates rising, investors could demand higher and higher yields to “roll over” maturing debt.

The IIF and the Bank for International Settlements have repeatedly warned of these risks. Earlier this month, the IIF said the borrowing binge of the past decade meant large amounts of hard currency debt would need to be rolled over in coming years, with around $450 billion due for repayment in 2018.

“Rising global interest rates will add to worries about the debt servicing capacity of highly indebted firms and governments,” it said.

Emerging market companies also have up to $30 trillion in domestic currency debt but this is mostly in bank loans and almost all is held locally. Most bonds issued in domestic currencies are not eligible for processing through Euroclear, the international post-trade services system which increases convenience and transparency.

GROWING MARKET
Prospects for emerging currency corporate bonds looked bright in 2014, when Bank of America Merrill Lynch launched a special index with around 250 “Euroclearable” securities.

But more than three years later, the index is still not tracked by any passive funds, according to the ICE exchange, which took over BAML indices in 2017. JPMorgan, which runs the most widely used emerging debt indexes, still does not have a local corporate bond benchmark.

One of the few active funds in the sector is run by Brent David, a portfolio manager at BlueBay Asset Management. He says the market is improving and estimates up to $500 billion of corporate local bonds are now Euroclearable, twice the amount in 2014.

While that’s less than a tenth of outstanding bonds, he expects the number will rise as Chinese and Indian firms issue yuan and rupee debt in Hong Kong, Singapore or London.

“More and more corporates are feeling the need to shift to issuing in their own currencies. They are trying to diversify their investor base, and to tap foreign investors they have to issue in Euroclearable format,” David said.

For David, a key attraction is that the BAML index’s average yield is roughly two percentage points above JPMorgan’s GBI-EM sovereign debt benchmark, after taking into account its shorter duration.

It also offers exposure to the Indian and Chinese currencies, which are not part of the GBI-EM, he said.

ILLIQUID
For the market to really take off, however, foreign funds need bigger sizes and trading volumes, which will be difficult to achieve without developing pension and asset management industries within emerging markets.

Not all companies will be keen to undertake the disclosures and operational complexities that Euroclear involves.

Even when bonds are Euroclearable, investors are wary. Russian lender Sberbank estimates foreigners own less than 5 percent of the corporate rouble bond market, which has over $100 billion outstanding and has been Euroclearable since 2013.

In contrast, they hold a third of rouble government debt.

“You have to weigh up: do you get compensated enough if you go into a non-sovereign instrument?” said Paul Greer, assistant portfolio manager at Fidelity International.

“With local corporate bonds, you get a small amount of spread over the sovereign curve but you have to deal with FX risk, credit risk and interest rate risk.”

Irresistibly cheap global borrowing costs may also have hampered the market’s development — dollar-denominated emerging corporate bonds yield an average 5.2%, according to the CEMBI Global index. That’s well below what firms from Brazil or India would pay to borrow in their own currencies.

That’s an incentive to keep borrowing in hard currency, said Guy Stear, co-head of fixed income research at Societe Generale.

“Companies might think ‘I am taking risks here in terms of original sin, but on the other hand I am happy today because my overall funding cost is low,’” Stear said. — Reuters

AUNG KYAW MOE and Jun Hasegawa have a lot in common.

Both are entrepreneurs. Both left home to seek their fortunes. Both are now working on digital-payment projects with operations in Southeast Asia.

But when it came to collecting money to fund their start-ups, they took opposite paths. Aung, 42, is raising as much as $30 million in venture capital with the goal of perhaps going public in a few years. Hasegawa, 36, brought in $25 million through a so-called initial coin offering, an unregulated sale process that’s exploded in popularity in the last year. His company’s tokens, OmiseGO, are already worth more than $2 billion.

“It’s been crazy,” says Hasegawa, co-founder and chief executive officer of the start-up Omise. “It took only six months to get here.”

Aung watched Omise’s rocket ride with wonder and a touch of envy. Should he try an ICO too? While venture money can be harder to get, he ultimately decided on that route and said ICOs are too shaky a foundation to build a business on.

“If it all came crashing down one day, you would have no control,’’ said Aung, whose start-up is called 2C2P, for Cash and Card Payment Processor. “I like to go to bed with peace of mind.’’

The rivals illustrate a dilemma startups are now facing the world over. Should they pursue traditional venture capital with its predictability and limitations or turn to ICOs where there is quick money, volatility and innumerable unknowns?

ICOs are winning support with fund raisings jumping to more than $6.8 billion in 2017, up from $151 million in 2014, 2015 and 2016 combined, according to research firm Smith + Crown. Telegram Inc., an encrypted messaging service, is planning to raise at least $1.2 billion through an initial coin offering, which would be by far the largest ever. Many people buy into ICOs for a simple reason: The coins have soared in the past year, driven in part by a surge in Bitcoin of more than 10 fold.

Omise and 2C2P took different routes to their decisions. Aung, a Myanmar-born computer programmer, founded his start-up in 2003 in Bangkok. He helps customers like Thai Airways, Lazada and Zara handle online payments with credit or debit cards — or cash payments at convenience stores from people without bank access.

The Japanese Hasegawa and Thai co-founder Ezra Don Harinsut started Omise in Bangkok a decade later as an e-commerce firm, then pivoted to payments. Their OmiseGO network aims to let anyone carry out financial transactions with cryptocurrencies such as ethereum and Bitcoin, as well as fiat money like the dollar. They want to move people from traditional banking into the decentralized world of digital currencies.

They may not have been able to raise venture money even if they tried — their crypto service hadn’t launched last year when they were seeking funds. The ICO was also easier because they didn’t have to give up equity in the company. People who buy OmiseGO tokens — or just OMG — don’t get shares in Omise; rather they get currency they’ll be able to use on the company’s network.

Hasegawa said some of his existing investors were reluctant to back the project. But because the company wasn’t selling equity, they didn’t need shareholder signoff. They posted the ICO whitepaper — essentially a fundraising plan — online in June without any detailed financials. A few weeks later, they had more than enough interest.

“When we told them we got more than $200 million in commitments, they were like, ‘Whaaaat?,’” said Hasegawa. Omise owns 30% of the tokens, now worth more than $500 million.

The ICO money was aimed at helping the company launch an ethereum-based technology for digital wallets by the fourth quarter, but the project hasn’t started yet. Hasegawa says a limited version of the network is on track for mid-2018.

Aung tries to avoid making promises he can’t keep. His company hands out T-shirts to employees emblazoned with “Say Less, Do More.”

Dmitry Levit, the first venture capitalist to back 2C2P, recalls that when his firm was scouting for deals in Southeast Asia in 2011, many potential online sales for airline tickets, e-commerce goods and bookings for services got canceled due to unreliable payment options. He quickly decided 2C2P had the best shot at a solution.

“We realized that what Aung was building is a very good fit,’’ said Levit, a partner at Cento Ventures.

Today, 2C2P counts Facebook Inc. and some 30 airlines among its 350 large customers. In 2017, the firm’s revenue growth hit 111%, up from 99% in 2016, as it processed almost $6 billion of payments, according to Aung. His backers include GMO Venture Partners, part of Japan’s GMO Internet Inc., SafeCharge International Group Ltd. and Amun Capital in Hong Kong.

With large customers and a fast-growing business, Aung won’t jeopardize his prospects by experimenting with a new form of financing. “2C2P will become profitable this year,” he said. “That’s what I’m going to focus on.”

It’s a global debate. China banned ICOs in September, part of a broader crackdown on cryptocurrencies. Regulators in Hong Kong and Singapore have also warned against ICOs, citing fraud concerns and money laundering risks. In the U.S., the securities regulator has stopped coin offerings it deems too similar to stock sales.

“Is it really better to have an unregulated, open system where anything can happen?’’ said Damian Adams, a Singapore-based partner at law firm Simmons & Simmons.

Omise’s Hasegawa believes ICOs are the beginning of a financial revolution. “All the great companies in the world, they always changed and pivoted their business models,” he said.

Aung isn’t convinced. “If it sounds too good to be true, it usually is,” he said. — Bloomberg