EM corporate earnings have started to turn the corner in 3Q20, with a double digit sequential gain following two consecutive quarters of declines. This is in-line with our expectation of a recovery taking hold in 2H20, with a robust +16% growth in revenue and +23% in EBITDA in 3Q20 a welcome development.

 Fundamental performance by region has diverged depending on the level of COVID-19 infections and related closures/reopening schedules, as well as industry composition. Prudent cost reductions and cash flow management

helped limit the impact of COVID-19 on earnings, which also translated into lower than feared default rates (link). Additionally, positive impact to exporters and swift recovery in China also helped buffer some of the revenue declines.

 EM corporate IG net leverage remains about a turn lower than for US credits but on HY side, the differential widened materially to 1.7x.   Net leverage appears poised for a smaller climb versus the end-2020 forecast for EM credit fundamentals we put out in early June. We now envision 2020 will end with IG net leverage at 1.6x, marginally below current

levels while HY net leverage will end the year at 2.9x, unchanged from now to year-end. This compares to our expectations of +0.4x and +0.8x higher net leverage in EM IG and HY this year, which would have led leverage beyond the previous peak.

 We expect the improvement in credit metrics to continue with the macro recovery remaining in place, and foresee net leverage ratios returning to 2019 levels by the end of 2021. This will be driven by a combination of rebound in EBITDA growth as well as further reduction in net debt.

 We do not believe EM issuers will be ready to deploy the cash flow from higher EBITDA towards M&A or other less creditor friendly means. Instead, we think they will be looking to continue focusing on refinancing and liability management  operations which combined with top line growth should result in reduced leverage.