Bankers see boom times in LatAm bond primaries

4 min read
Americas, Emerging Markets
Paul Kilby

Latin American bond issuance surged past last year’s levels this week, making 2017 the second-busiest year ever and putting the region on course to perhaps set a new record.

Year-to-date volume hit around US$123bn, about US$16bn shy of the US$138.87bn of supply seen in 2014, according to Thomson Reuters data.

While that is still a considerable gap to breach, some bankers reckon this could be a record year for the region, which is experiencing a late-season issuance boom.

“If we keep this up, we’ll break the all-time record,” one banker said.

Over the summer issuers began to line up to take advantage of near perfect conditions for the asset class - and about US$33bn in supply has come since the beginning of September.

“You are seeing a lot of issuers looking at this and saying: I have to take advantage of this,” one head of LatAm DCM told IFR.

Strong fixed-income inflows have had a positive knock-on effect for Latin America, which as a result has often looked cheap versus developed markets.

Decent global growth, including in China, has also buoyed the commodity exporting region, as have market friendly-economic policies in countries such as Argentina and Brazil.

And while this comes amid US rates hikes cycle - which has historically spelt trouble for Latin America - the snail-like pace of the Federal Reserve’s monetary tightening has left the region unscathed on this occasion.

“You don’t notice it because it is so slow and deliberate and data-dependent,” said one veteran syndicate official.

With little liquidity in the secondary markets, the primary has been the only place where cash-rich investors can put money to work in size.

“People are finding it very hard to allocate capital,” said Alejo Czerwonko, an emerging markets economist at UBS Wealth Management.

“Despite the very positive macro backdrop, investors are adjusting return expectations downwards due to demanding valuations. It’s a curse in disguise.”

BORROWERS WELCOME

While this has been frustrating for portfolio managers, it has been too tempting to resist for issuers, many of which are locking in record-low funding costs.

In some cases, companies are getting better pricing than they did in 2014, even though their credit ratings are weaker now.

Brazilian paper producer Klabin, now rated BB+/BB+, printed a US$500m 10-year at a yield 4.95%. It had to pay 5.25% on the same tenor in 2014, when it was rated investment grade at BBB-.

Against that kind of backdrop, bull-market trades are back in vogue.

Latin America has seen a surge of first-time issuers this year, as well as a wave of global local currency bonds from both sovereigns and corporates.

Colombia’s Banco Davivienda came with a global peso trade this week, and others are prepping similar structures, including Empresas Publicas de Medellin and Banco Nacional de Costa Rica.

Strong demand should keep borrowers coming as they look to fund an uptick in M&A and - for a change - some capex, as Argentina and Brazil finally see some growth kick in next year.

Refinancing and liability management will also be a driver as bonds issued during the last big wave of issuance between 2012 and 2014 start to mature, said the LatAm DCM head.

Unless there is another bout of geopolitical risk or a surprising uptick in inflation, bankers are struggling to find reasons why the party should stop now.

Even so, good times can quickly turn bad, as many veteran bankers point out.

Primary volumes shrank to just US$66.6bn in 2015 as concerns about China and the impending threat of the Fed’s first rate hike in nearly a decade quickly dented appetite for LatAm risk.

Presidential elections next year in Brazil, Colombia and Mexico are up for grabs and could potentially slow down issuance, especially if populist candidates carry the day.

“Conditions are the best I have ever seen,” said another banker. “This isn’t natural, so I am extremely nervous.”