Wednesday, 26 September 2018

LatAm integrates

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Be it Inca-bonds issued by a Colombian company or Europesos sold in Mexico by a Chilean group, Latin American companies have found in recent months that they do not have to go to London or New York to raise money: they can tap their neighbours instead. Christopher Langner reports.

As world liquidity dried out in the past year, Latin American companies have raised around US$500m within the region. The Chileans have led the charge: "Chilean companies want to diversify their investor base and are seeking opportunities all over the region," said a banker in Santiago. The Colombians and the Mexicans have been quick to follow the lead.

For the Chileans, the logic is simple: with the best sovereign rating in the region, Chilean blue chips can get great rates in other Latin American countries – Chile's foreign IDR is A/A1/A+. Meanwhile, locally, rates and spreads are rising fast, pushing companies abroad.

Inca bonds

Peru is a natural destination. It boasts low rates and sizeable pension funds, but lacks quality issuance. In May, Chilean retailer Cencosud opened that market when it issued a local currency 280m nuevos-soles (US$96.77m at the time) 10-year deal through a private placement to local pension funds.

The bullet was sold with a 7.1875% fixed-rate coupon, and proceeds were immediately swapped into a fixed-rate coupon pegged to Chile's inflation linked unit UF. Celfin Capital, the Chilean shop, led the deal, alongside Banco de Credito BCP in Lima.

Celfin did another Inca-bond with BCP in August, when Chilean retailer Ripley placed a 110m nuevos soles nine-year with a 8.5625% coupon.

Citi has also been active in the Inca bond market and has already led two deals, including a 10-year US$40m-equivalent bullet from Colombian food concern Compania Nacional de Chocolates. The shop is heard with more mandates in its pipelines, as are Celfin Capital and BCP.

In fact, the Inca bond market already tops US$250m this year, with all of the deals being issued with tenors around 10 years, fairly long by local standards.

"The pension funds have appetite for this kind of deal. These are good names and rates are very high so they want to lock in these yields for longer," said a banker who led two of the four deals so far.

Volumes could double by the end of the year, said bankers in Lima. But they are uncertain about the continuity of this market after rates retreat from current levels.

Issuance import export

As they seek better deals, Chilean companies have gone farther. Molybdenum processor Molymet was on the path to open the Mexican market this year with a Ps1.5bn (US$145.6m) 10-year led by Citi-Banamex. However, its decision faced drawbacks as the Mexican market became more volatile in August, closing up even for local companies.

Unlike Ripley and Cencosud, Molymet will convert proceeds into dollars to pay a US$118m 3.75-year loan the company contracted in late 2005 with BBVA as lead.

With all the liquidity in Mexico, once Molymet succeeds in doing its deal, other Latin American companies can be expected to follow suit. Chile, which so far has only been exporting issuers, could soon be attracting them as well. Chile is undergoing a sweeping change of its capital market regulations, which is expected to make it easier for foreign companies to issue there. It should also give foreign investors access to the local market.

The next target country is Colombia: Celfin Capital and Larrain Vial – another Chilean bank – are heard with mandates to issue debt there for Chilean companies. The proceeds of these deals are expected to stay mostly within the Colombian subsidiaries, though the issuer would be the mother company in Chile.

And Brazil would offer a good possibility too, especially after a new law, provisional measure 435, allowed for swaps to other Latin American currencies. The problem with this Latin American giant is that rates there are too high.

Foreign locals

So far, only companies that had sizeable subsidiaries in the country where they are issuing have tapped other Latin American local markets.

The underlying logic is simple: local investors already know the name. Moreover, they know there are assets to be attached if the worst happens.

It also works better that way for issuers. While proceeds of the bonds being issued are sent to the parent company, interest and amortisations are expected to be paid with cash flow from the local subsidiary.

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