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Saturday, 18 November 2017

Latin America Domestic Currency Bond

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Tapping new demand: BTG Pactual’s Ps360bn so-called Cafe bond broke new ground in the development of Latin America’s deepening local markets. A Brazilian bank issuing in Colombian pesos to a broad set of regional investors was a first, but it will not be the last such transaction. It is IFR’s Latin America Domestic Currency Bond of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

Latin American borrowers have been tapping bond markets in other parts of the region for several years, with each country doing its best to create a memorable title for each. Mexico’s America Movil has raised funds in Chile’s Huaso market, while several years ago Chilean retailer Cencosud tapped Peru’s Inca market, just to name two examples.

Priced at par to yield 7% (or 125bp over Colombian government TES paper), BTG Pactual’s Ps360bn (US$200m) due 2017 Cafe bond is the latest transaction in this growing trend. The deal stands out not only for being the first time a non-Colombian entity has tapped the country’s domestic markets in pesos, but also because of its broader distribution among Colombian, Chilean and Peruvian investors. 

“Most of the transaction was placed among investors in MILA [Mercado Integrado Latinoamericano], the united market that includes Peru, Chile and Colombia,” said Gonzalo Ferrer, managing director at Celfin Capital, which led the transaction along with BTG Pactual and Deutsche Bank. “All the other [past] transactions were only placed in the market where the currency belongs.”

It perhaps makes sense that a bank such as BTG Pactual should make the first step in this direction as it looks to spread its brand name and build a regional franchise outside its home base. After all, the Brazilian investment bank, headed by billionaire chief executive Andre Esteves, has demonstrated its regional ambitions – first through the purchase of Chilean rival Celfin Capital and then by acquiring Colombian brokerage Renta y Bolsa in June.

The potential for the intra-regional capital markets is considerable, with assets under management within the Andean region ballooning in recent years. Between insurance companies, pension funds and other asset managers in Chile, Colombia and Peru, investors manage anywhere between US$500bn and US$600bn, said Ferrer. This opens the door to considerable untapped demand.

“This was [about] bringing in new investors,” said Sandy Severino, managing director of external funding at BTG Pactual.

Lead managers on international US dollar deals have already taken note, and have increasingly put Santiago, Lima and Bogota on their roadshow schedules. “Average LatAm allocations this year [for dollar bonds] have been 15%–30%,” said Cynthia Powell, head of BTG Pactual’s fixed-income syndicate in New York. “Two years ago LatAm was smaller than Asia.”

This comes as bankers are increasingly expecting Latin American borrowers to raise local currency funding as they expand their business into neighbouring countries. Investors are also keen to diversify their portfolio into currencies and credits they already feel comfortable with.

“When you have operations in several different countries, it is not only a question of whether you can beat your benchmark in US dollars, but whether you need funding in the local currency,” said Javier Garcia, head of institutional distribution at Celfin Capital. “We will increasingly see these types of transactions.”

Leads decided to sell BTG Pactual’s Cafe bond under a Reg S format following requests from local investors. “We thought there would be substantial demand for this paper outside of Colombia,” said Ferrer. “If you do a Reg S transaction, there would be better demand for the paper. That was the same conversation we had in Peru, Chile and Colombia.”

Investors were pension funds, insurance companies, asset managers and family offices. “This came at a very attractive rate for this tenor,” said a Bogota-based trader.

The perfect comparable was elusive, given the unique nature of the Cafe bond, but syndicate desks saw BTG’s bond come with a pick-up to local issues from Bancolombia and Bancolombia Leasing.

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