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Tuesday, 24 October 2017

Latin lustre's growing appeal

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Bankers expect international bond issuance out of Latin America this year will surpass last year’s record level and could even hit the US$100bn threshold.

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For the year to September 10, total international debt capital market issuance out of Latin America amounted to US$67bn against US$92bn for the whole of last year and US$86bn in 2010, according to data from Thomson Reuters. Brazil is the biggest issuer this year at US$29.66bn (44.3% of the total) against Mexico with US$17.56bn (26.2%) and Chile with US$4.9bn (7.4%).

Brazil issued a total of US$36.3bn (39.4%) against Mexico with US$20.2bn (20.2%) last year. Venezuela took third place with US$13.68bn of almost exclusively sovereign issuance, but that has dropped significantly this year to US$4.38bn. Chile issued a total of US$4.5bn last year, from US$4.9bn the year before, in the international markets.

“Last year, we saw a record level of international issuance out of Latin America,” said Chris Gilfond, co-head of Latin America credit markets at Citigroup. “Currently, we are seeing very strong weekly volumes that have at times exceeded US$5bn in a single week, so we are on track to exceed last year’s record volumes.

“The window is very much open for issuers for three reasons: first, there is so much liquidity out there. Second, the developed world has lost its lustre, and people see better returns in Latin America. In 2010, investors started to realise just how favourable the fundamentals of Latin America are compared with developed economies. Third, demand is growing faster than supply – many deals are oversubscribed 10 to 17 times. There are many high calibre issuers from Latin America.”

He added that he expected to see more issuance from the high-yield space following the recent US$1.5bn of 8.25% notes due 2020 issue by Digicel Group, the Caribbean telecoms firm, which reopened the high-yield space following a long hiatus.

Easing tensions

“A large proportion of the issuance this year has been opportunistic,” said Monica Hanson, head of Latin America global finance at Barclays. “During the fourth quarter last year, there was so much international volatility that the markets were essentially shut down; there was no sovereign issuance. But during the first quarter there was a flood into the market, as tensions over the euro eased and everyone decided to tap the markets.

“During the third quarter, the markets largely digested first-quarter issuance and sought to manage heightened volatility. In recent weeks, with more positive news out of Europe and incremental quantitative easing out of the US, markets have been demonstrably more positive with record issuance at very attractive levels.

“Corporates and sovereigns should continue to take advantage of the low-yield environment and we expect to see incremental infrastructure-related issuance out of Brazil in particular.”

The energy and power sector has been the biggest issuer of corporate bonds in Latin America with a total of US$18.2bn this year, according to Thomson Reuters. Brazil accounted for US$8.8bn (43%) of the total, followed by Mexico with US$5.34bn (29%) and Venezuela with US$3bn (16%).

Financials were the second-biggest sector with a total issuance of US$15.95bn. Brazil accounted for US$11.5bn (72%) of this issuance. This sector in Peru took second spot with US$1.74bn (11%) of the total issuance. Mexico only accounted for US$1.01bn (6.8%).

Local limitations

This year the telecoms sector has seen total issuance of US$7.1bn, with eight separate transactions. Most of the issuance came out of Mexico – amounting to US$5.6bn (79%) of all issuance. There was one deal out of Brazil, valued at US$1.49bn.

Mexico has been the biggest sovereign issuer this year – issuing a total of US$4.97bn against US$2.15bn by Brazil and US$1.76bn by Colombia. Last year, Venezuela was the number one sovereign issuer with a total of US$8.3bn against US$4.9bn by Mexico and US$2bn by Colombia.

“In Latin America, very little long-term financing is available in local capital markets,” said Pedro Bianchi, head of DCM in Brazil at Bank of America Merrill Lynch. “If a deal is of a bigger size and a longer tenor, the issuer must turn to international markets. In Brazil, there is no local market for high-yield issuers, for example.”

Bianchi said normally the minimum ticket for an international issuance was US$250m. An issuance of US$150m is possible but far from ideal, as the number of interested international investors will be limited.

He added that the lack of a secondary bond market in Brazil was one of the biggest issues for the Brazilian capital markets. Assets under management are highly concentrated in Brazil. The potential universe of investors for a bond issued in the US adds up to 500, whereas the book in Brazil may reach only 100 accounts. This creates a strong incentive to issue in the international markets.

Captive investors

The domestic Brazilian DCM has a great deal of liquidity, mostly because it is a captive market: local pension funds and insurers have total assets under management of about US$1trn but they are limited to investing up to 5% abroad. Hence, they are forced to support the local market.

“The concentration of bookrunners in the Brazilian market means there is a buy-and-hold philosophy,” said Antonio Oliveira, head of local DCM at HSBC. “There are many attractive deals locally and captive investors. It is difficult to introduce foreign investors into the market because they do not do buy and hold. There are still few foreign investors in the domestic market.”

One of the biggest trends in the international markets during the past few years has been for corporates and sovereigns to issue overseas but in their local currencies. Essentially, this market came to an end in September last year after some bonds failed to perform well.

“Risk aversion among investors towards emerging markets, including Latin America continues to be high, despite the strong pace in primary markets,” said Ricardo Navarro, senior vice-president in DCM at Itau BBA. “Close to 70% of all corporate and financial issuances in Latin America are still investment grade rated. Markets remain relatively limited for high-yield issuers. Brazil is the most active market on the continent for this type of issuer by far; followed by countries like Mexico, Colombia and Peru.”

This year is proving to be a bumper year for international issuance out of Latin America. Investors have woken up to the good macroeconomic fundamentals of the region and realise there is a large pool of high calibre names that want to issue. Liquidity is so abundant that investors are starting to turn to high-yield issuers from the region.

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