Friday, 18 January 2019

The centre holds just fine

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Scandal-wracked Brazil has staged a dramatic comeback after an eight-month absence from the bond market, which had stoked pent-up demand for Latin America paper across the board and encouraged issuers in other countries in the region to step up.

Barely a month after Petrobras avoided a technical default by finally publishing its audited results, it stunned the market on June 2 with a more positive surprise – a US$2.5bn Century bond that attracted more than U$13bn in orders.

The deal marks a dramatic comeback for the scandal-wracked company and confirmed a resounding return by Brazilian issuers.

The country has been the primary driver behind the region’s seven-year hot streak in the bond markets but had retreated from the international markets following the Petrobras scandal, wreaking havoc on Latin American bond issuance.

For the first time in several years, Latin America did not post record issuance in 2014, when supply dipped to US$196bn from US$199bn in 2013. That continued during the first quarter of 2015 when overall supply fell to US$39bn from US$55bn a year earlier, according to Thomson Reuters data.

Scampering to the sidelines

After accounting for more than a third of the region’s record supply for the last several years, Brazil’s borrowers scampered to the sidelines during the second half of 2014.

The fallout from the corruption scandal was severe, closing access to credit markets for the country’s biggest issuers and also forcing a number of its supply-chain companies into bankruptcy.

Coupled as it was with a slump in the price of oil and recession in Brazil, the country’s usually frequent issuers pulled in their horns and mothballed capital expenditure programmes.

While market participants were stunned by the timing and reception of Petrobras’ return to the international bond markets, there were already early signs of a recovery in deal volumes during the second quarter.

“There is a sense that the fog is lifting over Brazil and that supply may be returning,” said Chris Gilfond, co-head of Latin America capital markets origination at Citigroup, speaking before Petrobras hit the market.

A flurry of recent supply supported that thesis. A fortnight after Petrobras published its accounts, cement company Votorantim Cimentos, which was unaffected by the Petrobras scandal, came to the euro market with a €500m offering. Rates volatility meant that markets were choppy.

Getting it done

“It got done, but it wasn’t a blowout,” said one source close to the deal. But given that it was the first international deal by a Brazilian company in eight months, “getting it done” was some achievement.

Then BRF, the Brazilian foods group, announced a brace of firsts – it made its debut in the euro market and also printed the first Green bond by a Brazilian issuer with a €500m no-grow seven year trade.

“There is a sense that the fog is lifting over Brazil and that supply may be returning”

Meanwhile, Vale, the Brazilian mining company, secured a US$3bn five-year revolving credit facility for a term of five years, after seeing its free cashflow eroded by the falling price of iron-ore. Then on May 22, Banca Itau raised US$1bn.

“Slower economic growth has allowed banks to fund internally and have less need for dollars, so the return of financial issuers is a positive sign,” said Gilfond.

Brazil’s absence in the previous eight months had stoked pent-up demand for Latin America paper across the board and encouraged issuers in other countries in the region to step up.

Breadth of issuance

“While the gap from Brazil’s absence is large and it is felt, 2015 has been a fantastic year so far for other issuers,” said Katia Bouazza, head of Latin America capital financing at HSBC in New York. “The breadth of issuance has been diverse and vast.”

With Russia off limits and Central and Eastern Europe out of favour, demand for well-known credits from the region has remained robust and borrowers have shown a preference for the euro markets, where yields have looked increasingly attractive on the back of the ECB’s quantitative easing initiative.

Notable non-Brazilian issuance has come from sovereigns such as the Republic of Chile, which raised €1.39bn with record-breaking yields and coupons, while Colombia Telecomunicaciones, which is owned 70% by Spain’s Telefonica and 30% by the Republic of Colombia, came to the market with a rare hybrid deal – and the first high-yield deal from a Colombian issuer.

Mexican moves

During Brazil’s absence, Mexico’s sovereign and quasi-sovereign issuers stole the limelight. In total, Mexican issuers accounted for 50% of total issuance during the first quarter of 2015, compared with 25% a year earlier as investors snapped up new issuance for its scarcity value.

In April, Mexico’s state-controlled oil firm Pemex wrapped up its funding needs for the year with a €2.25bn bond sale.

It was followed by the United States of Mexico, which came to the market with the first ever euro-denominated Century bond from an emerging markets issuer.

That marked its second trip to the euro market after a two-tranche offering in February, when it printed a €1.25bn March 2024 bond offering at a yield of 1.687% and a €1.25bn March 2045 note issue at a yield of 3.093%.

Rush to euros

The rush to euros is a relatively recent phenomenon and is being driven by diversification on the part of borrowers and a thirst for yield from the region’s investors. Europe-based investors have also accounted for about 35% of order books of dollar deals coming from the region, according to one banker.

The drive by Latin American companies to issue in euros dates back to the taper tantrum of 2013, when volatility in the US dollar market prompted the region’s frequent issuers to seek alternative markets.

Euro issuance by Latin American companies peaked in 2014, and has since fallen back as swap rates have turned less favourable, but the diversification trend is here to stay, especially by sovereigns, who have no swap needs.

Bouazza said: “Issuers realised the benefit of diversifying the investor base and that promoted a migration to the euro market, which we expect to continue. Other than the dollar market, the euro market can deliver size, maturities and long tenors.”

Supply is also coming from markets that have traditionally been less active. During the first quarter, 20% of all bond supply came from markets defined as “other” – Paraguay and Ecuador being notable examples, while in April Panamanian lender Banco Latinoamericano de Comercio Exterior printed a US$350m bond, the bank’s second 144A/Reg S transaction after its debut in 2012.

“Investors are looking outside the mainstream markets for supply and off-the-run issuers have enjoyed a warm reception” said Gilfond.

Supply could pick up in the second half 2015 as the region’s oil producers consider a return to the fray.

Ecuador, which relies on oil for more than 50% of its exports, came to the market in March as it looked to plug a widening financing gap caused by the recent dip in crude prices. The sovereign made a landmark return to the international debt markets in June 2104, when it raised US$2bn through a new 10-year bond sale ‒ its first since the 2008 default. The oil price rout has not ransacked the entire region.

“It’s impossible to take a ‘one-size fits all approach’ when analysing the impact of the lower oil price across Latin America,” said Bouazza. “For some in the region, oil at US$50‒$60 a barrel is not as big a problem as it is for high-yield names in the US, for example.”

Fresh momentum

The pace of tightening in the US will also have an impact on emerging markets, although many big Latin American borrowers began anticipating a rate rise in 2014 and pre-funded, another factor that powered record issuance last year.

It’s been a different picture so far in 2015, when despite the calendar’s colourful diversity, supply has remained tight and books have been dominated by buy-and-hold investors, creating a liquidity drought in the secondary market. Bankers will hope Petrobras’ bold re-entry will provide fresh momentum.

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