Latin American Bond House
Rising through the ranks: In a year that saw the credit crunch take its toll on Latin American bond volumes, HSBC rose through the ranks to a dominant position in 2008. It not only clinched a variety of mandates across the region, but also proved it had the skills to execute them. For its impressive performance amid challenging conditions, HSBC is IFR’s Latin American Bond House of the Year.
HSBC made dramatic progress in Latin American bond markets over the 12 months to mid November, executing a string of key bond deals and leaping to top spot in the league tables after lagging in the previous year. By leading in sovereign, investment-grade and high-yield corporates, as well as a list of local deals, it ensured its coverage of the market was broad-based, also setting it up well for the future.
The bank executed the largest number of deals over the awards period: it priced nine, compared to seven each for two other major names, Deutsche Bank and Credit Suisse. Barclays, which came second over the period, was propelled upward by Venezuela’s huge US$4bn offering.
Over the years, HSBC has been steadily building its platform in the region and was one of the few banks that was hiring over the course of the year. Its relationships with some of the region’s top issuers, the success of its past deals, and knowledge of global pockets of demand all paid off in 2008.
For HSBC, which has had a long presence in Asia and Europe, the Latin American business is relatively new. “We are looking to increase our penetration and exposure in the region, but with the right clients and right strategy,” said Gerardo Mato, co-head of global banking for the Americas.
The bank’s LatAm platform has not only been widening its scope within the DCM space, but also in its broader investment banking capabilities.
“We are seeing the reciprocity of business no longer coming from one angle, which used to be only DCM,” said Mato. “Now it is more than DCM: it is an investment banking product – equities, M&A and DCM.”
From a purely international bond perspective, no bank can claim to have had a great year in Latin America. Volumes shrank as vital cross-over investors beat a retreat and borrowers winced at the new pricing paradigm. There was a stubborn belief that better times were around the corner. Those borrowers that bit the bullet and issued successfully were no doubt pleased to have done so when those better times then failed to materialise.
Windows opened and slammed shut in a matter of weeks, so good execution proved to be vital. Advising clients about when and when not to step forward was of prime importance.
“What we did well this year was not only win deals, but also bring them to market with top-notch execution. We did not have any failed transactions,” said Katia Bouazza, co-head of Latin American debt capital markets. “This is one of the key successes we had, knowing how to position the right names at the right times within a volatile market environment.”
That was a considerable achievement. Investors have been in the driving seat for the past year, and execution has proved tricky – even for the most experienced banks. Pipelines were full, but deals often simply did not see the light of day in 2008. Many that did step forward failed, such as the jumbo US$1.5bn deal from investment-grade Brazilian telecom Telemar.
“Nobody is exempt from announcing a deal and having volatility kill it, but the rule of the game for HSBC is that we have been very cautious,” said Mato. “We don’t want to force the client to take the risk of coming to market and failing. There is a reputational risk for them and for us.”
With just two small windows opening in 2008, LatAm international bond issuance practically ground to a halt, with volumes reaching just US$18.29bn – of which US$4bn was the Venezuela deal. Of the remaining US$14bn, HSBC acted as lead on just over US$4bn.
The year’s dismal landscape contrasts strongly with the US$55.37bn in sovereign and corporate issuance that came out of the region just one year before. The variety of credits seen in 2007 raised hopes, but the promise of a true LatAm credit market was soon laid to waste in 2008 as the global credit crisis went from bad to worse.
In 2007, corporates issued about US$26bn, not including another US$9.5bn from quasi-sovereigns such as PDVSA and Pemex. Sovereign issuance amounted to a smaller US$18.38bn, while the remaining US$663.39m came from development banks such as CAF. Within the corporate universe in 2007, there had also been a true panoply of credit types: about US$15.76bn came from sub-investment grade names, while US$10.23bn comprised high-grade credits. A good number were also issuing in local currencies.
In 2008, the story was very different. The balance tilted back to higher-grade names, as corporates dominated the market with about US$9.7bn in new issuance, including about US$2.5bn from quasi-sovereigns like Pemex and BNDES. Some US$4.65m came from investment grade credits. Sovereign issuance hit about US$8.3bn.
HSBC performed particularly well in the investment grade and sovereign universe in 2008. The bank, along with Citi, opened the LatAm corporate markets in 2008, with a US$750m retap of Petrobras’s 2018, following on the back of several sovereigns. The credit was seen as a suitable choice to become the first LatAm corporate issue of the year, bolstered by recent oil discoveries and viewed as an increasingly global player.
At 10bp–15bp, the concession may have been wider than what it was used to, but the prevailing uncertainty convinced the issuer it was the smart thing to do. Book size hit US$1bn, with about 60 accounts coming into the trade. Shortly thereafter the window closed until April, when the markets settled down for a month or two before the Lehman Brothers debacle ruined the party. The decision to go ahead had been vindicated.
Between early May and early July, as the US high-grade market saw record volumes and before sentiment soured once again, HSBC brought another US$3.4bn of deals. In early May, HSBC and JP Morgan came with a US$500m 6% 2018 from Mexican media company Televisa.
Marking the company’s first 10-year dollar benchmark, the deal closed at 99.28 to yield 6.097% or 220bp, with an order book of close to US$2bn, just four hours after it was officially announced. It was at the tight end of official guidance of 225bp area, and just wide of global comparables such as BSkyB, whose US$750m 10-year was trading at around 210bp.
“Televisa was an impressive deal. It was properly executed. It captured the imagination of people at the time and it got them a great print,” said one banker away from the deal. “Relative to where BSkyB or Newscorp was trading it was a great print, and they capitalised on really great momentum in the marketplace.”
Displaying its skill in exploiting short window-opening opportunities, HSBC brought three deals in just one week in May. These included Brazil’s US$500 retap of its 2017s, which it did with Deutsche Bank, in a deal that proved an enormous success for the sovereign, just a week after being awarded investment grade status by S&P. Some 20% was taken by high-grade names that were new to its book, and the deal conceded a mere 3bp–5bp discount. The deal is also IFR’s Latin American Bond of the Year.
HSBC acted as joint bookrunner alongside RBS and JP Morgan on a US$500m retap for Brazilian steel giant Gerdau, which wasted no time by coming just one day after the sovereign. The deal took full advantage of the momentum created by the Brazil trade: Gerdau’s 7.25% 2017s were reopened at 102.5654, to yield 6.875% or 309bp over US Treasuries, bringing the outstanding size to US$1.5bn.
Concessions were seen anywhere between 12.7bp and 27.5bp, creating a reference for others to beat. The credit represented a cheap investment-grade name, after being downgraded because of acquisitions. Later in May the bond had tightened to 275bp after order books had initially reached over US$1.3bn.
Mexican oil company Pemex followed in late May with a US$1.5bn two-tranche offering, with HSBC acting as joint bookrunner. The deal included a new US$500m 6.635% 30-year trade. Trying to take advantage of some curve tightening, Pemex fought headlines about declining production levels and market volatility, but nevertheless managed to generate US$2.7bn in demand. It held up favourably against other high-grade credits that were coming to market that day.
HSBC also took on some lower grade names, namely Brazilian banks such as Banco Pine and Banco Daycoval, garnering decent sizes for deals of this type.
In a region where local markets have become an increasingly important component of the DCM business, HSBC could also boast a broad swathe of domestic transactions, which in some cases were welcome alternatives for clients unable to tap international markets. The shop’s local presence throughout the region helped it execute deals in Argentina, Mexico and Brazil, with names such as CAF, America Movil, and Cemex.
Paul Kilby.