Hanging on

IFR IMF/World Bank Report 2014
10 min read

Latin America’s capital markets have returned to investors’ sweet side and are set for another banner year as burgeoning debt markets offset sluggish gains in equity.

Bond issuance is on track to top US$120bn, up from US$105bn last year, as investors crank up demand for high-yielding LatAm paper. Quantitative easing drawing to a close and rising US rates has fuelled a surge of refinancing activity and as of August, the market had garnered US$92bn, up from US$64bn in the same period last year, according to Thomson Reuters’ data. Sovereign issuance is up 85%.

“It’s been a busy market and more active than many people anticipated,” said Katia Bouazza, HSBC’s co-head of global capital markets for the Americas. “Overall, we are seeing better stability and a better outlook for most issuers within their activities and countries. It’s not just the future rates, the backdrop for emerging markets is more stable and encouraging.”

That message has, of course, not been lost on corporates and sovereigns eager to profit from “a historic window to issue huge amounts of long-term debt”, said Mike Fitzgerald, chair of the Latin American practice at law firm Paul Hastings. “They are seeing this as a real chance to do deals before the low-rate window closes.”

“There is a lot of pre-financing activity as Treasury spreads are double what they were before the [taper] tantrum concerns,” said John Jairo Ramirez, a fixed-income analyst at Banco BTG Pactual’s Colombian franchise. “Companies are rushing to obtain funds amid signals that conditions could worsen.”

“There have been more 30-year bond issues this year than there have ever been in LatAm,” said Fitzgerald. “Some issuers are retiring debt issued during the financial crisis at 10% with debt issued today at 7.5%.”

Chris Gilfond, regional co-head at Citigroup, said at the current rate transactions in the region could top 200 this year. Even if issuance slows from now on, it will be a record year in LatAm with well over 200 transactions after racking up 127 so far, he said.

Mexico has seen a surge of activity, with deal-making up 80%, double the region’s 45% increase. Brazil, damaged after oil giant OGX’s bitter bankruptcy last year, has recovered to stage a 36% gain while Peru, Chile and Central America issuance is up 30%.

Showing just how much investors are willing to gamble for yield, in June Ecuador raised US$2bn in a bond issue that met vigorous demand. Just five years earlier, President Rafael Correa had branded creditors “true monsters” when defaulting on US$3.2bn of notes.

The sovereign priced the 10-year paper to yield 7.95%, attracting as much as US$5.1bn in orders.


Despite the enthusiasm, investors say the buzz surrounding the market has to be taken with a pinch of salt. Shamaila Kahn, EM corporate bonds manager at AllianceBernstein, said 2014’s gains were largely driven by liability management rather than funding growth.

Yet the equity market would love even a hint of fiesta. Issuance looks like it could fall short of last year’s US$30bn. However, market sentiment has improved, driving deals in Mexico and most recently in Brazil, where growing prospects of a win by opposition presidential candidate Marina Silva in October’s elections is boosting hopes that the country can lift its economy from recession.

“Compared with 2012 and 2013, the market dropped a lot in 2014,” said a Mexico City-based equity analyst, noting that investors have fretted about Mexico’s sluggish economic growth. “There has been a prolonged weakness, which has cut appetite for Mexican assets,” the analyst said.

However, energy reforms are now signed into law, bringing expansion opportunities for private companies eager to grow in Mexico’s oil and electricity sectors. The analyst expects the legislation will be a key ECM driver next year and in 2016.

Mariano Gaut, Citigroup’s regional capital markets co-head, is optimistic that M&A activity could drive equity offerings, including carve-outs, in the next 12 months.

IPOs are likely to remain in the established consumer, real estate, property and diversified industrials sectors, but Gaut is enthused about the prospects for Peru and Colombia.

“These are exciting markets with growing economies. If there are equity transactions at appropriate valuations, they will do well,” he said.

While ECM volumes are almost certain to fall short of 2013, some are remarkably optimistic for the coming years, even predicting issuance could one day overtake that of the debt markets.

“I’m more optimistic about equities than debt,” Paul Hastings’ Fitzgerald said. “Brazil could come back after the elections and LatAm’s rising middle class will continue to fuel huge and stable consumer markets and strong economic growth.”

Certainly the end of stimulus will force LatAm firms to pay wider spreads, but few on the debt side are envisaging the kind of slowdown that would allow equities to overtake them.

“We will see what message comes with the Fed, but so far investors are very comfortable with the region and they are not going to suddenly pull out,” Bouazza said. “There is ample liquidity and LatAm offers a good deal in terms of overall risk reward.”

Colombia: Reweighted, upgraded and building

Bogota is looking to source billions of US dollars for infrastructure construction. Buoyed by a robust economy and flexible local and international markets, this may well be the ideal time to strike.

“We expect overall growth of 10%–15% this year,” said Juan Luis Franco, CEO of BTG Pactual’s Colombian unit. “There is a lot of activity in the local and international debt markets.”

In equities, companies are looking for funds to engage in M&A and foreign expansion, he said.

JP Morgan in March increased the sovereign’s weight to 8%, from 3%, in its GBI-EM local debt index, noting improved conditions and added transparency for foreign investors.

The move triggered an investment flurry in the first half, boosting the local peso currency and slashing coupon payments for issuers. It also helped solidify views that Colombia has left its political turmoil and worst days of violence behind it.

There is firm appetite among foreign investors for global local currency deals, as demonstrated by development bank Findeter’s 7.875%, US$500m-equivalent 2024 issue, which drew US$1.3bn in orders when it was priced in early August. The deal was Colombia’s first Global peso in 20 months. It followed Moody’s upgrade of the country’s sovereign rating to Baa2 from Baa3, rewarding its ability to steer economic growth in a challenging global environment.

According to John Jairo Ramirez, a fixed-income analyst at BTG Pactual, the initial reaction to US tapering affected Colombia, with Bogota rushing to pre-finance near-term budget requirements, issuing around US$2bn in sovereign paper. The re-weighting on the GBI-EM index had helped reduce corporate and government coupon payments after they shot up in the wake of the taper.

“Corporates were paying a premium of 70bp to 80bp and are now paying 50bp to 60bp,” Ramirez said. “In sovereigns, the 10-year is at 6% from 7%.”

In ECM, a string of issuers are looking for the right window to raise funds to profit from the burgeoning economy.

“The risk premium for equity has become more acceptable and companies need financing for M&A, project finance and international expansion,” Franco said, adding that follow-on deals were likely to dominate issuance for the remainder of 2014.

Regarding IPOs, he said there might be one or two surprises following Grupo Aval’s intention to place an unspecified ADR package in New York. The company, which owns Banco de Bogota, will employ the funds to grow in Central America.

Bogota intends to spend US$60bn in the next decade to build new roads and modernise other transport infrastructure, mainly through PPP contracts, and debt and equity fundraisings are likely from companies looking to capture some of this spending. A director at a Bogota-based investment bank agreed that the infrastructure market would be a key deal driver.

In January, the government auctioned six tenders worth about US$5bn to build a massive four-lane highway network. The move was the first of four phases to put US$20bn worth of road modernisation projects on the block.

The six winners, mainly Colombian consortia, are expected to tap the capital markets later this year and next to procure funding to start building the highways in late 2015, said an analyst familiar with the plans. Contracts for airport upgrades will follow next year.

“They have won the projects. Now they need the money to build them,” he said, adding that firms were likely to approach international financiers as Colombia’s local investor pool was too small to meet their needs.

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Hanging on