By early this year, the torrent of Latin American corporate
and sovereign debt issued in recent months had slowed to a
The spectre of sovereign debt crisis notably in the
eurozone returned to haunt markets around the world,
taking the shine off one of the past years most buoyant
regions as global risk aversion once again reared its head.
Says Katia Bouazza, head of debt capital markets for Latin
America at HSBC: Investors became more selective in
February even though there was ample liquidity
because of concerns over Greeces debt burden, the outlook
of the global economy and the direction of US Treasury
Just $2.44 billion of new Latin corporate deals was launched
between February and March 6, compared to $6.86 billion in
January. By contrast, a record $45 billion of corporate paper
was printed last year, compared with $30 billion in the 2007
Bankers had pencilled in a front-loaded issuance calendar
this year, thanks to cheap liquidity and stable secondary
market spreads. Wed expected a far more active
primary market out of Latin America, as pricing levels are very
attractive, says Augusto Urmeneta, head of Latin America
capital markets at Bank of America Merrill Lynch.
Global asset prices reflated rapidly last year, thanks to
massive monetary and fiscal measures, principally in G-7
economies. The result was that investors started once again in
earnest to search for yield. But falling credit spreads and
expanding regional economies have also triggered a hunt for
yield further down the credit curve.
From last spring, Latin American issuers prized open the
doors to single-B, perpetual, and even covenant-lite deals with
But after the massive rally in 2009, investors are once
again taking stock of the relative value of Latin credits,
contributing to the recent primary market slowdown, says
Claudia Calich, a senior emerging markets portfolio manager at
Invesco. Markets have been taking a bit of a breather in
Has the exuberance for emerging markets in a sea of
liquidity against the threat of a global market slump
and anaemic western growth stretched valuations?
According to Anne Milne, head of Latin American corporate
bond research at Deutsche Bank, the bull market has left
high-grade investors with little compensation for interest rate
risk. A US rate hike of 0.5% will cause returns on high-grade
Latin corporate paper to drop to 05% in 2010, whereas a
1% hike would cause investor returns to fall to zero, or in
some cases negative territory, she notes.
But we are not in bubble territory yet, say
investors. Emerging market corporate bonds are still
trading at wider valuations than 2003, says Polina
Kurdyavko, portfolio manager at BlueBay Asset Management.
Emerging market corporates on average still offer a 150bp to
300bp pick-up to similarly rated firms in the US high-yield
market, according to ING.
Market technicals also suggest the rally still has legs. ING
estimates $19 billion of coupon and amortization payments were
paid to emerging market portfolio managers in February.
Re-investment flows will soak up new supply without pressuring
secondary market credit spreads.
CASH SEEKS HOME
Meanwhile, investor inflows into emerging market funds have
maintained their frenzied pace, in contrast to the outflows out
of US high-yield funds in recent weeks. In the week ended March
10, investors ploughed $1.05 billion into emerging market bond
funds the biggest weekly inflow in more than a decade
bringing the year-to-date allocation to $5 billion,
according to Emerging Portfolio Fund Research.
The lower levels of international new issuance are due to
the reduced financing needs of Latin American borrowers rather
than investors becoming reluctant to invest, say bankers.
Pent-up borrowing needs, after the crunch shut the door on
emerging market issues in 2008, set off the debt binge in 2009.
As a result, Latin firms dont have large funding
needs this year, as many firms have already prefinanced or
refinanced their funding needs, says Urmeneta.
The relative resilience of the asset class in the February
global market sell-off suggests the recent primary market
slowdown is a cyclical blip in a structural bull market for
Emerging market hard currency sovereign bonds have, to date,
outperformed US high-yield and developed high-grade bonds. The
benchmark, known as JPMorgans EMBI index, has returned to
pre-Lehman Brothers levels of 250270bp.
Meanwhile, nearly all of the 22 Latin corporate deals priced
this year are trading at or above their issue price, says Bevan
Rosenbloom, corporate debt analyst at RBS. This provides
a supportive environment for issuers to come to the market, as
they will price off new deals whether tighter or flat to
existing yield curves.
Nevertheless, Richard McNeil, head of Latin America debt
capital markets at Goldman Sachs, foresees lighter primary
market activity in the coming months due to low corporate
financing needs in the near-term. He says financial issuers,
especially in Brazil, buoyed by strong credit demand, will
dominate the corporate market along with industrial companies
with large capex programmes.
Before the six-week primary market slowdown, Latin credit
markets had been hit by a flurry of high-yield issuance. Most
recently, Brasil Foods made its debut in January by doubling
its original borrowing target to $750 million with a 10-year
bond, priced to yield 7.375%. Grupo Posadas Hotel, Cemex and
Perus Coperinica have also issued high-yield bonds in
The enthusiasm for high-yield borrowers, many of whom have
little room for manoeuvre with tight liquidity conditions,
contrasts with market hostility, in the grip of the downturn,
for companies with large near-term debt maturities.
Investors hope that growing domestic consumption and
production will beef up the creditworthiness of Latin firms.
Kurdyavko says well-governed corporates, with strong growth
outlooks from non-cyclical sectors such as telecommunications,
offer the best value in the high-yield sector. Urmeneta at
BoAML says that high-yield corporates will issue
opportunistically this year whenever market conditions
offer them access to long-term financing at a reasonable cost
relative to shorter-term domestic alternatives.
But the jury is out on the value of external bond markets
relative to local bank finance or local capital markets.
It is not clear if liquidity in regional banking systems and
local capital markets has returned to pre-crisis levels, say
bankers. Local market bulls cite the watershed transaction from
Mexican telecom giant América Móvil in early
March. This marked the reopening of the Mexican local market to
corporate issuers as the 6.5% contraction in 2009
triggered a liquidity crunch.
It was the first time a private company had achieved a
tighter spread than a quasi-sovereign. The borrower, rated
A-/BBB+, priced a landmark deal in the local peso market with
three tranches for a total Ps15 billion ($1.17 billion). The
Ps7 billion, 10-year fixed-rate tranche was priced to yield at
a slender 8.6%, just 92bp over the equivalent sovereign paper
and 46bp tighter to Pemex, the government-owned oil company.
Local banks and international investors snapped up the
However, this may be the exception rather than the norm.
McNeil at Goldman Sachs says balance sheet pressures among
global banks that dominate the Mexican financial system will
restrict local funding for corporate borrowers.
Theres still a lot of residual uncertainty
overshadowing banks globally, with the result that those
markets within Latin America that are most reliant on foreign
banks may take a bit longer to normalize fully.
But Urmeneta says Mexican banks still have a stable funding
base and large balance sheets, and so financial institutions
will intermediate deposits to corporate borrowers,
once demand picks up. However, he warns that in the near term,
international portfolio managers are unlikely to dive into
local capital markets since investors dont
currently have the appetite for foreign exchange
TIGHTER AND LONGER
The availability of longer-dated paper may also support
cross-border primary market issuance in dollars. In the grip of
the crisis many Latin firms, especially smaller to medium-sized
companies such as Brazilian food producers, faced a liquidity
crunch, says McNeil. This inhibited working capital while the
ability to roll debt over for long tenors was constrained.
As a result, Latin corporate treasurers view external debt
markets more favourably, due to the availability of longer
tenors. Despite the foreign exchange risk and the higher
cost of moving out along the yield curve, dollar markets help
to reduce roll-over risk, says McNeil.
Mexicos latest international debt issue proves the
point. The sovereign achieved its lowest ever 10-year funding
costs at 139bp for a $1 billion retap and a slender 5% coupon.
Yet over the past year, Mexico, rated BBB, has been Latin
Americas whipping boy, due to fears over its large debts
and close links to the US.
By comparison, Greece was forced to pay 300bp over mid-swaps
for a 10-year, E5 billion benchmark.
Investors are recognizing that Latin American
economies have more robust growth prospects than the developed
world, which is struggling with big consumer debt and fiscal
hangovers, says Chris Gilfond, head of Latin America debt
Despite the emerging market government paper trading at
tight levels, Gilfond says there is still room for spread
compression as investors strategically allocate capital to
growing, underlevered economies. He cites the rise of
GDP-weighted fixed income indices. This means real money
portfolios are becoming ever more global, gravitating toward
centres of economic growth, he says.
Calich at Invesco says there has been a jump in investor
allocations into emerging markets, triggered by outflows from
southern European sovereign paper. The European investor
base is so huge that just a minimal re-allocation into emerging
markets will drive high-grade sovereign spreads lower, he
Rather than the collapse of confidence in emerging market
debt, sparked by the global financial crisis, the opposite has
happened: sovereign debt spreads now trade inside BB-rated
European corporates and, in some cases, flat to BBB-rated US
corporates. Meanwhile, corporate borrowers are demanding
ever-aggressive pricing terms to investors.
But such market moves can overshoot. Kurdyavko at BlueBay
says: We have to be careful. We are in a good place right
now, but we have to be very selective and prepare ourselves for
the next explosion.