Bankers look to Latin bond revival

22/03/2010 | Sid Verma

Fee-hungry Western bankers are scrambling to execute Latin corporate deals in the wake of Brazilian mining giant Vale’s €750 million bond issue

Fee-hungry Western bankers are scrambling to execute Latin corporate deals in the wake of Brazilian mining giant Vale’s E750 million bond issue.

The region’s economic growth has unleashed a tide of investor interest, but the jury is out about whether the supply of cross-border deals from Latin companies will meet expectations.

Thanks to a strong €8 billion orderbook, Vale priced its debut eurobond on Wednesday to yield a slender 4.441% – 20 basis points cheaper than its existing dollar yield curve.

The strong demand and competitive pricing for the deal, rated Baa2/BBB+/BBB-, highlights the strong appetite for Brazil, bankers have said. In the coming weeks, Petrobras, utility firm Eletrobras, and conglomerate Grupo Votorantim – who are all working on big capex programmes – could tap euro markets to diversify their borrowing, bankers believe.

Such deals may revive primary markets, which took a took a breather in February due to the global market sell-off triggered by the Greek debt tragedy.

So far this year, Latin borrowers have issued only $10 billion of external corporate bonds compared with a record $45 billion last year.

“Latin firms don’t have large funding needs this year, as many firms have already prefinanced or refinanced their funding needs,” Augusto Urmeneta, head of Latin American capital markets at Bank of America Merrill Lynch, told Emerging Markets.

According to Dealogic, global investment banks made $1.5 billion in fees from executing debt and equity deals, syndicated lending and M&A in 2009, compared with the 2007 bull run of $2.5 billion. By contrast, only $250 million has been made so far this year.

Urmeneta said mergers and acquisitions and large capex needs of industrial borrowers will drive debt and equity issuance in the region, rather than vanilla capital-raising by firms seeking to refinance existing debt.

For example, Mexico’s America Movil SAB’s $25.7 billion acquisition of Carso Global Teleco earlier this month was the largest in the region this year and the second biggest globally.

But Chris Gilfond, head of Latin America debt at Citigroup, said a 40% reduction in US corporate bond supply this year will trigger demand from international investors for Latin corporate debt, which will spark strong primary market activity.

“The valuation gap between Latin debt and developed corporates is very compressed, giving issuers from the region access to competitively priced capital with which to grow organically or through acquisitions.”

Brazilian companies are capitalizing on their balance sheet strength, and growing domestic consumption and industrial production, to go on an acquisition spree locally and internationally.

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