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Latin American bond markets make
a remarkable recovery this year.
Bankers are reminded of the haydays
of '93 and '97.
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WHAT A DIFFERENCE a year makes. In mid-November 2002, JPMorgan's EMBI Global was trading at a stripped spread of 774 basis points over treasuries. Brazil was at 1,737bp over, yielding more than 20% - and even that constituted a significant improvement from the low point of the electioneering season, when the markets were petrified at the prospect of Lula winning the presidential vote.
One year later, the EMBI was 462bp over, with Brazil 581bp over, to yield less than 10%. The administration of president Lula has proved to be about as market-friendly as any in Latin America, and the country has come to the capital markets with half a dozen issues, totalling more than $5.8 billion. On top of that is $2 billion of issuance from state oil company Petrobrás and a slew of corporate bonds.
"This has been a fantastic year for emerging markets generally and Latin America in particular," says Carlos Mauleon, head of Latin debt capital markets and investment banking at Barclays Capital. "It reminds me of 1993 and 1997."
The Latin America head at another leading bank echoes Mauleon but adds a note of caution. "This has been a fantastic year, when the extremely bullish were right," he says. "Things turned out much better than expected on most fronts - except growth, which is the big challenge for 2004."
Overall, Latin bond issuance in 2003 looks set to top $40 billion - an impressive total that vastly exceeds the most optimistic projections of a year ago. One big reason is Mexico, which has chalked up some $7.5 billion in new issuance, including two big headline-grabbing deals. In February it issued a $1 billion 12-year bond, becoming the first sovereign to introduce collective action clauses (CACs) into its dollar-denominated global bonds. In April, bonds dubbed the adios retired the last of Mexico's Brady bonds.
CACs were a big theme of 2003. After Mexico introduced them, they rapidly became de rigueur in all sovereign bond issuance. There still isn't any hope of standardization: Korea, Mexico, Morocco, Russia and South Africa have opted for 75% CACs, while Belize, Brazil, Guatemala and Venezuela went for a more investor-friendly 85%. Meanwhile, Uruguay did something entirely different.
In general, it seems that there's a two-tier system, with the stronger countries making use of the lower threshold.
This year was something of a one-off for Mexico, and the country won't issue that much debt in 2004. Most of its issuance comes under the general heading of sovereign liability management, which also covers big 2003 issues from Uruguay and Venezuela that are even less likely to be repeated.
Breathing space
Uruguay managed to reschedule all $5.6 billion of its external debt in an operation designed to ensure that no bondholder ever missed a single coupon. Maturities were stretched out by five years to give the country breathing room in the wake of the Argentine collapse and a domestic banking crisis, but in all it was one of the cleanest and smoothest debt restructurings of all time.
Venezuela structured an audacious liability management exercise of its own, issuing a new $1.5 billion seven-year bond at the same time as buying back old Brady bonds. The exchange reduced Venezuela's external debt stock substantially, and saved the country an astonishing $1.4 billion over the next five years - all at a time when there was no demand for Venezuelan debt in the market. No problem, said the government, and promptly sold the debt to its own citizens, who have been desperate for dollar-denominated assets ever since exchange controls were implemented in the country in February.
Between Mexico, Uruguay and Venezuela, then, liability management deals kept the market busy in 2003 in a way that will only be repeated in 2004 if the long-awaited Argentine restructuring offer finally comes to market. Even so, Mexican state oil company Pemex will still remain eager to raise new cash - it issued more than $5 billion in 2003 - and increasing numbers of Mexican corporates are now finding that they are able to tap international capital markets.
Most of 2003 has been characterized by sovereign spread tightening and enormous flows from yield-hungry crossover investors. However, the end of the year seems to be shaping up to be the point at which the corporate market takes off.
It was Petrobrás that really got the ball rolling, with a rapturously received $500 million 10-year bond in June. Leads Bear Stearns and Deutsche Bank targeted the bond at US-based oil investors rather than the high-yield and crossover investors that have historically bought Brazilian debt.
That deal was followed up in July with an innovative acquisition-finance deal from Coca-Cola Femsa, which bought rival Coke bottler Panamco back in December 2002. The company decided to go to the loan market rather than issue bonds, and also managed to keep a very large proportion of its debt in Mexican pesos rather than dollars.
In fact, the Mexican peso market looks set to be a major part of the Latin debt capital markets in 2004 and beyond. Mexican corporates want to avoid currency risk, and their local debt markets are becoming a lot more liquid, a lot more sophisticated, and able to stretch out to increasingly long maturities.
The most exciting part of the Latin debt markets at the moment, however, is not the big-name companies with quasi-sovereign status or an investment-grade credit rating. Rather, for the first time in many years, smaller concerns such as B+ rated Braskem have found themselves able to tap the markets.
Braskem, a Brazilian thermoplastics company, issued a $200 million three-year deal on October 31 that was sold to 34 different accounts in the US, Europe and Latin America.
Investors seem to be looking to the corporate market increasingly these days, after shunning it for most of 2003. The year saw unprecedented levels of spread compression, and the best strategy for most investors was simply to buy liquid sovereign bonds, sit back, and watch them soar in value. While money was pouring into the market, there was very little demand for corporate product.