The road to the international capital markets will soon be well trodden by Chilean issuers. A combination of government policies, such as the foreign exchange intervention programme, and technical moves in the swap market, are driving this new interest in cross-border deals.
Chile’s borrowers have had an easy time in the local markets in recent years. Twelve months ago a well-developed $114 billion pension system provided borrowers with a willing investor, coupons have been low at an average of 3% to 4.5%, and swapping into dollars from Chilean pesos has been cheap – a year ago issuers could swap pesos into dollars at Libor minus 50 basis points.
This is no longer the case.
Two months ago an inflection point was reached – suddenly the pronounced advantage and relative attractiveness of domestic funding compared with external funding was inverted. The marked shift in spreads made swap rates for Chilean currency jump 130 basis points from an attractive Libor minus 50bp to Libor plus 80bp. In turn, this shift in spreads marked the end of the big arbitrage advantage that domestically funded Chilean borrowers had been enjoying for the past few years – now companies wanting dollar-denominated liability are also better off with cross-border deals. The cost of borrowing domestically and then swapping to dollars is far more expensive than issuing directly in dollars for Chileans today.
Before this shift in the swap market, there was no way cross-border deals could compete. But today’s local market needs to price deals at Libor flat to be cheaper than the international markets – an improbable event as the pension funds are unlikely to buy corporate paper that has the same return as government paper.
Issuers needing Chilean peso liability will find it cheaper to list in dollars and then swap into Chilean pesos rather than listing directly in pesos.
So far, no corporate has taken advantage of these new pricing technicals but the local banks, Codelco, Endesa and Enersis Group, are all likely candidates for dollar issues in the coming months. Market rumour has it that there are at least another two Chilean corporates looking to debut with cross-border transactions in October as macroeconomic movements continue to support swap prices in the long term.
Fundamental issues are driving swap market prices. In April, the government announced a new FX intervention programme that aims to buy $8 billion by December, with $50 million daily purchases. This announcement had larger effects on the market than expected, and although the initial peso appreciation was welcomed it brought with it new inflation worries. Just last month the Chilean central bank increased interest rates by 50bp – yet another move that will drive potential issuers to look at the international markets more seriously than in the past.