DCM: Latin American issuers attract record crowds

By:
Rob Dwyer
Published on:

Mexichem demand remarkable; Brazil economy slows; still dominant

Unprecedented liquidity for some international debt capital markets (DCM) deals from Latin America is leading to a surge in total volumes, and bankers expect the region to surpass $100 billion by the end of the year.

Brazil continues to be the largest issuer in the region – contributing about 45% of all deals in terms of volume – but the deals exciting investors are elsewhere. Last month, a $1.15 billion transaction from Mexichem drew $17 billion in orders.

Chris Gilfond, co-head of Latin America credit markets at Citi
Chris Gilfond, co-head of Latin America credit markets at Citi
"It’s remarkable," says Chris Gilfond, co-head of Latin America credit markets at Citi, which led the transaction along with HSBC, JPMorgan and Morgan Stanley. "I don’t remember the last time we have seen that level of oversubscription. There were a lot of frustrated investors out there who didn’t get as much paper as they would have liked."

The demand for Mexichem was so strong because it hit a number of sweet spots. The industrial conglomerate is a well-known and improving credit, but it has not tapped the market for three years. As well as scarcity for the specific credit, there is general scarcity of Mexican corporate paper, and the country is seen as a strong, improving economy, which also drove demand.

The Mexican sovereign – as with other sovereigns in the region – is issuing less paper as its total funding needs decline and it has access to deeper local DCM. Also, with Mexico’s financial system dominated by global banks, there has been little FIG issuance.

"FIG has been quite a big part of the story in Latin America debt issuance this year but it has been fairly modest in Mexico – as has the supply from the sovereign," says Gilfond. "Mexico is firing on all cylinders, so whenever there is a Mexican corporate transaction in the market, it tends to get a very long and hard look."

Mexichem priced a $750 million 10-year bond at 99.206 with a 4.875 coupon to yield 5% or US treasuries plus 324 basis points. The Ba1/BBB notes had initial guidance of 5.25%. The 30-year tranche priced at par with a 6.75% coupon after initial guidance of 7%.

Part of the proceeds will be used to finance a tender offering for $350 million of outstanding 8.75% 2019 bonds. Liability management is a theme among recent issuance, with Digicel’s $1.5 billion new eight-year NC4 transaction raised to retire two series of 2015 bonds. Citi managed the tender offer and was the left-lead bookrunner on the new 2020s.

"It’s a fantastic time to be locking in these incredibly low rates," says Citi’s Gilfond. "With QE3 as a great backdrop, investors anticipate that we are in for an extended period of low rates. At the same time, you have companies across the region enjoying strong growth in their home markets that can access low-cost dollar funding. They can take a strategic view on adding duration – it makes sense to play it long – and that kind of liability management can add significant value to companies when practised throughout the economic cycle.

"The combination of the new issue combined with the concurrent tender offer for Digicel was very powerful. The transaction itself had a positive impact on the company’s spreads because it extended the debt-maturity profile, which reduced risk without any incremental supply."

Bankers report that investor caution is mixed within the evident liquidity, but the Digicel deal demonstrates demand is there for high-yield credit. Despite a Caa1/B- rating, the bond attracted orders of more than $3 billion and priced at par with an 8.25% coupon after guidance of 8.25% to 8.50%.

The Andean region continues to attract interest from investors keen to diversify their portfolios. Maestro is a good example of smaller debut issuers that are coming to market. The home-improvement retailer priced a $180 million seven-year transaction led by Bank of America Merrill Lynch and JPMorgan last month, benefiting from the growing Peruvian economy and its house-building sector in particular, to price its Ba2/BB- transaction at par with a 6.75% coupon.

Financial institution issuance also continues to drive Andean total volumes. Bancolombia kicked off a busy September with a $1.15 billion bond that drew $7.2 billion in orders and priced to yield 300bp tighter than initial talk of 5.5%. The 10-year tier-2 bond was rated Baa3/BBB- and was led by BAML, Citi and Morgan Stanley.

International DCM issuance by issuer nationality

Later in the month, Grupo Aval also cashed in on cheap financing and attracted a book of $8 billion for its $1 billion 10-year transaction. The deal, led by Goldman Sachs, JPMorgan and Corficolombiana, yielded 4.8% after whispers of 5.125%.