Latin America debt: Peruvian issuers test buy-side capacity

By:
Rob Dwyer
Published on:

Strong international demand but investors might soon seek better pricing.

A flurry of Peruvian issuers have recently taken advantage of strong demand and pricing conditions to close international bond transactions, but bankers warn about limits to both supply and demand for future deals.

Eight Peruvian credits came to the international markets between mid-March and late April. The latest, Transportadaro de Gas del Perú (TGP), has successfully sold a $850 million debut bond that was the largest and highest-rated (Baa2/BBB) issuance from a Peruvian corporate. The 15-year paper priced at par with a 4.25% coupon to yield 230 basis points over treasuries. The deal, led by Bank of America Merrill Lynch and Morgan Stanley, is part of a liability management exercise. The natural gas operator conducted a $300 million buyback of local market bonds before kicking off this transaction.

Bankers close to the deal say the pricing can be used as a reference point for future deals from similarly rated entities. However, Milagros Cigueñas Espinel, head of financial management at BBVA Continental, which recently sold $500 million of five-year bonds in the international market, is more circumspect about these new so-called benchmarks: “We do expect Peruvian debt to continue to develop [but] there have been so many Peruvian issues recently that maybe the investors are in a position to ask for better pricing.”

Yield

Milagros Cigueñas Espinel, head of financial management, BBVA Continental
BBVA Continental attracted $3 billion in orders for its BBB/BBB+ transaction. It priced at 99.425 with a 3.25% coupon to yield 3.376 (265bp over treasuries) in early April. “Depending on the reference, the new-issue premium was flat to 15 basis points, but actually we were more focused on the yield,” says Cigueñas Espinel. “We were very glad with the yield, which was in line with our expectations [guidance had been in the high 200s over treasuries] and we saw the bond price fairly. We also achieved the repricing of the shorter parts of the funding curve. Both the [outstanding] ‘16s and ‘18s have tightened in recent weeks, so we are better positioned for future transactions and we have kept investors interested.”

Earlier this year, BBVA Continental gave internal authorization to raise up to $1.5 billion from the international markets. With pricing conditions favourable and a possible increase in US treasuries in 2014, wasn’t Cigueñas Espinel tempted to pre-fund the bank’s needs into 2014? “Our funding need for the year was $500 million,” she says. “Our funding needs change month to month, given the conditions in Peru and relating to regulatory change. Considering this, we feel much better with the flexibility of just funding through to the end of 2013.”

She adds that she doesn’t think interest rates will go much lower. The proceeds of the deal will largely be used to fund the bank’s US dollar-denominated loan book, which is about half of its total long-dated loan portfolio. Some might be used to fund mortgages, although the bank is trying to lower its proportion of dollar-denominated mortgages in favour of local-currency mortgages.

Consumer goods company Alicorp began the rush of Peruvian credits with its $450 million 2023, rated the same as TGP’s. It priced at 99.836 with a 3.875% coupon to yield 190bp over treasuries. It was led by Bank of America Merrill Lynch, JPMorgan and Banco de Crédito del Perú. That pricing for 10-year notes undoubtedly stimulated interest from others: in March mining company Milpo raised $350 million of BBB-rated 2023s (led by JPMorgan and Morgan Stanley); energy company Calidda raised $320 million of BBB-/Baa3 2023s (Citi and Santander). In April the flow continued, with BBVA Continental’s deal followed by Banco de Crédito del Perú’s $350 million of Baa2/BB/BB+ rated 2023s (Citi and JPMorgan); consumer goods company Lindley’s $260 million of BBB- 2023s (Citi and JPMorgan); and construction company Ferreyros’s $300 million of Ba1 rated 2020s (Bank of America Merrill Lynch and JPMorgan).

Appetite

“We think there is definitely strong appetite for Peru,” says Cigueñas Espinel. “Our economy has been the fastest growing in the region for the past five years and we expect to maintain that rate of growth in the coming years.” She says international investors are also drawn to the country’s low inflation, good fiscal balance and healthy debt to GDP ratios, as well as for portfolio diversification purposes.

“Our country is prepared to withstand external shocks – it is definitely an attractive risk for investors,” she adds. “And Peruvian corporates are definitely seeing an opportunity in the international markets right now. The interest rates are low and they see how the financial institutions have been tapping the markets and getting very competitive pricing conditions. We expect to see more corporates coming but we don’t have a clear idea of how many more – maybe 10 to 15.”