LatAm bond markets: Chile – Financing their own

By:
Rob Dwyer
Published on:

Bring up the topic of Chilean financial markets to a financier with a regional role and more often than not the adjective they use is 'sophisticated'. However, while the country has the longest-standing investment-grade credit rating and has strong, well-capitalized banks, that isn’t synonymous with sophistication.

Gavin Templeton, commercial manager at CorpBanca Corredores de Bolsa, is keen to explode this myth about Chile.

"Chile really isn’t a sophisticated market, for example, in equity we don’t have options, he says. Transactions are very plain vanilla – we have some inflation-linked derivatives but you don’t see high-tech instruments. The US is a lot more sophisticated, as are Brazil and Mexico – by a long distance. It’s [a] pretty competitive [market] but not sophisticated."

Rodrigo Gonzalez-large
Rodrigo Gonzalez,
Standard Chartered Bank

However, in turn, lack of sophistication doesn’t mean immature. "Chile has a very developed local market," says Rodrigo Gonzalez, head of DCM for the Americas at Standard Chartered Bank. 


"It provides all the funding needs of the Chilean corporates and banks. The blue chips are so high grade that they can finance locally at very cost-effective levels. The local market provides size, tenor and even the type of funding that suits the Chilean market."

Gonzalez is alluding to the market characteristic to finance in a virtual, inflation-linked currency called Unidad de Fomento (UF) that provides ideal financing for the banks in particular. 

"The only reason Chileans have gone abroad is to diversify and to make their names better known in the US, Europe and Asia."

This reputational enhancement is often the only real driver of international deals. Local bankers cite the example of SQM (Sociedad Quimica y Minera de Chile) that in October 2014 sold a $250 million 10-year unsecured bond in the international markets. The deal was priced to yield 4.448% and was led by Bank of American Merrill Lynch, JPMorgan and Scotiabank. However, a local banker says the company could have matched, if not bettered, pricing in the local markets but felt that Toyota, one of its biggest customers of lithium for car batteries, would feel more comfortable if it was better known by international investors.

Sebastian Cereceda-large
Sebastian Cereceda,
LarrainVial

Locally, SQM would have no trouble tapping the market but demand from the buyside – dominated by the large pension funds – has dried up in recent years for any companies rated locally lower than AA-. Following the default of La Polar (due to accounting fraud) in 2011 the institutional investors stopped buying BBB local paper (BB- on an international scale), which previously had been pricing just 100 basis points higher than AA-. 

This, plus a slowing in securitisations which peaked just before the financial crisis, means that annual volumes in the private market are remarkably stable, at around $3.5 billion-equivalent. Tenors can be long – up to 30 years. Pricing is also attractive for those who can access the market. In early February, a typical trading day, spreads over the sovereign credit were 1.28% for AAA, 150bp for a AA and 200bp for A rated companies. The jump to BBB was 600bp and none of that has been issued since La Polar. However, the banking market offers good liquidity for lower-rated companies.  

Chile’s pension funds generate about $400 million-equivalent in new contributions and earnings and dominate the market for new investment grade corporate issuance, but they are also joined by the Chilean insurance companies and mutual funds. The local regulator has also encouraged the entrance of international investors to the local corporate market by removing the withholding tax from corporate bonds bought by international investors. Local bankers say they have yet to see any international investors move beyond sovereign credit in local currency but they say there have been some expressions of interest. 

Further reading
LATAM-Bonds-further reading 
Building out Latin
America's bond markets

International companies can access the Chilean markets via what are known as 'Huaso’ bonds but to date there have been limited transactions despite much discussion. At the moment only one such deal is outstanding, a UF1.5 million ($72 million) transaction for second tier Brazilian Banco Pine, which was issued in December 2012 and led by BTG Pactual, then-independent Chilean investment bank Celfin and JPMorgan.

Chile’s local market also offers deal size – up to $300 million-equivalent for typical large deals (although the average is around $150 million) – enough for a deal like SQM’s but not enough for deals such as Cencosud’s recent $1 billion international transaction, which was led by HSBC and Scotiabank. The deal was part of the financing of capex budget of between $2.4 billion and $3 billion in the next three years and this kind of volume clearly meant the large retailer had to tap the international markets. However, Sebastian Cereceda, managing director of corporate finance at Chilean investment bank LarrainVial, thinks that capex-related debt issuance in the local markets will be low this year. 

"Debt needs arise due to either refinancing or capex and new capex plans are going to be very scarce this year because we are in a slow economy and there are only a few projects are in place," says Cereceda. "New issuance in the international and local markets is going to be very low although interest rates remain attractive in Chile and abroad so we may have some refinancing activity."