|
Few would have predicted in the dark days that followed Mexico’s disastrous devaluation of December 1994 that investors who had their fingers burnt would soon be clamouring for Latin debt again. Yet that is what has happened. Latin America, which appeared to have been shut out of the international capital markets, is back with a bang. Sovereign borrowers tentatively began to test their ability to tap the international markets soon after the initial scare. The response was more favourable than they could have expected, so much so that the big sovereign issuers, notably Mexico and Argentina, have since fired a salvo of successful issues. The trend gathered pace in 1996. In a November report, Salomon Brothers announced that “an avalanche of Latin American new issues has swept the international bond market”. Latin issues accounted for 8% of total new international issues, compared with only 3.5% in 1995 and 5.1% in the previously record-breaking 1993. The $44 billion issued by end-October contrasts starkly with the $13.5 billion during the same period of 1995. “This has been an exceptional year and we will see a number of records broken in terms of issuance,” says Moctar Fall, head of Latin American capital markets at Salomon Brothers. In 1993, he says, total Latin debt issuance, both sovereign and corporate, reached $28 billion. “So far this year we are already around $46 billion and we should hit $50 billion by the end of the year very easily.” Joe Cunningham, assistant director for new issues at anz in London, agrees that 1996 “will be viewed as a watershed year for Latin markets, especially coming on the back of the tequila crisis of 1994… It was a year when they were very successful in bringing new issues to market, building a solid base for future issues.” Several factors explain this success. Primarily, the international environment was right, the monetary authorities of the world’s three largest lenders the us, Germany and Japan all applying relaxed interest-rate policies. Of the tequila crisis, more than one observer has commented that, if Latin America had to go through such a test of fire, it picked just the right moment in which to do so. “From an external perspective, we were in a global environment flush with liquidity searching for higher yields,” says Larry Goodman, head of Latin American research at Salomon Brothers. “It has been an environment with just enough growth in Latin America… but not enough growth in developed countries to bid up interest rates.” Attractive in Japan Cesar Miranda, senior vice-president of investment banking for Latin America at Daiwa Securities, says international liquidity has been the crucial factor in this year’s success. “In Japan, you have a very low interest-rate environment, so Latin countries from an investor point of view offer very high yields 4% or 5% is better than 0.5% any day of the week,” he says. That, aided by the relaxation of rules governing issuance by below-investment-grade borrowers in Japan, is what sparked the interest of Japanese investors in Latin America. It enabled Daiwa this year to lead several successful samurai issues of sovereign Latin debt, including three from Mexico. In May, Daiwa was appointed lead-manager by Mexico for a ¥100 billion 10-year samurai issue. The issue was placed at a coupon of 6.75%, accruing semi-annually, and was followed later in the year by another Daiwa-led Mexican issue, a ¥70 billion six-year credit. Argentina, Brazil and Colombia also tapped the yen market for smaller amounts. For international funds looking for a home, Latin America proved itself a less daunting prospect than it had seemed at the time of the tequila crisis. The three big Latin economies Argentina, Brazil and Mexico stuck rigidly to their domestic economic reforms, as well as to their debt-repayment schedules. Although Argentina and Mexico suffered heavy recessions in 1995 as a result of a shock to confidence and the consequent outflow of capital, both bounced back in 1996. Furthermore, Mexico, in particular, proved itself adroit at managing its external debt by ironing out potentially worrying bunching in its amortization schedule. Perhaps most important of all, the external position of Mexico and Argentina improved dramatically as recession slowed imports and encouraged manufacturers to seek new markets abroad. “The salutary effect of the tequila crisis was a rebalancing of the region’s current account situation,” says Goodman. “Import demand shrunk precipitously and with it there was a virtual elimination of the current account deficits.” With the external position less fragile, lenders were much more willing to buy new Latin issues. “This year there has been a gradual improvement in credit fundamentals,” says Tulio Vera, head of sovereign-debt research at Bear Stearns. “Although this has not yet been manifested in rating upgrades, which always lag, there is a sense that the economies are slowly recuperating from the events of 1994 and early 1995.” Borrowing demand was also there, driven largely by refinancing needs that encouraged sovereign states to seek international funds. According to Salomon Brothers, sovereign, sovereign-guaranteed and sovereign-supported issuance accounted for 77% of new Latin issue volume in the year to November, completely overshadowing private-sector borrowing. In the Argentine, Colombian and Mexican issuer categories, sovereign borrowing constituted 82.6%, 96.1% and 83.4% respectively of total new-issue volume. These factors of international liquidity plus a renewed confidence in Latin sovereign debt markets as relatively safe havens were joined by what Vera sees as an increasingly ravenous “search for yield. This goes across the board, even in us equities, where investors are increasingly going into ipos [initial public offerings] and more speculative investments because the normal bread-and-butter investments are over-bought or fully priced.” Emerging-market investors were once an odd assortment of hedge funds, leverage specialists and speculators. Now they have been joined, says Vera, by “the Fidelities and Puttnams of this world, some of which are putting 5% to 10% of their investments into emerging-market debt. “There is a new investor base coming into the market, the cross-over institutional investors, who were previously dedicated to high-yield or high-grade assets and are now crossing over into emerging markets,” according to Vera. “People are searching farther and farther into different asset classes and emerging markets benefit from that, with countries such as Ecuador and Venezuela the biggest winners. It has been an excellent year for the Brady index which is up about 28% so far.” Fall of Salomon Brothers agrees: “The biggest trend is that us investors, the traditional high-yield investors, are becoming a much bigger player in emerging markets… This will grow in 1997.” Mexico’s debt engineering If the conditions were right, then Latin issuers have taken full advantage. None has been more expert in exploiting market possibilities than Mexico, which has used several innovative techniques to improve its external financing position. The single most spectacular, though not the largest, issue of 1996 was arguably Mexico’s $1.75 billion Brady swap in April. Under this audacious deal, investors, many of whom still had the sour taste of tequila in their mouths, were persuaded to exchange Brady debt collateralized by zero-coupon us treasury bonds for 30-year paper carrying pure Mexican risk. The launch of the dollar-denominated global bond with a yield of 552bp over us treasuries was managed by Goldman Sachs, Deutsche Morgan Grenfell, cj Lawrence and Salomon Brothers. “The Brady swap was a big deal. There was a lot of speculation that this signalled the death of the Brady market,” says Cunningham of anz in London. “I would certainly expect to see more of this type of issue.” “We marked the beginning of the end of the Brady market,” says Jorge o Mariscal, chief equity strategist for Latin America at Goldman Sachs. “We are creating a whole new family of instruments to replace the Bradys which are a very inefficient instrument, very expensive.” “Buy-backs are certainly taking off,” says Vera. There is constant market speculation that Argentina, Brazil, Venezuela and other countries are on the verge of launching similar deals. “You’re going to see more transactions like the Mexican Brady exchange, which will probably become a model for such deals,” he says. “The Brady market as an asset class has probably reached its peak in terms of volume, with only Peru still to issue. From then on it will shrink.” Salomon Brothers’ Goodman agrees: “There will clearly be a shift from Bradys, which have obvious complications in terms of collateral and so on, into instruments of pure risk. That’s part of the evolutionary process and a variety of new instruments will begin to supplant Bradys.” But rumours of the death of Bradys are exaggerated, he says. “When you look at overall stocks, it becomes clear that Brady bonds will be in existence for some time to come.” Mexico’s swap may not have sounded the Brady death knell but it did mark another clear trend of 1996: better liability management. Many of the Mexican issues of this year were not intended primarily to raise fresh finance but to lengthen maturities, lower coupons and smooth out amortization humps. The most interesting example of such a deal was the issue of a $6 billion five-year note, said to be the largest Eurobond issue ever. Led by jp Morgan and Swiss Bank Corporation, the note carried a coupon of 200bp over three-month Libor with a two-year grace period. The tight spread was achieved because the issue was collateralized by dollar earnings from state petroleum company Pemex, kept in an account in the Federal Reserve Bank of New York. That device, part of what many analysts see as a general move towards asset-backed issues, earned the note a bbb minus investment-grade rating from Standard & Poor’s the first time a Mexican sovereign issue had gained a non-junk rating. The deal enabled Mexico to pre-pay $8 billion of the $50 billion international bail-out package spearheaded by the us. In addition to gaining favour with the us and helping to tighten the spread of future issues, the deal saved Mexico a cool $125 million in interest. “Issuance is being used increasingly aggressively as a means of getting the yield curve down,” says Jerome Booth, head of research at anz Bank in London. “New government issues as well as Brady swaps are being used to retire debt or to replace existing obligations with debt at lower spreads. Just by issuing, one tends to send a message to the market that brings the yield curve down.” With a 1996 budget deficit estimated at $6.6 billion and continual refinancing requirements, Argentina had little choice but to take advantage of favourable international conditions. It did so hyperactively, raising more than $10 billion in the international markets. The Argentine issues were carried out successfully despite extreme political turbulence at home, which included the surprise dismissal of Domingo Cavallo as economy minister. But, instead of the economic apocalypse that many had predicted would follow Cavallo’s demise, the new economic team led by Roque Fernandez quickly won investor confidence by taking a more realistic look at Argentina’s fiscal position. So impressed were investors at the new sense of realism, underlined by a tough austerity package, that Argentina was able to launch a 30-year dm500 million bond in October. That issue, led by Deutsche Morgan Grenfell, was the first such maturity in the Euro-Deutschmark sector by an emerging market borrower. It carried a coupon of 11.75%, or 497bp over Bunds. Ingrid Iversen, an emerging-market specialist at ubs in New York, says the placement, along with the Mexican Brady swap, was one of the benchmark deals of 1996 in the sovereign debt markets. A Salomon Brothers report adds: “The Republic of Argentina has issued mostly in Deutschmarks with maturities spanning three, seven, 10, 15, 20, and 30 years, effectively establishing a yield curve in this currency sector.” A diversification strategy Argentina’s tapping of the Deutschmark sector also underlines the fact that sovereign issuers are increasingly issuing in non-dollar currencies as a way of diversifying obligations. According to figures from Salomon Brothers, 64.2% of issues in 1996 to November were in us dollars, 19.3% in Deutschmarks, 10.4% in yen and 6.1% in other currencies. Although this marked something of a return to the dollar market compared with 1995, it still represents a significant amount of issuance in the non-dollar sectors. “Sovereign issues came in almost any currency you can think of,” says Miranda of Daiwa. “Deutschmarks, yen, sterling, Italian lira, and I think even in Swiss francs.” Argentina, which had total financing requirements of some $14 billion in 1996, has become adept at taking advantage of such niches in demand. “They are definitely ahead of the curve on currency diversification,” says Cunningham of anz. However, he is not sure whether Buenos Aires will be able to sustain its issuing onslaught on some markets, particularly the German one. “The appetite in Deutschmarks may be waning,” he says. “I think Argentina has raised so much that it won’t be able to go back for a bit. On the other hand, investors there are now thoroughly familiar with that credit.” If Argentina generally has been very successful with its non-dollar placements this year, its yankee issues have had more mixed fortunes. Early in the year, a Credit Suisse First Boston-led $1 billion global bond attracted some criticism for being overpriced. The 473bp spread widened in the after-market and traders muttered that the deal had been deliberately over-hyped. “The Argentine global of 14 February was issued at the peak of the market and was seen by some as causing the subsequent market downturn,” says one analyst. “It was badly managed.” At the time, dealers were saying that the February placement had damaged Argentina’s possibilities for issuing into the yankee market, and indeed Buenos Aires did shift its attention to Japanese and European issues in subsequent months. But by August it was back with a $500 million issue led by jp Morgan, and on October 1 it entered the 10-year yankee segment with a $1 billion placement priced at a spread of 445bp. That issue, led by Salomon Brothers and Goldman Sachs, was described as an “incredible success” by one banker. “Argentina worked hard at understanding the constraints and requirements of the investor… We increased the issue from $750 million to $1 billion, and the amount of orders exceeded $2.6 billion.” On the first day of active trading, the spread widened by between 10bp and 13bp, he says. Most of Brazil’s financing needs are met by issues of short-term debt on the domestic market and Brasilia therefore has not been quite as active in the international markets as Argentina and Mexico. Alone of the Big Three, Brazilian corporations made up a substantial quantity of total debt issued in 1996. Brasilia’s big comeback After a number of small deals, though, Brasilia marked its big return to Eurobond markets with a $750 million five-year note issue on October 29, its first in the dollar sector since 1982. At the time, Gustavo Franco, director of the international department at the central bank, described the issue as “the big test” for his country. “Today we are exposing ourselves to the judgement of the market,” he said. The deal, which was lead-managed by jp Morgan and sbc Warburg, was trading at 280bp on the day of issue, considered very tight by many traders given the much higher spreads paid by Mexico and Argentina. The placement attracted heavy interest from Asian investors, who bought an estimated 40% of the issue. This year there was also a controversial resolution to the Dart family saga, a problem created because the Darts had refused to join Brady-style talks in April 1994 which rescheduled $49 billion of Brazilian debt held by private creditors. The billionaire Dart family was therefore left holding $1.28 billion in non-restructured debt and began a series of unsuccessful legal actions against loan agent Citibank and the Brazilian central bank. The dispute was settled in October with the issuance of $1.28 billion of floating-rate notes under us Rule 144a which securitized the remaining multi-year deposit facility agreement (mydfa) loans. “None of the serious banks would have anything to do with it because they believed it would sour their relationship with Brazil,” says one analyst. The mydfa deal was managed by Bear Stearns which, according to a trader from a rival house, “looked at the pros and cons and decided they could live with it”. Bear Stearns issued the 11-year mydfa restructured notes at a spread of 507bp. “The investors loved it,” says the trader. “[But] a number of people in Brazil were very upset by this deal. There was concern it would pre-empt or cannibalize any attempted deal by the Republic of Brazil itself and that it looked like a clear bail-out of the Dart position.” Another commentator says of Bear Stearns’ involvement: “Gustavo Franco [of the central bank] made it clear that he was not happy they were doing it. By going ahead, Bear Stearns waved goodbye to Brazil.” After Latin America’s Big Three, the main issuer in 1996 was Colombia, which borrowed nearly $2 billion internationally, roughly doubling its 1995 issuance. Colombia has always been a hard sell, given that its generally good macroeconomic fundamentals are marred by the country’s reputation for drug trafficking and violence. But this year was especially complicated because of allegations against President Ernesto Samper suggesting that his election campaign was part-funded by drugs dollars. Most of the international placements of 1996 were launched against the background of impeachment talk. Salomon Brothers’ Fall considers the $400 million Colombian issue of May 22, joint-led by Salomon and sbc Warburg, as one of the most significant of 1996. The issue, which was increased from an initial offer of $300 million, was the biggest in Colombia’s history and marked its first in the Eurodollar market since 1993. The issue, in accordance with Colombian wishes, was distributed to a mainly European investor base. “Colombia is a very difficult credit for a lot of investors to understand because of the high visibility of the drug problem,” says Fall. “It gets heavily punished because of this. us investors have been those most willing to analyze the credit and take the time to really understand the country. Our challenge was to educate European investors about the good fundamentals but we were doing this at a time when the issue of whether the president would be charged or not was coming to a head.” Fall says the deal was accomplished through constant reaffirmation of Colombia’s solid fundamentals and track record. “No one stopped buying us t-bills when Nixon was impeached,” says Fall. “We had to remind them [European investors] that no president is bigger than life.” The Colombian issue carried a coupon of 8% and the spread narrowed immediately from 150bp to 144bp on the day of pricing. Despite the extremely favourable conditions in 1996, there were very few new international issuers. Only Venezuela, which this year signed an imf deal, returned to the market in style with a dm650 million issue led by Westlb. The seven-year Eurobond issue, launched on September 12, carried a spread of 440bp very respectable given that many investors had considered Venezuela a virtual basket-case only a few months earlier. The only other issuer of note was Uruguay, which placed a $100 million 10-year Eurobond at a spread of 160bp, reflecting Montevideo’s reputation as a responsible borrower. The deal was led by cs First Boston. Can momentum be sustained? There is some concern among analysts that the exceptional conditions of 1996 cannot be maintained. Few expect 1997 to be as easy for Latin issuers as this year. “The countries that have to borrow next year could be vulnerable,” says Iversen of ubs. “This environment is very favourable at the moment and it can’t get a lot better, only worse.” Some countries, such as Argentina, plan to tap the international markets for billions of dollars needed to meet their refinancing needs. If the markets dried up, for example because of higher international interest rates, they could run into trouble. “Naturally, concerns have emerged that if the Federal Reserve raises rates, activity will screech to a halt,” says a Salomon Brothers report. “However, barring an exaggerated sell-off in the bond market, refinancing needs in 1997 likely will keep Latin American borrowers active in the primary market well into next year. According to our figures about $16 billion of Latin American external bonds (excluding Brady bonds and private placements) will mature in 1997 and 1998.” Vera of Bear Stearns believes there is “little threat to global liquidity” in the immediate future. He is also of the opinion that Latin sovereign issuers will continue to benefit from the growing sophistication of new investors moving into the emerging-debt markets. “We’re beginning to look at the emerging-market debt asset class in relation to other asset classes, which provides a relative value or what I call a value anchor,” he says. “Investors used to make relative value assessments within an asset class, say Argentine Bradys versus Mexican Bradys, but there was little comparison between Argentine debt and a high-yield issuer in the us.” Vera says that as the universe of investors in Latin issues expands, yields will drop. In October, the Brady composite was trading at around 620bp over us t-bills, while roughly equivalent us asset classes (carrying a bb rating) were fetching only around 260bp over. “Bradys are still cheap compared with other asset clasess and you will see a convergence,” says Vera. Although no new Bradys are likely to be issued, with the exception of Peru, such convergence of yields should make room for issues of other categories of Latin debt, particularly if spreads look relatively attractive. If conditions stay broadly favourable in 1997, analysts expect the trend toward better liability management to continue, with issues whose primary purpose is to improve a sovereign state’s debt-servicing costs and repayment schedule. “The move towards developing more streamlined yield curves will certainly continue,” says Vera. “Mexico is doing this well, Argentina is also doing it, and Brazil is beginning to do so with the issue of its [$750 million] global.” Brady swaps in the Mexican manner may become almost commonplace next year, according to analysts. “The move towards liability management has been contagious,” says Goodman. Part of liability management should include continued exploitation of opportunities in the non-dollar markets. “I expect to see the move to currencies continue,” says Vera. “There is a pipeline of potential issuers over the next five years, mainly Argentina and Mexico, which have the biggest refinancing needs. The volumes are large, and like any large issuer they will seek to diversify their funding sources… The move towards yen, Deutschmarks and other European currencies is here to stay.” If Mexico and Argentina dominated the sovereign issues this year, Brazil is likely to step up a gear in 1997. Only modest action has been taken in closing the budget deficit, leaving Brazil with a big borrowing requirement. “I expect Brazil to be offering more,” says Goodman. “It will likely encounter heightened balance of payments constraints in 1997 and its ability to tap the international markets [recently tested with the $750 million Euro-issue] could relieve some of the pressure building up.” Few expect next year to be as good as this, but there is every reason to believe that Latin American issuance will continue to be strong. And if the market conditions remain good, the manifest desire of Argentina, Brazil and Mexico to exploit each and every opportunity could yet mean the shattering of a few more records in 1997.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
