Corporate bonds pick up on recovery prospects

Of all the international businesses that suffered the after-effects of the September 11 attacks, those in Mexico were among the most affected, given strong ties to the US economy. The Latin American bond market was also caught in a downdraught. It effectively closed to new issues amid a global economic slowdown, making it more expensive for companies to raise money.

Now, some six months on as the US and Mexican economies show signs of strengthening again, Latin America’s capital markets also appear to be slowly coming back to life.

“The outlook is good for Mexican corporate bond issues. The market is becoming much more receptive,” says Walter Molano, head of emerging-markets debt research at BCP Securities.

Mexican media empire Televisa shook off the inertia of 2001 last month with the country’s first corporate bond issue of the year. Televisa, the world’s largest Spanish language broadcaster, sold $300 million of 30-year bonds with an 8.5% coupon in New York. The healthy market reception allowed the company to increase its offering from an originally planned $250 million.

Now others are expected to follow. Mining company Grupo México and home builder Corporación Geo could make issues of between $100 million and $250 million this year, analysts say. Wireless service provider America Móvil is also expected to make its international debt sale debut this year. The company cancelled its plans for a $500 million bond offering in the autumn of 2001 after the terrorist attacks on the US pushed up borrowing costs.

According to Gerhard Herrera, emerging-markets fixed-income strategist at IDEA global consultancy, investors are likely to see a run of Mexican corporate issues over the next four months in particular, as US interest rates remain low. “Now is a good time to issue. As the US economy starts to pick up, so interest rates will rise. That will increase spreads by around 100 basis points, increasing debt service costs,” Herrera says.

Some strategists are more cautious. “The market is opening in stages,” says Octavio Calvo, a director in Latin American capital markets at Deutsche Bank. “Today we see there is the opportunity for top-name companies, like Televisa. Smaller, lower-rated companies are likely to follow with new issues later.”

Mexican corporate issuers are likely in the short term to see higher demand because of a flight from the Enron effect towards perceived quality. “At least for now we are seeing a diversion of funds from US corporate markets towards Mexico partly due to the Enron collapse,” said a debt analyst who asked not to be named.

A decision in February by rating agency Standard&Poor’s to upgrade Mexico’s sovereign and corporate ratings from sub-investment grade has also boosted confidence.

However, Mexican borrowers have yet to see a return to the situation a year ago when the US economy seemed unstoppable.

Corporate spreads on JPMorgan’s Latin Eurobond Index then stood at 560 basis points over US treasuries. Today spreads are still much higher at around 900bp over treasuries.