Latin America
Best sovereign borrower (jointly awarded)
Mexico
After a world-beating performance last year, when the United States of Mexico easily won the global best sovereign borrower award, it was hard to see what the country could do to improve. And in fact the past year has not been nearly as headline-grabbing as the previous 12 months were. But that’s a good thing: no borrower wants to be making waves the whole time. And what Mexico has done, it has done extremely professionally, ahead of the curve, and with continually tightening spreads.
The deals started with a e750 million 10-year bond in June, lead managed by Citigroup and Deutsche Bank. For the first time ever, Mexico managed to achieve funding levels flat to the US curve on a swapped basis: historically, Europe has always been a more expensive place than the US to borrow. But after that, there was very little left to do in 2003: Mexico had long since met its financing needs for the year.
So it was something of a surprise when the sovereign returned to the capital markets with a 10-year dollar deal in October, through JPMorgan and Morgan Stanley. Mexico’s annual 10-year deal comes like clockwork every January, and now suddenly it was announcing that it was going to be prefunding its 2004 financing needs in October.
There were two reasons for this, it turned out. First, there was certainly a worry that US interest rates would start to be pushed up at the beginning of the year, making borrowing more expensive for emerging-market issuers.
The other was more subtle: the very fact that Mexico always came to market in January meant that investors tended to short the 10-year part of Mexico’s curve in December, making room for the new issue and bringing market yields up a little bit. Mexico reckoned that if it came in October, it would pay closer to real market rates, rather than post-shorting rates.
On the other hand, admits under-secretary of finance Alonso Garcia Tames: ?Being in the market each January, you knew everybody was getting rid of the old 10-year ? but you also knew everybody was ready to participate. If you surprise the market too much, you might be left with a more complicated environment.?
Predictably enough, of course, the early 10-year was a success, and it opened up the January window for a different type of issue altogether.
So it was that on the second business day of the year, Mexico came out with a $1 billion five-year floating-rate note through Citi and Deutsche ? its first floater in five years. The coupon was 70 basis points over Libor, and before long everybody was following suit: CAF, Chile, even Venezuela. In an environment where investors are worried about rising interest rates, floaters look very attractive ? and in fact the UMS floater has been the best-performing bond of the year in emerging markets.
While Europe slept The investors were mainly in the US. ?Many Europeans weren’t even back from vacation yet,? as one of the leads drily puts it. In any case, they’d had their own deal four months previously. Instead, the deal accessed short-term floating-rate investors in the US, many of whom were entirely new to Mexican paper.
Mexico’s final innovation in the primary markets was a 20-year, £500 million ($895 million) issue from HSBC and Barclays, a little bit later in January. This was the first time the country had issued in pounds in five years, and the issue was both longer and larger than most outside observers had thought possible.
By the end of January, Mexico had completed its financing needs for the year, which were pretty small to start with. The finance ministry, in fact, asked congress to reduce its zero funding limit for the year by $500 million ? it could only borrow $500 million less than it was repaying in amortizations.
All that was left was a liability management transaction, through Goldman Sachs and CSFB, which was designed to tidy up the long end of the yield curve. With Mexican yields falling dramatically over the past few years, many bonds, especially the 2026s, were trading at very high dollar prices ? something that puts off a lot of investors.
So Mexico bought back some $2.8 billion-worth of high-coupon 2019s, 2022s and 2026s, replacing them with new on-the-run 2014s and 2033s. Not all investors liked the deal, but they did gain convexity, while Mexico cleared a small profit on the transaction.
Mexico’s borrowing strategy is likely to continue to concentrate on liability management transactions for the foreseeable future. The impetus in the finance ministry is very much to do away with the currency mismatch that plagues all Latin American economies, where their debts are in dollars but their revenues are in depreciating domestic currencies. To that end, Mexico has now started issuing treasury bills domestically as far out as 20 years: a stunning achievement for a country that until relatively recently found it hard to borrow at 12 months. In a sense, Mexico will remain the best borrower in Latin America just so long as it’s one of the smallest borrowers in Latin America.
Best sovereign borrower (jointly awarded)
Venezuela
The problem is that PDVSA’s shipping operations are taking a long time to recover from the strike, and the country needs cash now. Typically, foreign banks would be falling over themselves to advance you money in such a situation ? but this is not a typical time. Your president, Hugo Chávez, is extremely unpopular both on Wall Street and in the US government, and banks are simply saying that they have no interest in doing any business with you.
You’re convinced that things are turning around: in mid-January, 91-day domestic bills were yielding a clearly unsustainable 44%, and you had no obvious way of meeting the March coupon payments on your international bonds. But you found a clever solution: BANDES, the Venezuelan Bank for Social and Economic Development, held about $300 million-worth of Venezuelan Brady bonds, which it sold quietly in the secondary market, lending the proceeds to the government in return for new debt. That $300 million was enough to pay your amortizations, and Venezuelan spreads are finally coming down.
Nevertheless, the government is still demanding more money, and there’s no way that international investors ? or international banks ? are going to lend it to you. With no more assets to sell, you’re stuck. What do you do next?
Give up? The answer that Nobrega found lay in the currency controls that the Venezuelan government had implemented in order to staunch the massive outflows of dollars at the end of 2002. Between November and January, central bank reserves had fallen to a critically low $9 billion from $14 billion, as Venezuelans rushed to sell their bolivares and keep their money safe in Miami.
Now that the currency controls were in place, however, there were few legitimate ways in which Venezuelans could buy dollar-denominated assets. So Venezuela embarked on a very clever liability management exercise in July, in which it actually bought back some $1.6 billion of Brady bonds from international investors, and issued a seven-year $1.5 billion global bond with a tiny 5.375% coupon, which was sold to domestic investors hungry for foreign assets. Locals essentially had to pay a penalty rate for dollars, receiving a spread of less than 250 basis points over treasuries for Venezuelan debt even as the market was asking about 850bp for similar paper.
The deal was lead managed by CSFB, the first bank to start dealing with Venezuela again; within a year, all the major debt houses, including JP Morgan, Deutsche Bank and Citigroup, would follow suit.
With a large chunk of Venezuela’s Brady amortizations no longer a problem, and the net present value of its debt falling by $429 million, international investors, flush with the buy-back cash, started getting interested in Venezuelan bonds once again. By September, the country was able to issue a perfectly normal $700 million 10-year bond, through ABN Amro and Citigroup, with a 10.75% coupon and a 12.4% yield. One month later, the bond was reopened for a further $800 million at a yield of 11.6%, and it just kept on rallying from there on in: at one point, it was trading at 110, up from an original issue price of just 91.
But Venezuela was only getting started. In November, CSFB and Deutsche Bank brought a 15-year $1 billion bond, which was followed up in the first week of January by another $1 billion deal, this time a 30-year lead managed by JPMorgan, coming at just 503bp over treasuries. Finally, April saw the issuance of a $1 billion 17-year floating-rate-note, which helped to reintroduce some floating-rate liabilities onto Venezuela’s balance sheet: most of the floating-rate Bradys had been bought back in the July exchange. The long-dated notes pay just 100bp over Libor: not bad for a country rated B? with decidedly dubious willingness to repay its debts.
Meanwhile, the country had not been neglecting its domestic markets. In February and March, it issued some $3 billion worth of Investment Units to locals: a combination of a dollar-denominated six-month note with domestic Vebonos maturing between 2008 and 2010. Most of the proceeds were used to refinance its 2004 amortizations, while the new debt had a much longer maturity: 3.7 years, on average.
Venezuela has now finished its financing for the year: it might try some further liability management exercises if an attractive deal presents itself. But with oil prices at record highs, it doesn’t need new money any more.
And foreign banks, of course, are falling over themselves to lend the country money at very attractive rates. From refusing to deal with the country at all, now institutions like ABN Amro, Barclays and Deutsche Bank will show a $500 million line of credit upfront in return for a bond mandate. After all, Venezuela is now one of the biggest issuers in all the emerging markets ? a dramatic change from the situation only a year ago.
Best state-owned borrower
Petrobras
Today it seems almost too easy to be giving a borrower’s award to an oil company. With prices at record highs, most such companies’ main problem is working out what to do with all the money that is coming in, not worrying about where they’re going to find enough money to cover expenditures.
But for much of 2003, oil prices were not nearly as high as they are now, and Petrobras, especially, Brazil’s state-owned oil company, was in a difficult position. Because it is ultimately controlled by the Brazilian government, investors were afraid that the country’s new Lula administration could and would turn the company into little more than a branch of the Worker’s Party, with much more loyalty to political expediency than to shareholders or fiscal responsibility.
Struggling in 2002 And for much of 2002, Petrobras had been issuing bonds only with the help of political risk insurance ? plain-vanilla deals without an investment-grade credit rating were considered undesirable to foreign investors. (In a rather ironic development, those same PRI deals are now trading flat to the Petrobras curve: no-one seems to value the wraps at anything any more.)
So when Petrobras flew out of the gates in June 2003 with a $500 million 10-year bond through Deutsche Bank and Bear Stearns, it took the markets by storm. Not only was the bond much longer than anything the sovereign had attempted at the time, it also priced ? on a completely plain-vanilla basis, without any bells or whistles ? 175 basis points through the sovereign curve.
It was a magnificent deal, sold largely to oil-industry investors who loved the pick-up that Petrobras offered over similarly rated but much smaller and weaker US oil names. Nearly half of the deal was sold outside the US, further broadening Petrobras’s investor base.
The deal was reopened for another $250 million in September, and followed up by a very cheap 15-year deal in December from CSFB and Lehman Brothers, which was upsized from $500 million to $750 million, and came with an 8.375% coupon.
Petrobras is not just a Brazilian oil company, however. It also owns 58% of Petrobras Energia, the Argentine company that used to be known as Pérez Companc. So in October, Petrobras became the first entity to issue a cash bond out of Argentina since the sovereign default at the end of 2001, with a $100 million 10-year issue led by Merrill Lynch. Naturally, the bond came well through the sovereign; more impressively, it came just 84 basis points over Petrobras itself, and 54bp through the Brazilian sovereign curve. The deal was reopened for another $100 million in April, through Deutsche Bank.
If the oil price stays anywhere near its present levels, it’s unlikely we’ll be seeing Petrobras in the market again in the short term. The company’s seven-year plan foresees $53.6 billion of total investment, of which only $3.5 billion will come from bond issuance ? just $500 million a year. Meanwhile, some $19.6 billion of debt will amortize. And that’s using conservative forecasts of Brent crude trading at $28 in the short term and $23 over the long term. If oil prices are higher than that, there will be even less need for new bonds, and the company’s leverage ratio could drop even faster than currently forecast.
Petrobras currently has a debt-to-capitalization ratio of 41%; it plans to reduce that number to 16% by 2010. Investors are clearly buying the bonds now while they can: there’s a good chance they will be very rare very soon.
Best agency borrower
CAF
The past year has been something of a breakthrough for Corporación Andino Formento, the Andean development fund which, because of size and location problems, has always had difficulty getting the kind of spread levels its fundamentals might warrant.
In tough times, CAF often tries to break the ground for Latin American issuers, being the first to market when windows start to reopen in order to get investors comfortable with the idea of lending to Latin America again. When bond issuance is easier, however, CAF can afford to stop looking at the long-dated benchmark deals, and start trying to find the cheap floating-rate money that fits its balance sheet a bit better.
The latest turning point came in May 2003, when a planned $300 million 10-year yankee through Merrill Lynch got upsized to $500 million after receiving $2.1 billion in orders. From price talk in the 175 to180 basis point range, the bond came at 168bp over treasuries, and immediately tightened even further in the aftermarket.
Even more gratifying for CAF was the fact that among the usual institutional investors were a few local accounts, from such countries as El Salvador, Mexico, Chile and Peru. The fund is always seeking to both diversify its investor base and build strong relationships in the region, and this deal helped on both fronts.
It was at the beginning of January, however, that CAF finally achieved what it had been dreaming of for many years, when it issued a three-year floating-rate note through CSFB which came at 35bp over Libor. The bond was originally planned to be $150 million, but was upsized to $200 million. Two days later, Chile issued a similar note ? and paid 40bp over. ?For the first time ever, we came in under Chile,? recalls CAF’s CFO, Hugo Sarmiento.
CAF also stayed at the short end for its next deal, a bond that Goldman Sachs calls an X-note. At heart it is a one-year floating-rate note that pays 15bp over Libor but the creditor can extend the maturity every year up to five years, with the spread stepping up 2.5bp a year to a maximum of 25bp over. That’s still, of course, 10bp through the level at which CAF managed to borrow plain-vanilla debt at three years.
Investors are happy to pay for having less refinancing risk, which benefits the issuer ? everybody comes out happy, and CAF ended the deal with $150 million of short-term liabilities that it needed for financing liquidity in case it suddenly and unexpectedly found itself in need of cash. Once again, as well, it managed to find a new investor base: Goldman Sachs has now issued some $10 billion of X-notes in total, and can sell them to a group that is much larger than the people who normally buy CAF bonds.
Finally, sticking to the floating-rate theme, CAF moved its show to Europe, where it issued a e150 million three-year note at 30bp over euribor. The leads were Deutsche Bank and BBVA, and the deal was notable in that more than half of the investors were Spanish: previously, Spaniards had accounted for maybe 5% of CAF’s euro-denominated deals.
On a swapped basis, CAF ended up paying about 31bp over Libor in dollars, which was less than it paid with its dollar issue ? Europe is now a cheaper source of funds for the agency than the US is.
In total, CAF managed to borrow more than $525 million of floating-rate funds in the first five months of 2004, before the market turned. All CAF loans are floating-rate, so it didn’t even need to swap its obligations into floating as it normally does. And now that it has increased its liquidity, it can easily wait a long time before having to come back to market again. With luck, however, the markets won’t close completely, and CAF won’t once again be saddled with the job of reopening them.
Best financial sector borrower
Bradesco
Bradesco, the largest private bank in Brazil, has no shortage of clients happy to borrow funds whose repayments are indexed to the dollar. Bradesco, then, has perfected the art of borrowing in dollars and lending out at a higher rate.
Most issues from Brazilian banks are very similar: 12 or 18-month notes that are usually sold straight into Swiss private-banking operations, where they are placed with high-net-worth Brazilian individuals. But Bradesco has refined such deals, managing to find enough hedge funds and fixed-income funds that they are not at the mercy of retail investors when it comes to yield.
In June 2003, for instance, Bradesco issued an 18-month deal through BNP Paribas at a yield of just 4.8%, at the tight end
of the 4.75% to 5% price range, despite being upsized to $150 million from $50 million. No Brazilian bank had issued at a tighter spread.
But Bradesco also goes out much longer than most other bank issuers: BNP Paribas also lead managed a $100 million three-year deal in January, this time coming with an even lower coupon of 3.625%.
The bank is also happy going even longer, for the sake of clients wanting medium-term financing. For those maturities, it chooses securitizations, an area where it has been very innovative. In the past year, it started off, with ABN Amro, by issuing a $400 million bond securitized by MT 100 future flows (the fees it gets from remittance payments and other wire transfers into the country). Then it broke off into uncharted territory, with a $500 million credit-card receivables deal from Merrill Lynch.
The final maturity was eight years, with an average life of 5.3 years, with no reserve account. No credit-card securitization had ever been done in Brazil before, but it still managed to get excellent credit ratings of Baa1/BBB+ from all three major ratings agencies.
And Bradesco doesn’t just borrow money to finance its dollar-indexed lending. It is also active in the subordinated borrowing field, where it issues tier 2 capital to boost its capital adequacy ratios.
In October, Merrill Lynch lead managed a $500 million 10-year deal for the bank that carried a political risk insurance wrap to bring it up to the same investment-grade rating as the credit-card securitization. The yield of 8.875% was 97 basis points through the sovereign, although it was a little bit higher than similarly rated US bank deals. After being upsized from $300 million, the deal was the largest tier 2 transaction ever executed for an emerging-market issuer.
Bradesco didn’t stop there, either: the bank went on to issue a e250 million 10-year subordinated bond through BNP Paribas, also with political risk insurance, which worked out cheaper than issuing in dollars once the deal was swapped. The deal marked the first time that an emerging-market bank had raised tier 2 capital in euros, and it was sold to some 40 investors from around the world, including even Singapore.
Best corporate borrower
Braskem
Braskem, the largest thermoplastics company in Brazil, chose an inauspicious time, August 2002, to be born. It was the high point of political and economic turmoil in the country, when markets were both convinced and petrified that Lula would win the presidency. No-one was lending to even the sovereign, let alone to the corporate sector.
So Braskem had a problem. Formed from the merger of Copene with a bunch of companies owning downstream assets, it was loaded with expensive short-term debt and its stock price was languishing in the low single figures.
By the beginning of 2004, everything had changed. Using a whole suite of debt products, Braskem CFO Paul Altit managed to cut the company’s debt ratios in half, even as he issued more than $1.5 billion in obligations over the space of 10 months. The fruits of his labour were easily seen on the New York Stock Exchange, where the stock reached $29.40 in January, up from $2.30 in March.
He managed this feat not a moment too soon: Braskem had a bad first quarter of 2004, and the company’s bonds and stocks have sold off dramatically in the general move away from riskier emerging-market assets. But the good news is that Braskem is now much better positioned to weather any difficulties.
The first step on the road to rehabilitation came, naturally enough, with basic trade finance, from both local and international banks. Then, in March 2003, more substantial liability management started, when Brazil’s five largest banks agreed to consolidate all their loans to the company and turn them into a local debenture with a four-year maturity.
Plastic flows
After that, Braskem created a cashflow receivables fund in local currency, so that it could securitize its domestic payments for polyethylene, polypropylene and PVC. This was non-trivial: there’s no real market in those products, so it’s impossible to hedge the risk of the price falling too far. Therefore, since Braskem itself was not known by the market, it was forced to find a large, well-known buyer to guarantee revenues.
The structure that Braskem chose was certainly solid. The deal came at the same time as a functionally identical one from Parmalat, and when that company imploded, all the creditors were repaid and the vehicle broken up without loss.
By July, Braskem was ready to hit the international capital markets. It set up an MTN shelf with CSFB, and started out gently, with a $75 million one-year bond that was then reopened five times to bring the total outstanding to $121 million.
The two-year bond came in October, sporting a 9.25% coupon ? 125 basis points lower than the 10.5% coupon on the one-year issued only three months earlier. It was only $65 million, though, because already plans were afoot for the five-year bond, which came to market in November with a 12.5% coupon. Originally planned at $150 million with a coupon between 13% and 14%, it was upsized to $200 million on the strength of demand from more than 30 different accounts in both the high-yield and emerging-market spaces ? even European investors got involved. A $75 million reopening followed three weeks later.
Finally, at the beginning of January, Braskem issued a benchmark $250 million 10-year bond, this time with joint lead managers: CSFB and UBS. It was upsized from $150 million, with an 11.75% coupon ? again, lower than the the shorter bond that had preceded it by just two months.
The timing was perfect: the issue ? Braskem’s longest ? came just as Brazilian spreads reached their absolute lows.
Between March and January, Braskem had issued securities in both Brazil and New York; had built out a dollar curve with maturities at one, two, five and 10 years; and had managed to reduce its debt-to-ebitda ratio to 3.5 from 7. Now, says Altit, the company is sitting pretty: ?We thought in September that the market could change from February onwards, so by February we had done all the transactions we had to do ? and have a high level of liquidity.?
It’s unclear when and whether high-yield Brazilian corporates will have this level of access to the market again. But Braskem took full advantage of the window of opportunity in 2003, and is hugely healthier now than it was a year ago.
