Latin America: Strong DCM start lifts hopes but doubts linger
Brazil and Mexico got off to a good start on the first trading day of 2012 by both coming to the international bond markets. The success of the new $2 billion United Mexican States 10-year bond and the reopening of Brazil’s 2021s proved the availability of liquidity for international Latin America debt issuance. However, despite the success of these two sovereign deals there is no guarantee that liquidity will be available for lesser credits and other structures and currencies.
"The first trading day of 2012 has been positive with risk-on and lower volatility; if this continues the market might open for corporates and, in time, even high-yield corporates, but we are going to need a prolonged run without scares ramping volatility back up," says a DCM banker.
UMS’s new 10-year benchmark attracted a book of more than $5 billion despite coming to the market shortly after Brazil announced the reopening of its 2021s. Both issuers were keen to come to market ahead of other rumoured emerging markets to capitalize on liquidity. It seemed to work, with UMS achieving its lowest coupon for this point on the curve, moving from early whispers of 180 basis points over US treasuries for a $1.5 billion trade to launching a $2 billion at 175bp before pricing its 3.625% coupon at 99.322 to yield 3.706%. Deutsche Bank and Morgan Stanley were the bookrunners on the BBB/Baa1/BBB transaction.
Brazil achieved a lower spread of 150bp for its $750 million re-tap of its 4.875% global notes due January 2021. The deal priced at 110.997 to yield 3.449%. Brazil’s book, managed by BNP Paribas and Itaú BBA, grew to $3.6 billion, highlighting the liquidity available for highly rated credits.
"That low-beta names can access the markets is not a surprise, but we need more sovereign and investment-grade issuers to come and open the market to the high-betas – the non-investment-grade corporates or issues from outside the low-beta countries of Brazil, Chile, Colombia and Peru," says one banker.
Similarly, bonds in other currencies and with different structures will take longer to return. Speaking specifically about the outlook for local-currency bonds, Robert Carlson, a director in Latin American debt capital markets at Barclays Capital, says: "The overall, long-term picture for local-currency bonds is positive. Investors remain interested in local currency; we expect the focus on these bonds to grow over time."
However the outlook for issuance in 2012 is less clear: "There is a currency as well as a rates component to these transactions that, in times of increased volatility, affects the performance as well as liquidity of these bonds relative to international dollar-denominated bonds," says Carlson. "In more volatile markets, it becomes more difficult to access the primary market, as we saw in the fourth quarter of last year."