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Capital Markets

Latin America DCM: High yields scramble through the open window

Appetite for deals beyond plain vanilla; Multiple deals marketing concurrently

The speed of the development of the Latin America DCM market in 2012 has taken long-time observers by surprise. The market started the year strongly, pricing two sovereign deals on the first day of trading and has progressed with unparalleled pace through the credit spectrum into high-grade corporate issuers and through to high-yield deals.

At the end of last month there were a number of high-grade transactions marketed and bankers’ expectations for success were high.

“I can’t remember anything like this in terms of the time between the sovereigns and the high yields being compressed into such a short space of time,” says Dan Vallimarescu, Santander’s head of Americas DCM in New York. “Right from the first day the pace has continued.”

The strong performance of the sovereign deals from Brazil and Mexico was swiftly followed by successful high-grade corporate deals, such as Pemex’s $2 billion 10-year bond with a 4.875% coupon, which was priced at 99.119 to yield 4.988%.

Vale, which had been waiting in the wings in December, also came to market on January 4 with new $1 billion 10-year paper with an overall yield of 4.748%. Meanwhile, Grupo Bimbo attracted a book of more than $6 billion for its $800 million 10-year bond, rated triple-B, which priced at 99.190 with a 4.5% coupon to yield 4.602%.

Banco do Brasil’s $1 billion hybrid perpetual transaction also demonstrated investor appetite for deals beyond the plain vanilla. The transaction is the first such hybrid in Latin America that contains a Basle III-compliant loss-absorption clause, enabling the bank to convert the bond into equity in the case of imminent default.

The bank paid for the novel structure. The double-B minus rated junior subordinated perpetual, led by Banco do Brasil, BNP Paribas, Citi, HSBC and Standard Chartered, attracted a book of more than $6 billion before being priced at par to yield 9.25%.

Liquidity has been driven by good economic data from the US, and a strongly performing US stock index has fed investor confidence. Recent successful bond sales in Europe and better-than-expected Chinese GDP figures have all fed into a buoyant market. Also, last month, investors had liquidity and were looking for opportunities for their new mandates.

A spate of high-yield deals has since been announced as bankers scramble to tap the available liquidity. “A lot of high-yield names are now looking to come to the market, which means that the banks, from what they have seen so far in their [high-grade] deals, are feeling comfortable that investors are ready to start buying high-yield names,” says Nadine Cavusoglu, managing director, fixed income at Itaú BBA, in New York. “We were surprised about how quickly high grades have returned.”

Dan Vallimarescu, Santander

Roberto D’Avola, head of Latin American DCM for JPMorgan, adds: “I thought we would see a little more high-grade issuance before we saw high-yield deals, but it looks like there is a lot of investor appetite, so we are seeing these deals sooner than expected. We will need to see how they fare in the market.” Urbi Desarrollos Urbanos, a Mexican home-builder, is in the market (as Euromoney goes to press) with a double-B rated deal led by BBVA, Credit Suisse, Citi and Santander. Camposol, a single-B rated Peruvian agricultural producer, is marketing a $125 million five-year bond rated B3/B through Credit Suisse and Santander. Meanwhile, Grupo Virgolino de Oliveira, the Brazilian sugar and ethanol producer, is attempting to print $200 million of 10-year, B3-rated paper, with BTG Pactual, Credit Suisse, Itaú BBA and Santander managing the debut.

Previously, market practice had been for one high-yield deal to test the market before others followed but this year multiple deals are marketing concurrently. “What is happening [now] is that everyone who has been mandated is thinking why wait?” says Vallimarescu.

“There have been some interesting deals that went well – for example, the subordinated Basle III from Banco do Brasil – and so now everyone is prepared to test the market with other structures and credits. And from the investor standpoint, we have been hearing at roadshows they want high yield; they want those credit stories with incremental yield pick-up, so the investor appetite is there.”

Banks, such as Itaú BBA, are advising clients to come to the market and pre-fund their debt financing while the window is open. However, Cavusoglu says: “Some [companies] are deciding on their own to come to the market sooner than they would have done in many cases. The boards of those that were contemplating coming later in the year are telling them to hurry up and come to market early – they don’t know when the markets will be open or shut down [later in the year], so they may as well come and pre-fund everything in the beginning of the year rather than do it in steps and come later.”

However, Cavusoglu says not all of the pipeline is from companies pre-funding. “There were high-yield issuers in the second half of last year waiting to come to market – most of the high-grade issuers that needed to come did so. In terms of other issuers [that haven’t been announced], I am aware of at least two high-yield issuers and one high-grade company.”

However, with high-yield credits looking to close transactions in this window, will investors not be concerned about the secondary market performance of similar deals during the global volatility last year, when they traded lower on a relative basis than the high-grade transactions?

“Some of these deals are smaller and illiquid, so liquidity is an issue but it’s really just a risk-factor that investors incorporate into their decision to buy,” says Vallimarescu. “Many of the investors feel that the higher yield on the instrument compensates in part – if not fully – for the lower liquidity.”

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