DCM: LatAm issuers enjoy Fed-sponsored harvest
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DCM: LatAm issuers enjoy Fed-sponsored harvest

Funding more costly, but less so than expected; Colombia, BNDES and Mexico lead the way

Issuers from Latin America have taken advantage of the improvement in the international debt capital markets following the US Federal Reserve’s decision not to taper its $85 billion monthly asset purchase programme.

The decision, which was contrary to most observers’ expectations, was seized upon by issuers either seeking fresh capital or those keen to lengthen and lower their debt profiles through liability-management exercises.

Max Volkov, managing director of Latin America debt capital markets at Bank of America Merrill Lynch
Max Volkov, managing director of Latin America debt capital markets at Bank of America Merrill Lynch

"It was like a Christmas gift and completely unexpected," says Max Volkov, managing director of Latin America debt capital markets at Bank of America Merrill Lynch. "In the last two weeks of August and the first week of September [10-year US] treasuries had gone from 2.68% to 3% and people were drawing negative conclusions about it going to 3.5% or 4%." Although the interest rate environment is still higher than earlier in the year, Volkov says issuers have shifted to a new perspective. "They realize the markets we saw in April aren’t coming back," he says. "We aren’t going to see 10-year treasuries at 1.5%, 1.6% or 1.7%; they will be at least 100 to 150 basis points wider. But if you have to face a new reality [you recognize that] interest rates are still lower than they have been historically." Volkov contrasts today’s 10-year treasury rate of 2.65% with September 2008’s, which was between 3.5% and 4%. In 2007 the 10-year treasury rate was 5.5%.

Opportunities for two

Deutsche Bank brought both Colombia and Brazilian development bank BNDES to market the day after the Fed’s announcement. "We knew that the FOMC announcement on Wednesday was key to the rates market one way or another – obviously the outcome was a lot better than the market consensus and we clearly saw a great opportunity for these two high-grade issuers," says Alberto Ardura, head of Latin America capital markets and treasury solutions for Deutsche.

Many others followed, including a strong theme of liability management exercises at UMS, Arcos Dorados and Cemex.

"The market is wide open and high-grade issuers are achieving very tight spreads over treasuries," says Ardura. "Many investors are sitting on significant cash positions and are looking to put it to work – there is ample liquidity. The pipeline is also very strong and we are taking advantage of the current market dynamics to execute the pipeline. LatAm will likely see record issuance volumes this year. However, it is also clear that investors are more price sensitive than in the first half of the year [before the prospect of Fed tapering]. Everyone understands that this is a temporary window as the Fed will start to taper sooner or later."

Deutsche Bank and HSBC led on Colombia’s $1.6 billion BBB/Baa3 transaction, which priced at 142 basis points over treasuries after attracting more than $6 billion in demand, tightening from early talk of US treasuries plus 165bp and guidance of 150bp. On the same day, Deutsche led a $2.5 billion deal (with Itaú BBA and JPMorgan) for BNDES in two tranches: $1.25 billion of three-year notes that priced at US treasuries plus 275bp and $1.25 billion of 2023s priced at US treasuries plus 300bp. The deal attracted total orders of $12 billion despite pricing tightly because investors saw a good pick-up over the Brazilian sovereign.

The new-issue premium of these two deals was around 9bp or 10bp and despite the large levels of liquidity, bankers say the days of doing deals with essentially no new-issue premiums have gone. "New-issue premium has increased – it used to be non-existent, but now they can be around 25bp and 50bp – depending on the credit and the deal," says a DCM banker, who points to the $49 billion Verizon deal, which paid 100bp new-issue premium to lock in today’s interest rates.

The Mexican sovereign (UMS) came to market a week after the Fed’s announcement to create a large $3.9 billion 10-year benchmark. The deal was in part to fund a tender offer on the issuer’s outstanding 2015s, 2017s, 2019s and 2020s, which combined are worth about $10 billion. UMS was seeking about $1.5 billion in fresh money and wanted to create a 2023 benchmark of between $3 billion and $4 billion, so the tender offer was calibrated to attract about $2 billion of demand from the holders of the shorter-term paper. The tender and the 2023 transactions were conducted consecutively and had a fixed deadline within 24 hours.

Mexico paid a new-issue premium of between 15bp and 20bp, but the sovereign was keen to create a bigger benchmark, extend its sovereign maturity profile and lower the overall financing cost. Alejandro Díaz de León Carrilo, deputy undersecretary for public credit, says the sovereign had been observing the market and decided conditions created the opportunity to do a "large and meaningful" transaction that had been planned for months. He says: "There had been a lot of anxiety and volatility in the last few months and there was a lot of expectation about the Fed decision. Our view was that, given the tightening of the financial conditions that had already taken place in the US in a short space of time, we expected that [the Fed] would provide some support for fixed income. They did even more than we expected, and this confirmed that the transaction was well suited to today’s environment."

Liability management became a strong theme. As well as driving a portion of UMS’s transaction, as Euromoney went to press Barbados was planning to issue a new $250 billion, 12-year bond to fund a tender offer for its 7.25% 2021s and 7% 2020s. Latin American corporates are also keen to rework their outstanding debt. Arcos Dorados sold $375 million in 10-year notes, in part to refinance shorter and more expensive paper.

The deal had an unusual structure: rather than issue a tender, the company opted for an exchange offer because it didn’t want to exacerbate recent valuation losses on its Venezuelan and Argentine operations by recognising an accounting loss (of about $24 million) from re-financing its in-the-money bonds. By opting for an exchange structure the company is able to amortize this premium paid to current bondholders. However, to be able to create pricing tension in the exchange offer – which is typically harder to achieve than in a tender process – the company ran a tender offer consecutively to generate transparency on the market valuation. To incentivize the exchange offer, the company paid a one basis point premium for exchange offers.

Mafrig and Embraer are preparing fresh bonds linked to tender offers. On September 25 Cemex sold $1.4 billion in two tranches (five and seven years) that generated over $3 billion in demand. The proceeds will finance a tender for outstanding 2016s.

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