Conditions in the international debt capital markets have never been as favourable as now for Latin American issuers, say bankers. The buy side tends to agree, with complaints about pricing becoming more frequent.
Investors cite the recent sovereign trade for Ecuador that generated $5 billion in orders and, led by Citi and Credit Suisse, was able to increase from a target size of $700 million to $2 billion. Leads still managed to price the Caa1/B/B rated deal at par to yield 7.95%, tightening it from early guidance of low 8%, even with the country’s 2008 default still fresh in investors’ minds.
| Companies in Brazil have been very conservative in avoiding refinancing risk due to the World Cup and elections. Now, with low growth and inflation risk, companies are also being very conservative about investment and capex |
Some buyers baulked at the pricing but a banker close to the deal is phlegmatic about the complaints. “Some investors always say that we are pushing the price too far but we only lost about 15% to 20%,” he says. “Investors just need yield and, especially with money pulling out from Russia and some other EMs, there is no juice anywhere else – even in the region [of Latin America].”
The hunt for yield particularly favours high yield paper, says the banker. “Investors can park their money in Mexican sovereign deals for 3% but, if they do, they need to be very well hedged because any change in treasuries will leave you out of position. If you go after bonds with a higher yield base you don’t have to be so perfectly aligned – you have some margin for movement – and plus you are earning that yield.”
Since the recent restatement of US GDP growth, investors are increasingly confident that US treasuries will remain at their low levels for a while yet, and that is driving demand for all types of Latin American credit. Brazil’s Caixa Economica Federal’s 4.25%, $1.3 billion five year bond in May also frustrated investors, with the deal pricing at 265bp over treasuries, 20bp tighter than initial price thoughts. However, the deal was one of the few investment grade transactions from the region despite – or because – of the favourable pricing terms available for new issues.
The lack of supply is exacerbating the strong demand from traditional EM investors, which in turn is being compounded by increasing numbers of US high yield investors crossing over into Latin American deals as they cannot find enough assets to deploy their high liquidity in their traditional markets. Caixa’s deal was reportedly strategic: the bank did not need the proceeds but was creating a yield curve with which to price upcoming tier 1 and tier 2 transactions, as well as to diversify its investor base.
Conservative over risk
Leandro Miranda, managing director and head of fixed income at Bradesco BBI, says investment grade companies are increasingly conservative over FX risk and can also find pricing equal to, or in some cases better than, the international markets.
“Companies in Brazil have been very conservative in avoiding refinancing risk for 2014, due to the World Cup and the elections,” says Miranda. “Now, with low growth and inflation risk, companies are also being very conservative about investment and capex and they have little or no need for fresh capital. If they do want to raise money, the lack of issuance and the high liquidity of Brazil’s institutional investors have caused spreads to tighten quite significantly in the domestic debt capital markets in recent months and the majority of investment grade bonds are being issued onshore in Brazil, as they are in other local markets around the region.”
Miranda says the local markets have deepened, with companies able to raise up to R$3 billion and deal terms have also extended to up to 17 years. For these reasons, access to the international markets should be limited to issuers such as Petrobras, which have very large financing needs, banks seeking to raise Basle III-complaint capital (with structures that are being pioneered in the international markets), or high yield companies that cannot tap the conservative local investors.
A new asset class is developing for offshore high yield private placements of up to $300 million and activity is brisk, as liquidity concerns prohibit high yield transactions under $500 million. This focus on liquidity risk will also drive the last category of international DCM transactions: liability management.
“Investors are very cautious about liquidity and the moment a company can buy a significant part of an outstanding issuance the liquidity will shrink dramatically,” says Miranda. “Investors will therefore be open to changing terms: reducing coupon, extending tenor and changing covenants in order to ensure they will have access to a new potentially larger issuance with more liquidity and remain in the market. Investors will prefer to be in an issue that maybe isn’t as financially attractive because there is no significant new issuance coming to replace it and if they are having deals bought back by an issuer they are not sure they will be able to buy another one.