Latin American DCM – the beeps squeak
Latin America’s markets are as good as anyone can remember. If you’re an issuer, that is. Investors are not celebrating.
There is talk, among seasoned Latin American DCM bankers, that the market has been enjoying the most favourable conditions that anyone can recall. Euromoney asks the opinion of someone who can safely be called a stalwart. He chuckles: “You mean for issuers, right? It’s definitely not for investors…”
The buy side is increasingly complaining that banks are squeezing deals. Time and time again, banks have tightened deals dramatically from early guidance to pricing, by 20 basis points, 30bp, 40bp, or even more.
It’s clear why: the US revision of its GDP data shows growth – and therefore higher interest rates – are a while away (but still much closer than for Europe). When investors had an eye for taper tantrums, issuers had to give a little yield, but with volatility as flat as yield curves, banks can push down the price of new deals, and then push again. Investors are, if anything, more liquid and desperate for yield than ever. Latin American issuers in particular, and most EM markets in general, have seen a quick return of investors, and even greater numbers of high-yield investors are crossing over from developed markets as their traditional supply fails to satiate demand.
With such favourable conditions, issuers should be rushing to market, shouldn’t they? Well, no. Latin American credits have gorged themselves, clocking up consecutive years of record volumes. Now growth is slowing throughout the region, and investment plans in many markets – particularly in Brazil, which is growing slowest and has a political overhang from the presidential elections later this year – have reduced the need for credit.
Companies are cash rich and conservative. Local markets are also desperate for credit and are becoming FX-risk-free competitors to the international market in terms of size, pricing and tenors for all but the largest issuers or the high-yield names. There will continue to be deals, of course, with liability management predicted to be particularly active, but not enough to satisfy the current demand.
While these conditions persist – and a disruption trigger is not quickly identifiable – it will be a sellers’ market and while investors might complain, they will often have little choice but to climb on board deals that they know are not priced accurately to reflect risk. But even investors with the most sophisticated credit analytics ultimately face a binary choice of buy or be out of the market. And is the latter really an option?
However, DCM bankers should keep in mind that this market will end. Bankers, and issuers, need to balance their ability to push prices with a more secular view. The power won’t always be with the issuers – and investors will remember those that gratuitously pushed the prices. In other words, bankers would be well advised not to push investors until their beeps hurt.