Last year 75% of Colombian local debt issuance was rated AAA and the rest was AA+. The last time a lower-rated credit managed to access the local market was in November 2011, when Banco Colpatria came with a modest $80,000-equivalent 10-year deal.
“It’s almost impossible to issue a bond in the local markets unless you are rated AA+ or above,” says Alejandro Piedrahíta, managing director of Capital Markets at Banca de Inversión Bancolombia. “This is a major issue because the number of [eligible] issuers is so few, so even though the market has liquidity, tenors and size, the overall volumes are limited by this challenge of the ratings.”
In 2014 total issuance in the Colombian market was $4.3 billion-equivalent, virtually identical to 2013. The market has duration (nearly 60% of deals have maturities longer than 10 years and deals of 20 years are available), liquidity (most of the deals were more than two-times oversubscribed) and size (Grupo Argos sold COP1 trillion in September 2014, which was then equivalent to $532 million). But the pension-dominated investor base remains exceptionally ratings-sensitive – only about half of total issuance was from companies in the real economy (with the other half being financial institutions).
“A double-A rated company is a really good company actually but because of buyside issues it is almost impossible to tackle the market with the rating,” says Piedrahita.
|Evolution of the fixed income market in Colombia|
By sector, tenor and rating
|Source: BVC, Grupo Bancolombia|
One potential solution would be to try to introduce international investors to create demand for lower-rated corporate paper. However, the regulators appear to be sending mixed signals. “The regulators did a push about a year and a half ago to open up to foreigners but they haven’t finished the process,” says one portfolio manager who covers local currency fixed income.
“Opening accounts is complicated and there are other regulatory issues. It will cost them in the end – they want the foreign money but they don’t want it. They are in the middle of the road and it’s a little weird because it appears like they haven’t decided what they are going to do. They should open up but they are very worried about currency appreciation. But liquidity has picked up – the increased weightings in the JPMorgan index help improved liquidity – but it’s definitely not at the same level as Brazil or Mexico.”
It’s almost impossible to issue a bond in the local markets unless you are rated AA+ or above, This is a major issue because the number of [eligible] issuers is so few, so even though the market has liquidity, tenors and size, the overall volumes are limited by this challenge of the ratings
JPMorgan reported that Colombia attracted $2.8 billion in the seven weeks following its decision to raise the weighting of the country’s bonds in its GBI-EM Global Diversified and GBI-EM Global indices, in May 2014. Bankers say the level of capital that flowed into the country to match these benchmarks may have surprised the authorities and led to unwanted appreciation on the currency. However, with the Colombian peso falling since the end of last year there is the renewed possibility that the initiative to open to foreign investors will advance.
|Building out Latin America's bond markets|
Piedrahita would like to see the Colombian market open up to institutional investors in the other Mercado Integrado Latinoamericano (MILA) countries of Mexico, Chile and Peru as a means to build appetite for lower rated corporates. “The main problem is taxation,” he says. “We have double-A rated companies that would like to source money from Peru or Chile but the taxation and the FX regulation is not very efficient and so for the moment it is really expensive to sell into the markets of MILA. The other potential strategy is a 144a Reg S transaction but that’s a dollar-denominated market so it’s hard for companies without US revenues because they need to add a cross-currency swap into the transaction.” Piedrahita says he knows that the securities commission and the government are aware of the issues that are preventing Colombian companies that are rated below AA+ tapping international investors but while he thinks that they are sympathetic to the aims of the market, any potential legislative changes are a low priority. Fortunately there is a liquid loan and syndicated loan market that offers these companies competitive pricing and tenors of up to 10 years.
The buyside creates problems in the secondary markets as well as for primary issuance. They are buy-and-hold investors by nature and so trading volumes are light. Banks aren’t making a fortune on either activity – fees for new bonds range between 10bp and 50bp, not as thin as Chile perhaps but not enough to warrant competition from the large international banks. Regional banks such as BTG Pactual and Banco de Crédito del Peru are present but the locals don’t foresee the US or European investment banks entering the market to compete on local transactions.