LatAm bond markets: Peru – Ready for a big leap forward

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By:
Rob Dwyer
Published on:

Peru’s economy has been averaging more than 5% growth a year for the last 10 years but that growth has not, as yet, been matched by corresponding growth in the volume of bonds issued in its local debt capital markets.

However, banks say that they expect plenty of growth the in the market in the coming five years, from an increase in the number of medium to large companies (with the scale to issue bonds) as well as from steady issuance from infrastructure related concessions. Also, recent FX volatility has caused losses from some Peruvian companies that have been issuing US dollar-denominated debt and there is expected to be a renewed focus on Nuevo Sol-denominated, local market issuance from Peru’s larger companies this year.

Issuance by currency  
Issuance by currency
 Source: Bolsa de Valores de Lima

In 2014 primary issuance in Peru reached $1.17 billion from 30 transactions. This volume was a big drop from 2013’s $1.75 billion and the $1.66 billion in 2012. However, the headline numbers are a misrepresentation: last year Rutas de Lima, a concession backed by Brazilian company Odebrecht, issued $520 million-equivalent. Alongside other banks such as Credicorp Capital and BBVA, Goldman Sachs advised the Peruvian-based issuer that there would be international appetite for Nuevo Sol-denominated debt and so an international 144A/Reg S structure was used to facilitate an international book but the deal coincided with a spike in emerging market currency volatility and in the end there were zero international orders. With the transaction being 100% placed in the local market it was effectively a (very large) local deal, and had it counted in the overall local market volumes would have made 2014 a typical year of issuance.

The spike in volatility also hit some Peruvian companies. Alicorp issued a NS500 million ($162 million) transaction, which was, in part, conducted to buy back $87.76 million of its $450 million international transaction issued in March 2013. The Peruvian company is not alone in being hurt by dollar exposure as the Nuevo Sol depreciates and bankers expect local companies to refocus on the local markets. “I think this year and next year we are going to see more Peruvian corporations look to the local capital markets for the larger deals because of the increase in FX volatility,” says Rodrigo Mejía, director of debt and equity capital markets at Credicorp Capital in Peru.

I think this year and next year we are going to see more Peruvian corporations look to the local capital markets for the larger deals because of the increase in FX volatility

Rodrigo Mejía, Credicorp Capital in Peru

The local market’s buyside is dominated by three very large pension funds and they are sensitive to ratings but the biggest obstacle preventing issuance growth is reportedly the supply side. Last year 30 issuers tapped the market, and most of those conducted very small deals, with only a few larger deals of around $300 million-$350 million. Mejía says there have been very few new issuers in recent years, which has stagnated the market’s growth but he says Credicorp Capital is now working with five new issuers who are likely to come to the market in 2015. He hopes that within five years the number of annual issuers will rise to close to 50, boosting volumes. To date the lack of size of Peruvian companies has restricted new issuers but companies in many sectors, for example construction, have grown rapidly and also importantly increased the level of reporting and transparency needed to access the local markets.

Mejía says these new issuers will be very welcome to the pension funds. “Most of the issuance is dominated by financial institutions or the few large energy companies and so the institutional investors are always very receptive to new companies in new sectors.”

Further reading
LATAM-Bonds-further reading
Building out Latin
America's bond markets

International investors are not present locally beyond sovereign debt and even here they have been lowering their Peruvian exposures. The share of foreign-held Peruvian national debt has fallen from 56% in June 2013 to 44% in February 2015. In January 2015 alone Peru saw outflows of $0.8 billion. These outflows probably reflect local currency weakness and a slowing of GDP growth in Q42014 to a five year low of 1.0%. However, economists expect GDP growth to rebound this year – not least because of a strong flow of infrastructure concessions that will both boost GDP and provide perfect projects for capital markets transactions. According to Mejía, Peru has an infrastructure deficit of $88 billion and the government has been awarding concessions (and will continue to), which will flow into both international and local debt capital market transactions.

“The Lima subway concession has been awarded and at $5 billion will be too big for the local markets and so that will be sold to international investors,” says Mejía, adding that nearly all the infrastructure concessions are being awarded in US dollar-denominated contracts. “However, there are other deals that are perfect for the local markets. Odebrecht has just been awarded an irrigation project which, at between $200 million and $250 million, is perfect for the local markets.”

Mejía notes that the pension funds will not accept the construction risk and so local and international banks will provide interim funding, before the projects are taken out by bond financings. “There is a mechanism that provides government guarantees for these concessions so we expect they will be very popular with investors, as they will pay a premium over sovereign credit for virtually the same risk.”