LatAm bond markets: Currencies’ depreciation will test local appetite
International investors are increasingly looking at Latin America’s local currency markets, but foreign exchange volatility makes the buyside wary of losing any potential gains, as has happened with some recent deals. The mixture of currency and credit risk may be too heady a cocktail for some.
Last year investors feasted on Latin American credits in the international markets. A record volume of $185.2 billion was issued, beating the previous year’s record by 9%. The average deal size also set a new record, up 23% to $453 million. That was all seemingly great news for companies, bankers and investors, but there was a sting in the tail: fourth quarter issuance fell to $30.4 billion – the lowest quarterly volume since the second quarter of 2012.
And it has got worse in 2015. By late February, the first quarter (usually the strongest for issuance) had produced just $15.8 billion worth of volume from 12 deals. By comparison, in the first quarter of 2014, 48 issuers raised a total of $43.6 billion, according to Dealogic data.
The main reason for the slowdown is the fallout from the Petrobras saga. The oil company’s inability to publish audited financial results has led to a huge spike in premium for Brazilian credits that, to date, no other company has wanted, or needed, to pay. Other countries have been taking advantage – Mexico’s government opened the markets in January and was followed by quasi-sovereign Pemex.