|Oil exposure: A Colombian policeman next to cars, queuing fill their petrol tanks in Cucuta, Colombia|
Colombia’s $1.5 billion 10-year benchmark bond, issued in mid-September, paid investors a big new issue premium and illustrates the new pricing dynamics for Latin American credits.
The sovereign, rated Baa2/BBB/BBB, sold the paper, which pays a 4.5% coupon, at 98.762 to yield 4.653%, or 245 basis points over US treasuries. With its 2024 notes trading at 210bp over treasuries shortly before the transaction, the sale implies a new issue premium of 30bp. That enticement to investors led to a book of around $3.5 billion and enabled the bookrunners, Bank of America Merrill Lynch and Credit Suisse, to launch at the tight end of guidance of 250bp plus or minus 5bp and inside initial price thoughts of 262.5bp.
International DCM bankers say the new issue premium and wider spreads reflect Colombia’s exposure to oil prices. However, the credit is still seen as one of the best performing in the region, which suggests that this will be a pricing reference for other deals. It is also in line with Peru’s $1.25 billion 12-year bond that surprised investors by coming to the market in the traditionally quiet month of August and offered investors a new issue premium of between 15 and 20bp.
“Colombia was very smart coming when it did,” says Harry Koppel, director at Barclays. “It took advantage of the fact that the Fed didn’t raise rates, and although it needed to start with a new issue premium of around 30bp to generate demand it still makes sense when you see that AAA credits are paying high single-digit new issue premia for supposedly risk-free paper.”
Koppel says the trend for differentiation among Latin American credit is deepening. “Investors are not just differentiating in terms of which countries are commodity exporters but they are looking specifically at the nature of those underlying commodities,” he says. “For example, Chile, with its copper exposure, is looked at more favourably than energy commodities. Meanwhile, Mexico’s long-standing programme of hedging oil is really coming to the fore and appealing to investors.”
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Investors are particularly interested by Mexican credits, says Koppel, and the bank has mandates to manage international bond transactions for Mexican issuers Terrafina (Reit) and Controladora Mabe (white goods manufacturer). However, Mexican credits have also been subjected to volatility with both these deals being postponed as Euromoney went to press.
Lisandro Miguens, head of LatAm DCM at JPMorgan, says Latin American credits’ linkages to commodities have led to a repricing. He also says that technical factors, which had until recently protected the region from greater volatility have ceased to be a support, and will subdue aggregate demand for new issuance for the rest of this year and next year, as well as making investors more selective in the type of credits they buy.
“The strong technical position of Latin America’s international DCM was the silver lining,” says Miguens. “Until August the asset class was enjoying inflows, had large amortization and coupon payments relative to new issues, and investors had a large proportion of their portfolio in cash – these technical factors have now turned around and that’s why we are seeing widening spreads.”
Meanwhile, from the issuers’ point of view the euro market will continue to be attractive. The volume of euro-denominated deals from Latin American issuers has grown this year and the continued strengthening of the dollar is a factor.
“The weakness of Latin American currencies against the dollar has increased the proportion of outstanding debt in external currencies,” says Barclays. “This dynamic will increase the appeal of euro-denominated deals because it diversifies currency exposure and the ECB is still loosening monetary policy, rather than looking to tighten as is the case in the US. In addition, new issue premia are also lower.”
Miguens says there will still be demand for high-quality credits, and with countries around the region facing higher fiscal and capital account deficits, coming sovereign issuance should be strong. He also says that there will be interest in high-yielding names, and with Argentina potentially re-entering the international markets after this year’s election, that country could be one of the highlights of the coming 12 months.
However, bankers estimate that this year’s total issuance volume will be $90 billion to $100 billion and expect similar levels in 2016. This year will be the first time that total volumes have fallen since a long bull run that started in 2008, with issuance growing from $70 billion to more than double that last year.
High-grade corporates will also be active, but to a much lesser extent than in recent years and Joe Bormann, corporate credit analyst at Fitch Ratings, says issuance will be depressed.
In 2014 non-financial corporates in Latin America raised $77 billion of debt in the international capital markets compared to $34 billion this year. Much of the slump in issuance is from energy firms: last year they accounted for $34 billion in Latin America, compared to just $14 billion this year.
“PDVSA and Petrobras have effectively been shut out of the market this year, as have single-B companies,” says Bormann, who argues that the Fed’s postponement in raising US interest rates won’t have any impact on the level of new bond issuance from Latin America. “Investors have already voted with their feet, and money, and a lot of the cross over investors have jumped back out of Latin America.”