Latin America’s fixed income markets bloom

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Activity picks up across sub-asset classes; volumes set to rise despite volatility in H2.

by Rob Dwyer

Latin America’s international fixed income markets have come back to life, with increased volumes across types of issuer, countries, products and currencies. In May the rate of issuance spiked following a relatively dormant first four months and arguably peaked with the world’s largest ever convertible bond: a €3 billion transaction for América Móvil.

Lisandro Miguens-160x186
 Technicals worked in the region’s favour, with March seeing amortization and coupon payments of $13 billion and new issuance of just $3 billion

Lisandro Miguens,
JPMorgan

On May 7, Votorantim Cimentos finally reopened the international market for Brazilian issuers with a €500 million, 3.5% seven-year bond. The deal, led by Citi, Deutsche and HSBC, was priced at 98.542 to yield 3.737% – in line with price guidance. Hopes that the deal would open the door for other issuers were confirmed when Itaú followed closely with the region’s first dollar-denominated transaction: a three-year deal that pays a coupon of 2.85% and priced to yield 2.86%. Banco do Brasil, Bank of America Merrill Lynch. Citi, Itaú BBA and Santander led the deal.

There had clearly been an inflection point in investors’ attitude to the region’s credit towards the end of March, bankers report, following the rout to commodity and oil prices in the six preceding months. Recently, inflows to emerging markets and Latin America have resumed – driven by a long-term structural need to allocate to the asset class.

“At the end of last year, we anticipated that in 2015 we would see inflows to the region of between $20 billion and $30 billion – and as of April we had already seen about $16 billion,” says Lisandro Miguens, head of Latin America debt capital markets at JPMorgan in New York. “The technicals also worked in the region’s favour, with March seeing amortization and coupon payments of $13 billion and new issuance of just $3 billion. The volume of issuance in the first quarter was down 35% and corporate issuance was down 80%, which created the technical scarcity value, and with the recovery of the oil price – which is highly correlated to Latin American economies – many investors found themselves underweight and so spreads compressed to the point where investors and issuers have met each other.” 

Miguens says there is also now potential to sell local-currency bonds to international investors, which reinforces the idea that there has been an inflection point, with growth and currency projections showing more upside for EM investors.

However, the revival was not contained to Brazil. The Republic of Chile took advantage of falling European bond yields to sell €950 million of 2030s, which priced with a 1.875% coupon to yield 2.021%, and retapped its 2025s with a very small premium. HSBC, JPMorgan and Santander led the transaction. Chile was joined in sovereigns by Ecuador, which – led by Citi – doubled its 10.5% $750 million 2020 bond with a re-tap. There were also deals in high yield, Swiss-Franc denominated transactions for Banco de Credito e Inversiones and Santander Chile, and even the region’s first EETC (enhanced equipment trust certificate) securitization for LatAm airlines, worth $1 billion and led by Citi, Deutsche and JPMorgan. The innovation continued: as the May deal closed, BRF was marketing a euro-denominated benchmark green bond, led by Bank of America Merrill Lynch, BNP Paribas, Citi, Deutsche, Morgan Stanley and Santander.

Record breaker

The standout transaction was the record-breaking €3 billion convertible transaction for América Móvil. The coupon on the deal, which was increased from $2.25 billion, is zero and the bookrunners took advantage of the low-yield environment in Europe to tempt investors into a deal that is backed with the majority of the issuer’s holdings in Dutch Telecom KPN. At maturity, in 2020, the Mexican company can pay cash or KPN stock. In the case of an equity redemption, the shares would be valued at €4.90 – a 45% premium to KPN’s current value. The total order book was worth €7 billion and there were more than 160 accounts.

“This deal is a great way for América Móvil to raise funding at zero, while maintaining the upside on the stock, the ownership on scheduled dividends and voting rights on KPN,” says Alberto Ardura, head of capital markets and treasury solutions Latin America at Deutsche Bank, which was the sole global coordinator on the transaction.

Ardura says that despite the size of the deal being increased from €2.25 billion to €3 billion, the deal priced on the wide end of its 40% to 45% premium range, while the 0% coupon was set on the low end of the 0% to 0.5% range.

The jump in deal activity is leading to optimism that the second half of the year will see a return to volumes similar to recent years. Miguens predicts $100 billion of issuance in 2015 – down from $140 billion, although he says that increased DCM activity related to M&A could be a “surprise factor” that leads to higher volumes. 

However, he predicts a market of windows as greater volatility – largely driven by illiquidity – will lead to jumps in US Treasuries as has already happened this year. 

“The market will be characterized by short windows, and issuers will need to jump through those,” Miguens says. “Timing those windows will be crucial for execution and the key to that is preparation.”