The repricing of Latin American credit risk and market volatility have reduced primary issuance volumes and prevented all but the strongest credits from raising money in the international markets in 2016.
Only $14.7 billion of new debt has been issued in the year to February 22, Dealogic data shows, which is 43.2% lower than in 2015 and 54.1% lower than in 2014.
Mexico added a euro-denominated deal in February and Pemex issued a three-tranche deal with a combined $5 billion in new bonds on the back of large demand.
One notable exception was the high-yield credit of the Dominican Republic, which was able to raise $1.5 billion at the end of January in a deal that showed the investor base for the sovereign that has an atypical risk profile in the region: the country is a net oil importer and its economy is more aligned to the US than other countries (with the exception of Mexico).
The sovereign managed to tighten pricing on the 10-year bond from initial price thoughts around 7% to price at par on a 6.875% coupon.
“Right now from an issuer’s perspective everything feels high yield – even investment-grade issuers are looking at prices that are higher than those they are accustomed to,” says Chris Gilfond head of debt and equity capital markets origination for Latin America at Citi.
“In some cases you have seen issuers stand down from deals, hoping that the market will improve and this explains a large part in the drop in volumes last year. It was reduced supply, based on a deteriorating valuation environment.
“However, I think now the low volumes are more a function of what people will buy. The market has become bifurcated between those that have access and those that don’t and so we have seen some sovereigns access but we will struggle to see any corporates beyond those that are the most highly-rated.
“So I think you can split the [LatAm DCM] world into sovereigns and parastatals and everyone else.”
|Rodrigo Gonzalez, Standard|
Chartered: Issuers don't
want to validate spreads
“It’s not just Latin America or emerging markets, investors are becoming a lot more credit-centric,” he says. “Many issuers don’t want to validate today’s spreads unless they really need to – you might see some liability management-related transactions but even then, in times of turmoil, cash is king and so companies might want to keep cash liquidity.”
Good bad news
While the lack of deal-flow is bad news for bankers, some investors see it as a positive part of the market rebalancing.
“Lack of primary issuance is a big benefit from a technical perspective – it’s a great modulator,” says Gunter Heiland, co-head of the emerging markets debt group at Gramercy.
“When you have a year of negative returns investors pull back, and issuance drops, and then the following year you’re set up for better returns because supply dries up. I think it’s very good that issuance has slowed down – especially in corporates, although we are starting to see the larger deals such as Mexico’s euro-denominated transaction.”
Mexico’s euro-denominated deal continues a trend this year of a great European focus: 29.5% of international deals from Latin America have been sold in Europe compared to 0% in the first two months of 2015 and 16.8% in 2014.
The European market’s continuing monetary stimulus has tightened rates and lowered volatility and high quality issuers are finding the market a cost-effective alternative to the traditional dollar market – even with the Mexican deal offering a substantial 20bp new issue premium on both the six-year and 15-year tranches.
“The Pemex dollar bond has a very nice turn-out. It had to offer a larger premium than it is used to but that is because of its sector and the market conditions. These bonds are also very liquid which brings investors to the book – although I don’t think there will be a lot of supply available,” says Gonzalez.
“Given the market turmoil, diversification will be key. Many of our international clients are looking beyond the dollar market to where there is less volatility and pricing advantages. The euro, yen and even onshore renminbi market will be interesting and with EM rates where they are I think investors in those markets will be willing to buy strong credits. The theme for investors and issuers will be the same: greater diversification.”