Chile opened Latin America’s international DCM market for 2016 on January 12 with a dual-tranche deal denominated in US dollars and euros for a total equivalent of about $2.65 billion. United Mexican States followed the next day with a $2.25 billion deal. However, despite this promising start, the market then promptly shut, with global market volatility forcing those on the sidelines to postpone the start of their year’s fundraising.
Lisandro Miguens, head of Latin America debt capital markets at JPMorgan in New York, says the market is similar to the latter part of 2015, when heightened risk aversion (driven primarily by fears about Greece, China, the Ukraine and US monetary policy), led to a poor September for Latin American issuance. However, as
technicals improved, this poor investor sentiment dissipated quickly and the region enjoyed strong demand in October and November.
“When the spike in risk aversion passed, investors found that they had a large amount of cash that they needed to put to work,” says Miguens. “However, the sovereigns were largely funded for the year and many of the companies that could have taken advantage of the liquidity were not ready to issue. That lack of supply led to a huge secondary market rally, and so the name of the game for 2016 will be for issuers to be ready to take advantage of the shorter windows.”
When the windows do appear, the pricing should be favourable, driven by technical support. JPMorgan estimates that since July of 2015, amortization, coupon payments and tender offers have surpassed new issuance by $35 million, or 50% of total new issuance activity in 2015. Net outflows from emerging markets were $9 billion, but the bulk of that was retail and ETF investments, which is typically local currency.
Primary issuance in 2016 is projected to be close to 2015’s total volume and so this liquidity should produce good pricing dynamics for those that can tap the market. Mexico demonstrated this: its $2.25 billion 10-year bond drew a $6 billion book, enabling its lead banks (Citi, JPMorgan and Morgan Stanley) to tighten from initial price thoughts of 230bp over US Treasuries to price at 210bp over US Treasuries, a new issue premium of roughly 10bp.
Demand is expected to focus on sovereigns and quasi-sovereigns, with investors having heightened sensitivity to credit ratings and individual deal volumes. Some large corporates will be able to satisfy these requirements but volumes in high yield and IPOs are likely to be low. In 2014 there were 30 debut issues from Latin America, which fell to just two in 2015 and this segment is not predicted to return this year.
Chile’s sovereign issuance highlighted the continuing attraction of the euro market for Latin American issuers. The twin-tranche transaction presented the market with a perfect case study of large euro-denominated and dollar-denominated books being constructed at the same time. “There was very little overlap among investors in the two books,” says a banker on the deal. Over 90% of the orders for the euro notes were from pure investment grade investors, with the sovereign benefiting from its OECD membership.
Demand for the €1.2 billion tranche was reported to be almost double that for the dollar-denominated deal and the pricing for the euro notes was also inside that of the dollar paper on a headline basis. The coupon on the euro-denominated tranche was also lower, at 1.75% compared to 3.125%
The euro portion’s secondary market performance was also better: while market volatility in the third week of the year led the dollar-denominated tranche to widen, the euro notes were still trading slightly inside the issue price (as Euromoney went to press).
Max Volkov, Bank of
“The secondary performance of the Chile transaction, in particular, sends a message to many issuers looking at euros that they should consider this currency a major source of fund raising.”
The vast majority of the region’s sovereigns, quasi-sovereigns and national champions are linked to either commodities or metals and mining. International investors are reprising that risk, which will add in some price discovery challenges for future transactions.
However, Miguens says countries in central America and the Caribbean are set to benefit. “Many of the high-yield sovereigns in this region are not commodity-dependent, they are commodity consumers,” he says. “These economies are doing relatively well, are linked to the US and are seeing the value of remittances increase due to the strengthening in the dollar.”
However, while Miguens expects strong investor demand for deals from this region, there will be limited supply so he does not think they will drive increased volumes this year – JPMorgan expects 2016’s total issuance to be flat to 2015.
Another banker agrees that central America and the Caribbean will be attractive to EM investors, almost as a hedge to their exposure to bonds from oil-dependent sovereigns, although he points out that Jamaica and Dominican Republic conducted large liability management-driven trades last year and so supply from two of the region’s largest potential issues is likely to be muted.