Petrobras’s $6.75 billion bond deal in May has set the ball running for a rush of Brazilian issuers in the international debt markets, according to DCM bankers. With Argentinean activity already strong following the huge sovereign bond issue in April, bankers are confident that these two markets will drive a recovery in the region’s deal volumes this year.
Brazil’s heavily indebted quasi-sovereign oil company sold an international deal with two tranches: one $5 billion five-year and a $1.75 billion 10-year bond. The order book grew to a combined value of $20 billion, with the company using most of the funds to buy back up to $3.5 billion in bonds that mature up to 2019 to lengthen the average tenor of its corporate debt and lessen its exposure to short-term financing volatility.
The company had to pay up for the debt, with the five-year yielding 8.625%, higher than the 8.45% yield it attained for the century bond it sold in 2015, and the 10-year yielding 9.0%.
Leandro Miranda, head of investment baking at Bradesco BBI, says of the Petrobras deal: “It creates a path for other Brazilian corporates to tap the market and I believe that in the very near future we will see some strong names.”
Baruc Saez, Itaú BBA
Miranda thinks the high price Petrobras paid will not be an obstacle for corporates, as it will not be used as a benchmark.
“You have to consider the CDS, which has recently decreased dramatically in comparison to Mexico’s,” he says. “We look to the Republic’s ceiling and the CDS for the pricing reference for the corporates and often [still] the local market is cheaper than the international, but if the company [in question] is an exporter and doesn’t need to bring the proceeds into Brazil then an international transaction makes sense.
"I believe the market is still selective but we should start to see the strong names in the market in the near future. Argentina and Petrobras have reopened the market because there was very strong demand for those issuers.”
Argentina’s $16.5 billion multi-tranche bond opened the door for the provinces, with Neuquen (raising a book of $1.5 billion for a $235 million deal) and Mendoza ($1.8 billion in orders for a $500 million bond) being followed into the international market by the province of Chubut and the city of Buenos Aires at the end of May. The provinces of Cordoba and Salta are reported to be next in line and have already appointed bookrunners (JPMorgan and Morgan Stanley for Cordoba and Banco Macro so far for Salta).
Baruc Saez, head of international fixed income at Itaú BBA, is confident that there is enough investor demand to enable the Argentine credit cycle to evolve to all types of credits by the end of the year. “I think we will start to see the [Argentine] corporates come to the international market in June and July with the blue-chip names,” he says. “It may slow down in August [due to the holidays in the US] and then pick up again in September and October with the smaller issue size deals and the debut issuers coming later, as is normal in the credit cycle, but with the whole cycle playing out this year.”
Saez says the strong names, which are capped by the sovereign rating, should be able to price close to its benchmark. “Demand is there,” he says. “Argentina is still priced more attractively than a lot of other [LatAm] names and is still around 150 basis points wider than Brazil. That’s very good for investors.”
Itaú led (along with Bank of America Merrill Lynch) the $150 million tap of Banco Hipotecario’s 2020s in May, and Saez says the strategy the sovereign used in its transaction has been a big help for those following it to the market. Many bankers have praised the sovereign’s decision to leave space for the provinces and corporates by raising ‘only’ $16.5 billion from the $70 billion book. It also priced the deal with an eye towards strong secondary performance, which meant investors made a quick profit and remain well disposed to fresh Argentine debt.“I don’t see companies or their banks trying to squeeze the market, I rather see a disciplined approach to tapping the market,” says Baruc.
There is also expected to be limited supply in the next 12 months which will also help with liquidity. “A lot of the issuance right now is to refinance or other very specific needs,” says Baruc. “We don’t see companies with capex needs – that won’t start coming to market for six to 12 months or so and the issuers that have come are being disciplined in just raising the amount of funds they need and not upsizing for the sake of it. That should keep investor liquidity strong.”
The sovereign has also said it will not return to the market for at least 12 months, which is helping demand for other Argentine credits. And, with the external market conditions set fair, deal flow is predicted to continue.“China is no longer as much of a concern,” says Katia Bouazza, head of Latin America global banking financing at HSBC. “I think the China story is now better understood and has been digested by the market.”
Bankers also report that the uncertainty caused by potential rise in US rates at the Federal Reserve’s June meeting is only a marginal concern. “If US rates rise 25bp, or even 50bp, it’s not much of difference for those looking to issue at yields of 8.5% to 9%,” says one DCM banker. “However, it will have an indirect impact on sentiment for EM more broadly, if EM currencies and commodity prices are falling, but it shouldn’t lead to a shutdown in the market.”