|Katia Bouazza, |
co-head of global banking,
Latin America at HSBC
“Latin American markets have achieved a remarkable level of sophistication in recent years, both in terms of the volume and complexity of deals,” says Bouazza. For example, “what Argentina achieved showed just how far markets have progressed.”
Argentina returned to global financial markets in April 2016 in style after a 15-year hiatus with a $16.5 billion deal – the largest emerging markets bond deal ever at the time. HSBC, a global coordinator on the trade, was attuned to the evolving backdrop during that period.
A fixture amid the top five in LatAm bonds league tables since 2008, HSBC has played a key role in an overall transformation. In 2001, LatAm bond volumes totalled less than $28 billion, according to Dealogic. By 2017 they hit a record $141 billion.
“When we look at the catalysts that have spun our market into what it is today, China and the rapid growth recorded in Asia is at the centre,” says Bouazza. The growth in capital markets activity reflects that – particularly in commodity-driven countries like Brazil, Chile and Peru.
HSBC has aimed to foment Chinese investments in Brazil, and some of the main Brazilian groups have all exported to China in recent years. State Grid has been a client in Brazil since its first investments in the country, along with State Power Investment Corp, which has acquired a number of Brazilian assets in the power and utilities sector.
A further vote of confidence has been seen in issuers printing 100-year paper. Mexico led the way in 2010 with a $1 billion bond due in 2110 and has since reopened that series to total $2.67 billion. With similar deals in sterling (2014) and euros (2015), it is the only sovereign with century bonds in three currencies.
In June 2017, Argentina priced a $2.75 billion bond due in 2117. Argentina’s pivot following Mauricio Macri’s December 2015 election also led to several bank and corporate deals in dollars and pesos, as investors jumped on new opportunities.
Equities also benefited. In October 2017, Loma Negra, Argentina’s largest cement producer, placed a $1.1 billion IPO with HSBC as a lead bank, the biggest IPO by an Argentine company in more than two decades.
Furthermore, Bouazza highlights that the growth of the structured markets has been very important. “Whether it’s local, cross-border, structured or sustainable bonds, the sophistication of the market is greater,” she says.
Of note, in March 2018, HSBC was sole structuring agent and joint bookrunner on the MXN15.4 billion ($836 million) 20-year securitization of the Mexico Puebla toll-road – a crucial roadway and largest transaction of its type in LatAm.
“Behind the scenes we have a platform of derivatives that allows all this to happen beyond the vanilla flow business.”
This carries into private placements, underpinned by bespoke demand, where issuers take advantage of arbitrage “off the screens” in HKD, EUR, AUD, CHF and Formosa, for example. HSBC brought remarkable debut US dollar Formosa trades into Taiwan for Codelco and CFE in April 2018 and June 2017, respectively.Increased prowess comes with savvy management of outstanding debt, and innovative structures to optimize debt mix and address refinancing risk. In 2012, Colombia and Mexico experimented with shortening the period for bond tenders offers to one day, forming a closer tie to the vehicle funding the offer and hence encouraging tighter new issue pricing. This one-day approach has now become standard for sovereigns, reducing market exposure.
Local but global
Bouazza believes that arguably the “biggest focus for the next five years” will be in turning LatAm local currency into a more global asset class. Chile, Peru and Uruguay have all recently begun to sell Euroclearable local currency bonds as they entice international buyers into their domestic curves.
She says Mexico has historically boasted the highest participation of foreign buyers in its local bond curve, but adds that even smaller economies such as Chile, Peru and Colombia have “active domestic markets and investors with deep pockets”.
“This has been crucial in bringing stability to the region,” says Bouazza. “It provides funding options when cross-border markets are volatile and for smaller companies unable to tap international markets. Additionally, it allows companies to reduce FX exposure by borrowing in their local currency.
“Governments are doing a good job of making their markets more accessible, but there is still a lot of space for growth.”
The trend goes beyond sovereigns: HSBC has worked with the likes of América Móvil in Mexico and EPM in Colombia on peso deals sold abroad. The bank also led the City and Province of Buenos Aires on domestic bond deals that attracted a good deal of foreign interest.
“Today investors are global and sophisticated and look at all currencies as long as there is sufficient liquidity and a good regulatory framework,” says Bouazza.
Furthermore, Bouazza notes that “[HSBC]’s salesforce has taken a leading role in bringing LatAm buyers into international deals, and sometimes they can represent up to 10% of the book.”
This is two to three times the participation of just a few years ago, says Bouazza, and it has become the norm for borrowers to visit Peru, Chile and Colombia on roadshows.
Subtle or flashy, the steps taken by market participants in the region have materially shifted their rank higher amid the global sphere. If Argentina’s comeback provided fresh impetus to LatAm, there still is one gaping hole in the region.
“It is impossible to make any predictions here, but the one thing that could change the landscape in a similar way to Argentina would be if Venezuela were to return from the wilderness,” says Bouazza.