EMERGING MARKETS: Investor clamor for Latin debt hits risk-reward

Latin debt capital markets are in party mode with huge investor demand. That has caused spreads to tumble by one third and is sucking in a host of lesser-known names, with this week seeing a blow-out Colombian corporate deal and the Bolivian sovereign reiterating its intention to issue.

Spread compression; rising issuance out of the US high-yield market yoked to an appreciating greenback; a faster slowdown in China with its hit on Latin growth; and an oil price shock could all undermine the investor rush.

For now, all is rosy. Rock bottom government bond yields in the US and Europe and worries about the sovereign crisis continue. Decent, if falling, yield pick-up from Latin bonds are coupled with good economic growth prospects and relatively low debt levels.

That has allowed companies such as Transportadora de Gas Internacional (TGI) to carry out a $750m, 10-year, non-call five issue, that priced better than expected on strong demand last week. Pricing talk had been at 6% while the deal prices at 5.7% and traded up aggressively, says Carlyle Peake, emerging markets debt syndicate head at BBVA.

Bolivia reiterated over the course of the Bank meetings that it was keen to launch a $500m international bond issue too. The year has already seen ground-breaking deals out of Peru and Mexico while Peruvian sovereign global depositary notes ($1bn) were very well received as was a local currency offshore Pemex GDN.

Lack of issuance out of other regions of the world has created a vacuum that Latin issuers are only too willing to take advantage of, says Walter Molano, head of research at BCP Securities in Greenwich. Petrobras has aggressively filled the space left by the retreat of European issuers, especially banks, he notes. Alberto Ades, managing director and co-head of GEM fixed-income at Bank of America Merrill Lynch, point out that to access higher yields of 4-5%, you have to look at Latin markets.

A recent drop in Latin supply is also pushing down yields: issuance in Latin debt capital markets has dramatically tailed off in recent weeks, after a record $30bn in new issuance in the first six weeks of the year, Peake notes.

That has led to impressive levels of spread compression. At the start of the year, Mexican baked goods company Grupo Bimbo carried out a 10-year deal at 270 basis points over equivalent US Treasuries. Bonds are now trading in the low 200s, representing a hefty 60-70bp of contraction, notes Peake. “This is absolutely an attractive market for issuers because of historically low yields and spreads,” he says.

Liquidity has come from across the board, especially from US and increasingly from cross-border Latin investors. Both cross-over and dedicated emerging markets investors are present as they look for higher returns.

Demand from European investors has not dropped off either, says Peake. Moreover, Latin investors are ever more active in their own region outside their home market. Chilean, Peruvian, Colombian and Mexican pension funds are starting to take large positions.  In some deals, that demand can represent up to 20% and roadshows across the region are becoming more common.

But after this big run-up in prices, Latin markets are vulnerable to growing competition from other regions. Issuance out of the US high grade is starting to boom and high yield issuance, which competes more directly with Latin America, is likely to follow in short order. US high-yield will benefit from the perception that the US dollar is set to strengthen after a long period of weakness.

Indeed, Ades sees US dollar denominated deals being more popular than local currency, arguing that as the US economy continues to recover, the greenback should appreciate and that Latin currencies have already performed well.

Brazilian local currency deals that are sold cross-border are particularly vulnerable to the sentiment that the greenback will rise as the real remains the most over-valued currency in the region, notes Molano.  “Investors will be slightly reticent to continue to go to emerging markets paper unless they have higher yields or a story that is really interesting,” he says.

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