Issues such as high valuations, financial regulation and threat of rising interest rates could slow debt issuance
Appetite for new Latin US dollar debt issuers is expected to remain strong for the next couple of years fuelled by a cocktail of low US interest rates and continued strong regional economic growth but overall issuance may fall, according to investors.
Issuers including Paraguay, Bolivia and Honduras have all successfully ridden the wave of demand. Bolivia is reported to be mulling a second issue through its state-owned oil company. Maxim Volkov, head of Latin America debt capital markets at Bank of America Merrill Lynch, said the market would be interested in another issue from Bolivia, describing the country’s numbers as “spectacular,” with reserves of more than 50% to GDP.
Walter Molano, head of research at US-based BCP Securities, said there was even appetite for Ecuador, which defaulted on bonds in 2008. “I think that Ecuador is a pretty decent credit. Yes, it’s dependent on oil but I don’t think it would have a hard time coming to market in the current environment.” However, Volkov warned that the Ecuadorean market was for highly specialist investors and that probably only hedge funds would be interested.
But overall issuance is likely to fall from last year’s peak and any exogenous issues could hit the market hard.
Latin American issuance was strong throughout 2009-11, peaking at $114 billion last year. It has dropped so far this year with some $20 billion in new issuance through March 7 compared to $35 billion through the same period last year.
Volkov said that a substantial drop in issuance from financial institutions in Brazil, which were implementing recent Basel regulations, had hit this year’s numbers. Smaller Brazilian banks, once a large source of issues, had been completely absent from the market. He expected issuance by Brazilian banks to pick up in the second quarter once the rules from the central bank have been digested.
Plenty of issues could upset the apple cart. The market is at a peak and investors are worried by current levels, said Molano, adding that appetite was supported by ultra-low global interest rates.
Volkov pointed out that contrary to the 1990s, sovereigns were not using dollar markets to finance funding but more for liability management. Local debt markets in Brazil, Mexico, Peru, Chile and Colombia are so deep that there is less need for them to resort to dollar markets. The policy of these countries is to come to the dollar market when they want to and they tend just to refresh issues at the 10 and 30 year mark, he said. Peru recently prepaid the Inter-American Development Bank with a bond issue while Brazil’s last dollar issue dates back to September.
There has been a pickup in demand recently for local issues, with Brazilian Cosan issuing R$500 million and Banco Santander Brazil R$750 million, while Mexico’s América Móvil and Bogotá telecom company ETB have also tapped the market. “These are three currencies that have tested the market with great success. But local currency bonds sold to foreign investors remains less than 5% of total issuance,” he noted.