Much has been expected from Latin borrowers raising local currency bonds in the international markets, especially after Colombia and Uruguay have led the way over the last 12 months. But many sovereigns are opting instead to encourage foreign investors into their domestic markets as a means of extending their own local access to intermediate and long dated fixed rate bonds. Danielle Robinson reports.
When Colombia issued its landmark $375m equivalent peso denominated global bond last year, bankers and investors geared up for what they thought would be a budding new issue market for Latin local currency global and Eurobonds.
So far, that has not materialised. Colombia and Uruguay are still the only sovereigns to have offered foreign bond investors exposure to their local currency in the inernational markets.
The market is still growing, but in a different direction than first thought. Brazilian banks continue to offer a smattering of short dated reais denominated Eurobonds. A market for high yielding corporate Eurobonds in local currency is also beginning to sprout (see Eletropaulo story on page 10).
More recently high quality corporates such as GECC and Citigroup have found reverse inquiry for Mexican peso and Brazilian reais deals respectively.
Increasingly, however, Latin American sovereigns are instead encouraging foreign investors into their home markets as a way of developing their own local access to medium and long dated fixed rate bonds.
Mexico has done just that in the past five years, and can now issue fixed rate 20 year bonds in pesos locally, 80% of which are held by international investors.
This year both Peru and Argentina have made efforts to attract foreign investors into their domestic markets and Brazil is slowly but cautiously looking to improve investor access to its own bond market.
The trend is all part of sovereigns' efforts to reduce their dependence on international markets and to increase the component of local currency debt in their total stocks of debt.
Latin American sovereign external bond issuance stands at $14.8bn year to date, compared with $20.4bn for the whole of 2004.
And much of this year's issuance has been pre-funding for the years ahead.
"You have a trend in these countries of improving credit worthiness," says Joyce Chang, global head of emerging markets, research, foreign exchange and commodities at JP Morgan. "They are issuing less and buying back more external debt and increasing issuance in their own markets. As a result you see a gravitation to the higher yielding local markets by investors."
Roach motel trades?
Even so, bankers argue that for places like Brazil, Colombia and Argentina, the global or Eurobond Latin currency product could still play a role in their funding strategies.
"These deals are stepping stones for those countries that haven't created conditions to have a fully functional market that is able to attract the full swath of international investors," says Chris Gilfond, co-head of Latin American debt capital markets at Citigroup in New York.
Bankers still hold out hopes of a jumbo reais global bond by Brazil, despite claims from the sovereign's borrowing team that it is not a priority.
Whatever comes next, though, will have to be liquid. "Some investors call them the roach motel trade," said one syndicate head of Latin American local currency Eurobonds. "You get in there, get stuck and can't get out again."
Colombia's peso global was initially met with an enormous amount of enthusiasm, enabling the sovereign to price it at 30bp inside its domestic TES curve. Now it trades flat to wide of TES comparables, largely because of its illiquidity. "People now realise a peso global has way less liquidity than a dollar or euro global," said one banker in London.
Maturities of deals this year have all been short. "We've seen some issuers try to push out maturities, but then investors push back because liquidity is a concern," says Cynthia Powell, head of emerging market debt syndicate at JP Morgan.
One problem is that by doing a local currency deal outside of home markets, secondary market trading is devoid of the buy-and-hold domestic investors.
The GECC and Citigroup deals show there are still a healthy amount of investors who do not want to go directly to Latin American domestic markets for exposure to their currencies.
The dedicated investors for emerging market bonds, however, are now allocating enough of their portfolios to local markets to warrant tackling the various barriers of entry and setting up accounts in the countries themselves.
Their move is in response to a declining amount of external bond issues by Latin sovereigns and the subsequent squeeze on spreads in the global and Eurobond securities. Some local instruments have vastly outperformed external bonds this year.
Brazilian local instruments had year to date returns of 26% by mid-August compared with a 4.3% return on its external debt. Mexico's returns were 12.1% locally compared with 4.4% externally.
According to JP Morgan, in mid-August, international investors were still at or close to their all time high overweight positions in Latin American local markets, with Brazil, Colombia, Argentina, Mexico and Chile being the most popular.
Historically, international investors have viewed allocations to local markets as more tactical than strategic. But JP Morgan has observed a switch occurring — one reason why it has launched the first major local emerging market index.
"With the launch of the GBI-EM index, we believe that many more real money investors will get more involved because they now have a real benchmark," says William Oswald, global head of emerging market quantitative strategy at JP Morgan in London.