The Caribbean has provided the international bond markets with $1.3bn of paper over the past year, with Trinidad & Tobago and Barbados capitalising on their investment grade ratings, and Jamaica receiving a vote of confidence from investors despite its economic troubles.
Jamaica will be looking to return to the external bond markets before long, but the recent strong supply from the region will remain an exception to the norm. Euan Hagger reports.
SINCE last September, Caribbean sovereigns have sold a greater volume of international bonds than in the previous 10 years.
In total, Jamaica, Trinidad & Tobago, and Barbados have sold $1.3bn between them over the past 12 months which, although a tiny amount in comparison to the activity of large Latin American neighbours, may prove to be the Caribbean region's most active period in the international bond markets for a while to come.
The revival in emerging markets since last year, hard graft by lead managers, and improving credit profiles in the case of Trinidad & Tobago and Barbados have all been catalysts for the increase in bond supply.
Heavily indebted Jamaica is the odd one out among the three issuers, as its bond issues have been in defiance rather than in celebration of its ratings.
For Trinidad & Tobago and Barbados, however, the award of investment grade ratings over the past 12 months has provided the cue for both issuers to break new ground in the international markets, with Trinidad & Tobago issuing a $250m 20 year bond in June, and Barbados putting 10 year funding in place for the first time, in February.
The deal from Trinidad & Tobago reopened the 20 year sector for Latin American credits, and followed a $230m 10 year issue last September; the first international bond issue from the Caribbean since the Russian crisis.
The 10 year deal, which marked Trinidad & Tobago's return to the international markets after a three year absence, coincided with Standard & Poor's (S&P's) upgrade of the country's foreign currency ratings to BBB-. Moody's followed suit with a Baa3 rating in June.
Barbados, which was returning to the international markets after an absence of six years, raised $100m in the 10 year maturity.
Moody's upgraded Barbados's foreign currency ratings by two notches, from Ba1 to Baa2, to coincide with the issue. S&P assigned initial ratings of A- last December.
"Both issuers took advantage of credit upgrades in a market environment which is improving, but which still places a premium on liquidity," says Paul Tregidgo, head of emerging debt capital markets at CSFB, which lead managed all three deals. "Trinidad & Tobago's success in putting 20 year funding in place was an impressive result for the issuer. Similarly, Barbados sent a strong message to the markets by attracting a good US investor following for 10 year paper."
Barbados's previous deals in the dollar market have been virtual private placements, as they have been only $20m-$30m in size. The $100m deal was therefore an important step forward for the borrower.
"Barbados has accessed a group of investors that it simply did not have before," says Tregidgo, "and there has been a further broadening of the investor base for Trinidad & Tobago due to its move to investment grade."
Sound fiscal and economic management, and diversification of the oil-based economy provided the basis for Trinidad & Tobago's move to investment grade status.
Tourism and the financial sector account for more than 30% of government revenues, whereas oil has declined from 40% of revenues five years ago to nearer 20% today.
The creation of a revenue stabilisation fund to protect fiscal offers during periods of declining oil prices has contributed to the country's improving credit profile. The stabilisation fund, which is due to pass into law for inclusion in next year's budget, saves excess oil revenues above a target price of $16 per barrel.
"It is an important initiative, given that every dollar of oil price represents 1.2% of Trinidad & Tobago's GDP," said Javier Murcio, head of economic research for Latin America at CSFB in New York.
Like Trinidad & Tobago, Barbados's stronger credit profile reflects a track record of sound economic management, along with a gradual diversification of export earnings from commodities to services.
Both issuers were after long-term investment to finance infrastructure development.
Jamaica's return to the international markets was impressive for the simple reason that investors were being asked to buy paper from a country that has been piling up public sector debt in huge quantities due to the government's bailout of the financial sector over the past four years.
With public sector debt reaching 144% of GDP at the end of 1999/2000 fiscal year according to Bank of Jamaica figures, the country's ability to tap the international bond markets has been uncertain.
An attempt to issue a dollar denominated bond in July 1999, had to be aborted after investors took fright.
But this year Jamaica has tapped the international markets twice, as a degree of optimism has returned over the country's ability to avoid a restructuring of its debt.
In February, Jamaica issued the first euro denominated bond from a Caribbean sovereign, selling Eu200m of three year bonds via Deutsche Bank.
"The deal generated good demand which allowed us to reopen the first Eu100m trade for an additional Eu100m," says Tim Dowling, head of Latin American debt capital markets at Deutsche Bank. Issuing in the international markets is of obvious benefit for Jamaica, given the stress which the public sector debt burden is placing on the local economy. Exploring a new investor base in order to refinance domestic debt and reduce the pressure on local markets turned out to be a rewarding experience.
And there was more good news last month, when the sovereign returned to the dollar market for the first time in more than two years with a $225m seven year issue lead managed by Bear Stearns. The deal was priced at a discount with a 12-3/4% coupon to yield 13.125%. "This was an important deal for Jamaica, and as with the issue in euros, its success represented a vote of confidence in the Jamaican credit," says Jorge Cantonnet, head of emerging debt capital markets at Bear Stearns. "There was sufficient demand to increase the deal from $200m. Pricing was inside the Argentina 2009s, which were trading at 13.45%, and 50bp-60bp back from the Argentina 2006s. The Brazil 2009s were trading at 12.70%. Distribution was 70% to US institutional investors, with the remainder going to Latin American and European accounts."
As with the issues from Trinidad & Tobago and Barbados, the Jamaican deals benefited from the return to stronger performance in emerging market bonds, albeit only after the worst of the pessimism surrounding the restructuring of Jamaica's financial sector had subsided.
In the case of the offering in euros, strong supply in the sector since last year from major Latin American issuers - in particular Argentina - prepared the way for acceptance of the credit.
"Institutional participation in Europe has been as expected, but the extent to which European retail participation in emerging markets issues has grown since last year has surprised everybody," says Dowling at Deutsche Bank, "and that drove Argentina's ability to tap the market so actively last year. In turn, broad acceptance of Brazil and Argentina by investors has created the opportunity for other emerging market sovereigns such as Jamaica."
The Jamaican deal offered investors a 10% coupon, which was a healthy starting point for the deal.
"There is very little available in the three year maturity with a 10% coupon, so the deal had strong appeal," says Stuart Young, head of emerging markets syndicate at Deutsche Bank in London.
On the initial Eu100m trade, 60% of the paper went into Germany, 15% into Switzerland, 12% into the UK and 13% into Italy and France. With the reopening, 40% of the paper was sold to Germany, 20% to the UK, 20% to offshore accounts and 20% to Italy, Luxembourg and Austria.
In the dollar sector, demand for Caribbean paper has been boosted as Brazilian, Argentinian and Mexican spreads have begun to look fairly priced and investors have turned to diversification plays.
"The market perceives value in diversifying into new sovereign names as the larger and more liquid issues have shown strong performance and are perceived to be moving toward fair value this year," says Dowling at Deutsche Bank. In addition, diversification considerations have resulted in good demand for Caribbean paper from emerging market CBOs.
For emerging market CBO funds holding large quantities of paper from Mexico, Argentina and Brazil, the Ba3/B ratings of the Jamaican credit have been of particular appeal.
A lack of Latin American corporate bond issuance is another factor that has worked in favour of Caribbean issuers.
"There has been very little corporate issuance from Latin America and that is likely to remain the case until conditions improve in the US high yield market," said Cantonnet at Bear Stearns. "For dedicated emerging market buyers, issuance from smaller sovereigns has helped fill the gap."
But although the market backdrop has generally been helpful for smaller sovereigns, investors have largely been calling the shots.
"Emerging markets have been one of the best performing fixed income asset classes this year and it is only natural that investors are looking to diversification," says Tregidgo. "But one should not underestimate the value which investors are placing on quality and liquidity as they seek to diversify."
Caribbean issuers have therefore had to pay a price for issuing in small size, although Trinidad & Tobago and Barbados have naturally had to concede far less on pricing than Jamaica. However, as one senior capital market director points out, "bringing Jamaica to the international markets is a success, full stop".
But even with their strong credit stories, Trinidad & Tobago and Barbados had to price their deals generously.
Barbados, for example, paid a 8.75% coupon on its 10 year deal to give a spread of 270bp over Treasuries, which is wide for its ratings.
"Trinidad & Tobago and Barbados are well rated and offer some scarcity value, but these are small island economies and pricing has reflected that," says a banker outside the deal. "If I had been marketing the Barbados deal I would have presented it as 'what a great deal at 270bp over for an A- credit'. But although it looks cheap for the ratings, they got the deal done and an 8.75% coupon does not look terribly bad."
In the case of Trinidad & Tobago, its 20 year deal was priced almost 100bp back from a 10 year issue launched around the same time by similarly rated Uruguay, which suggests it too has had to err on the side of generosity. Uruguay's $300m issue was priced at a spread of 300bp, while the Trinidad & Tobago deal came at a spread of 398bp.
"It looked cheap to other BBB- paper," notes one banker outside the deal, "but $250m was a good size and it was going into investment grade accounts."
Caribbean sovereigns have not been alone in offering investors attractively priced paper. Uruguay's 10 year deal was considered cheap, and Costa Rica followed Trinidad & Tobago into the market with a 20 year issue that was priced 100bp back from its 10 year paper. Secondary market levels for Costa Rica's 10 year paper is flavoured by a strong domestic bid, which makes the 100bp spread differential seem less dramatic, but bankers said the spread differential reflected a healthy liquidity premium.
Although Trinidad & Tobago and Barbados have raised their profile with international investors, both are set to remain sporadic issuers in the external bond markets. But Jamaica has said it will issue up to $350m equivalent internationally in the current fiscal year, which leaves the way open for another bond issue before April 2001. *