A recent improvement in bond spreads and very low US Treasury rates are unlikely to be enough to entice more Latin American corporate issuers into the international bond markets and help lift issuance volumes below their lowest levels since 2009.
Excluding sovereign borrowers, just eight issuers from the region have sold $12.9bn of cross-border bonds so far in 2016 — easily the worst showing in seven years. And over half of that volume has come from Mexican state-owned oil producer Pemex.
In the same period last year, 19 corporate borrowers raised $13.9bn, but even that was well below recent numbers. By the start of April every year from 2011 through to 2014, at least 40 Latin American corporates had issued.
In the equivalent period of 2012, 55 borrowers raised $35bn, while in the same period in 2014 42 issuers had raised $36.5bn, according to Dealogic.
“It is not the best time for Latin American corporates to be issuing international bonds,” said Ray Zucaro, chief investment officer at Miami-based RVX Asset Management.
Firstly, Zucaro pointed out, Brazil is the biggest source of issuers. There, the Lava Jato scandal has made any kind of issuance difficult. Despite the sovereign raising $1.5bn of 10 year notes in March after receiving more than $6bn in orders, no other Brazilian issuers have come to market.
Zucaro continued: “If you look to the rest of the region, many issuers are either commodity related, meaning their spreads are very wide, or they are mainly domestic businesses that are having to deal with high currency volatility.”
But although extreme market volatility in the early part of the first quarter made issuance difficult for even the best rated issuers, a strong rally in the last month appears to be making for better conditions.
“We have a 10 year US Treasury at around 1.7%, which is remarkably low, and in terms of spreads we’re at the very least at the tights of the year,” said one head of LatAm bond syndicate in New York. “Supply has been low so technicals are working in the favour of issuers, meaning in theory conditions are supportive. The question is: who is actually going to issue?”
Another syndicate banker pointed out that small high yield names that need financing would struggle to find traction with investors as liquidity in these credits is so poor.
“This leaves the blue chip names in Mexico as the main candidates, and though we’ve seen some issue in euros, overall they are telling me that they are not in need of financing,” he said. “I’m not just worried about the short term, I’m concerned that we will not see many of these names all year.”
There was a ray of light for corporate supply on Thursday morning, when Banco Nacional de Costa Rica announced fixed income investor meetings with Bank of America Merrill Lynch and JP Morgan ahead of a potential $500m senior bond issue.