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Emerging MarketsEM LatAm

LatAm Letter: The new normal

Sao Paulo, Brazil, storm, lightning, LatAm, 575

Emerging market bonds were a cheerier place to inhabit this week. Just about.

Relative stability at the long end of the Treasury yield curve and a slightly weaker dollar — not to mention broadly cheap valuations in EM compared with US high yield — made for a constructive tone. In the words of one LatAm syndicate banker, the market had been “looking for an excuse to rally”.

Alas, Jair Bolsonaro did not have such a fun time. Not only did an inquiry find that the Brazilian president should be charged with “crimes against humanity” for his handling of the coronavirus pandemic, but “no one is believing Bolsonaro’s attempts to reassure the market”, Jim Barrineau at Schroders told us.

Bolsonaro — lest we forget, one time flavour of the month for EM investors — has contradicted his finance minister Paulo Guedes, who said Bolsonaro’s ambitious welfare spending plans would require waiving Brazil’s spending cap.

Markets are spooked, and it’s not hard to see why. Election years are rarely good for fiscal accounts in Latin America, and Bolsonaro seems willing to stop at very little to get himself re-elected in 2022. If even the constitutional spending cap is not sacred, whatever is?

Brazil’s deteriorating fiscal trajectory was an issue even before Covid-19, and though the debt-to-GDP ratio is likely to decline this year, William Jackson at Capital Economics reckons it is going to rise significantly next year.

“There’s little appetite for the long term fiscal squeeze needed to stabilise the public finances,” wrote Jackson this week.

All this means Brazilian issuers have not been able to capitalise on this week’s improved fundraising conditions, say bankers. It may be several weeks before new issue markets for them return to normal. Rio Smart Lighting’s proposed real-denominated sustainable bond (double A rated, thanks to DFC) could be a useful one to follow.

Uneasy equilibrium

Just how much better are conditions? Undoubtedly, there was a shift — for the better — in deal execution dynamics between Falabella’s deal on October 12 and the trio of LatAm new issues that landed on October 14. These deals performed well, so the improvement continued into this week.

CEEMEA, where primary markets have been rather more bustling than in Latin America in recent weeks, enjoyed a notable pick-up in aftermarket performance on this week’s deals too. We therefore went to EM syndicate desks and fund managers on both sides of the Atlantic to find out where they thought the market was.

The conclusion? Broadly, EM has found an equilibrium whereby execution is just about easy enough for issuers to navigate, but new issue premia are far higher than the negligible — or even negative — concessions that many issuers had been paying for large parts of the past year. And there is little to suggest such heady days are returning soon. The full read here.

Chile: Keep ‘em coming

Codelco, never one to leave anything it doesn’t have to on the table, jumped on this momentum on Tuesday with a $780m 30 year tap that offered 7bp of pick-up to secondaries.

The fact the Chilean miner was tapping its 2050s sold in 2019, rather than its 2051s printed last December, showed just how much markets have changed. Those 2051s are trading at around 90 cents on the dollar — a discount that prohibits Codelco tapping them.

Of course, Chilean borrowers are battling more than external headwinds. Indeed, it’s the stressed condition of their domestic funding markets that has forced a slew of Chilean borrowers to put up with trickier international markets in recent weeks. Santander Chile on Thursday became the latest international issuer from the country.

The bank did not waste its day in the spotlight. First up, a $500m 10 year senior unsecured trade. Next, it issued Chile’s first ever additional tier one capital bond — though all the $700m deal went to the bank’s parent, Grupo Santander.

The capital trade provides a buffer to the volatility facing Chilean issuers right now, whether from pension withdrawals, coming elections or the constitutional convention.

Still, Codelco’s 7bp was probably the lowest new issue concession in EM this week (sorry, CAF, you’re an SSA now, not EM — no matter how many LatAm bankers keep watching you longingly).

While we’re here, CAF reckoned it paid just 2bp of NIC for a $1bn three deal on Tuesday on its first dollar benchmark for a year. Manuel Valdez, CAF’s head of DCM and derivatives, told us that a large euro trade in January had left the multilateral lender in no rush to do another benchmark. But ultimately it “decided to come back this week, as we saw there was little competing supply and conditions were very favourable”, Valdez said.

As issuance conditions get trickier, Emerging Markets Global Advisory reckons there’s more space in Latin America for funding from development finance institutions. GlobalCapital spoke to EMGA’s Jeremy Dobson and Sajeev Chakkalakal about their hopes for DFI funding, shortly after they advised on a $300m senior debt facility provided by the DFC to Brazil’s BTG Pactual.

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Saludos, Olly

This is GlobalCapital's LatAm Letter, written weekly by Latin America reporter Oliver West. If you enjoy it, sign up for free in a matter of seconds here and feel free to pass it on to colleagues and contacts.

The best of this week’s LatAm bond coverage:

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