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LatAm Letter: An uneasy balance

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Deals keep getting done, but LatAm bond markets do not feel like a particularly happy place

Recent new issues from across emerging markets are trading heavily in secondary, and many investors tell us they’d quite like to see in the end of the year without the stress of further primary supply.

As one LatAm syndicate banker put it: “I know most deals are trading down, and even if I didn’t, investors are calling me all day to remind me.”

No one is expecting a repeat of 2020’s late-year buying frenzy, with little to suggest PMs have the energy to chase performance. “2021 is dead to me”, one EM portfolio manager told us earlier in the week.

2021 is not, however, dead to Latin American issuers. In fact, the four who came to market this week will probably feel pretty happy with themselves.

Colombian natural gas producer Canacol cut its funding costs significantly versus its inaugural deal in 2018. JBS and Banorte, regular issuers, notched their record low coupons. ISA, the power transmission-focussed conglomerate that Ecopetrol recently acquired from the Colombian government, brought a debut that landed a long way inside the sovereign that owned it until earlier this year.

Are investors all bark and no bite? Why are they, in the words of one US fund manager, “throwing their money away” into new issues that have been buckling under the pressure of Treasury volatility and immediately losing value?

Some reckon there was some precautionary cash raised on the buyside during the October wave of volatility and that this needs to be put to use, while other EM funds may have been hastily selling their China property exposure and deploying the money in other EM regions.

Tell me a story

Latin America is no safe haven, but this week’s issuers, at least, had decent stories to tell. Canacol stands out as a pure natural gas play, as its comps are junior oil companies, and it is a far stronger credit than it was on debut three years ago. ISA was, at least, something new.

Banorte is a familiar face, so did not exactly need to tell a story to sell its latest capital trade. Yet some investors suddenly found a reason to sound excited when faced with the prospect of a yield above 6% for a top bank that tends to call its AT1s.

More important, for one investor at least, was that Banorte is not Brazilian. Nor Chilean, nor Colombian. It’s Mexico’s fourth largest bank, and election season in Mexico is not due for a couple of years, unlike in those other LatAm jurisdictions (Boric vs Kast is the first fight on the bill, this Sunday in Chile).

This is enough for some investors to consider Mexico as something approaching flavour of the month — especially as in Brazil, the only LatAm market that surpasses it in size, election worries are already at the top of investors’ minds over 10 months before the vote.

And then there’s JBS, the Brazilian meatpacker that also has enjoyed great success in bond markets thanks to being, well, not that Brazilian. It is now the world’s largest food company, and its two tranches on Wednesday — including one from US subsidiary JBS USA — offered little to no concession as the company jumped on the momentum created by impressive Q3 numbers and a second upgrade to IG.

To further underscore that JBS is a different animal, the bonds even had the audacity to trade up on the break.

JBS aside, the primary market churning out deals despite weak follow-on performance makes for a rather reluctant compromise, and it doesn’t feel particularly sustainable. Consensus is that there’ll be little more than a trickle of new LatAm deals before the end of the year (this trickle is of course rumoured to have a Mexican flavour). Thanksgiving is of course an ideal excuse for a hiatus.

The looming question is how long this uneasy balance will last before we finally shut up shop for the year.

If dollar markets do finally take a proper break, we should at least have Uruguay to keep us entertained. Having carried out investor meetings with Japanese buyers in September, the sovereign officially mandated Daiwa and Nomura for a potential Samurai trade that should come in the early part of December. It would be Uruguay’s first since 2011, when it was still doing JBIC-guaranteed deals.

Have a great weekend, and do get in touch for a free trial to access all of GlobalCapital.

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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