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Emerging MarketsEM LatAm

LatAm Letter: Unexpected flair

Former Paraguayan goalie Jose Luis Chilavert (R) embraces former Colombian soccer player Carlos Valderrama at the end of his farewell match at Velez Sarsfield stadium in Buenos Aires, November 15, 2004. Chilavert, who captained Paraguay at the last two Wo

It was easy for Paraguay to catch the eye of young fans following 1990s football

No goalkeepers took their teams free kicks in the English second division, for a start.

Yet since it debuted in international bond markets in 2013, Paraguay has hardly made the same kind of splash on the global stage as Jose Luis Chilavert. Apart from one particularly eventful IADB shin-dig in Asunción in 2017, when some bankers were barricaded in their hotels as protestors set fire to parliament, Paraguay has gone about its capital markets business rather quietly — with one modestly-sized new issue per year (except two outings in Covid-hit 2020) and gradual credit improvements, from Ba3/BB-/BB- on debut nine years ago to Ba1/BB/BB+ today.

This probably says more about turmoil and challenges faced by the rest of Latin America over the last decade than Paraguay itself, but by virtue of achieving slow but steady improvements, the landlocked country now clearly stands out in Latin America.

In the words of Mauro Roca at TCW Group in Los Angeles, “alongside Uruguay, Paraguay is one of the two most attractive credit stories in Latin America.”

The country has “improving institutions”, is “strategically close to Brazil”, and “is benefiting from the secular deterioration of Argentina, as it receives more FDI”, Roca told GlobalCapital.

Add in some helpful technical factors — a smallish $500m deal that is nonetheless index-eligible — and Paraguay sure did stand out on its bond market return on Thursday. If watching clips of the 1998 FIFA World Cup in France takes you to another age, wait until you hear about the new issue concession that Paraguay paid. A remarkably small pick-up to the curve of just 0bp-5bp feels like it comes from a previous vintage of LatAm dollar deals.

Not only is it a far smaller new issue premium than what Paraguay’s investment grade brethren Panama and Mexico paid earlier this month, but it’s a lower concession than several recent US IG corporate issuers have paid.

Time to show bottle

Maybe, then, market conditions are not as profoundly terrible as they might seem. As Roca says himself, US monetary policy normalisation is ultimately a “healthy development”, and he thinks good stories should be able to weather volatile conditions quite well. One EM syndicate banker in New York told us he sees “no good reason” why new issue concessions should continue to exceed 25bp, as they have in some recent LatAm deals.

Indeed, the Central American Bottling Corporation (CBC) did exactly what it says on the tin and bottled up plenty of demand for a $1.1bn sustainability-linked bond that bankers also thought constituted an impressive outcome, with a new issue concession well inside 25bp.

Less clear, however, is the fate of Chilean transmission company Sociedad de Transmisión Austral (STA), which announced a new 10 year on Thursday but has delayed pricing until Friday. To what extent will bond buyers reach for the STA? We will not know until later on Friday, but some bankers feel it is a timely reminder that in this market all issuers need to start with generous pricing to gain traction.

Will issuers continue to show sufficient bottle and venture out into the market despite widening price expectations? GlobalCapital’s LatAm bureau will sit on the fence: some will, some won’t. One LatAm DCM head told the tale this week of two very different conversations with clients on the same day.

“One doesn’t like the market but sees no reason to expect any improvement and is going to come soon,” said the DCM head. “The other must have nerves of steel and cash in the bank because he’s going to sit and wait as long as he needs.”

Clear the air

Among the ups and downs of the market, one banker admitted it had slipped his mind that CBC (SLB) and STA (green) were ESG deals. No danger in Switzerland, where not only is pricing without concession very achievable, but ESG is a major supporting factor.

Two weeks ago, it was Chilean lender BCI that impressed with size and pricing on its latest visit to the Swiss franc market with its first green bond there. On Tuesday, it was the turn of LatAm development bank CAF to raise funds in Zurich, and there seems to be no lack of focus on ESG instruments in that market.

Manuel Valdez, CAF’s head of DCM funding and derivatives, was particularly enthusiastic after the multilateral’s Sfr350m five year green bond, which came flat to the curve and with up to 3bp of “greenium”, according to a source on the deal.

Valdez said two factors contributed to a “superb outcome”: Fitch’s decision to assign a positive outlook to CAF the day before the deal, and the green element.

“More and more we are seeing the impact that green bonds are having in the overall demand for our trades,” said the funding official. Tuesday’s deal, CAF’s second green bond in Swissies, will “certainly not be the last”, he said.

We are not surprised if CAF’s Bogota-based funding team is feeling chirpy about green policies. Apart from anything else, they must be — like your correspondent — enjoying the atypical bliss of cleaner air and less traffic in the Colombian capital after restrictions on private vehicle usage were tightened a couple of weeks ago.

No matter how big green bond euphoria becomes in Colombia, however, we’re not sure many treasurers here will be following the orders of Bogotá’s mayor Claudia López to sell their car.

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.

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