The debt capital markets banker’s playbook is usually quite straightforward. Tell clients to make the most of the earliest possible issuance window, and de-risk by getting funding out the way as soon as possible. After all, the most expensive money is money that’s not in your pocket.
For a treasurer, paying a few basis points of extra new issue concession for missing the peak of the market is hardly a sackable offence. Running out of money if funding markets collapse, on the other hand, is a far more grave matter.
That’s the theory, anyway. For Latin American DCM bankers, especially, this playbook has been a hard-sell. Compared with, say, their US counterparts, the region’s borrowers are far less nimble and proactive. It takes more time to get documentation together, and they tend to be far more hesitant about hitting primary markets if they fear volatility is looming.
Perhaps perversely, this hesitance has often turned out to be beneficial. Just take the immediate aftermath of the initial Covid-19 shock to markets, in March 2020, when for a few days the tone in financial markets was nothing less than apocalyptic.
As soon as US fiscal and monetary support opened a window to issuance, US corporates jumped through it to build liquidity buffers, raising funding at an unprecedented pace. Most Latin American issuers, however, took one look at the elevated funding costs and turned their noses up.
Here was where the DCM playbook ended up looking silly. From a funding conditions perspective, 2020 — and indeed most of 2021 — proved to be far less choppy than expected. The scale of monetary policy support meant LatAm bond buyers began to welcome borrowers into the markets with open arms, and spreads rallied sharply. Added to historically low US Treasury yields, some LatAm borrowers were soon funding below pre-pandemic levels.
Hindsight is a wonderful thing, but the handful of issuers that did brave the markets in March or April paid dearly for their haste. Within two months of issuing, for example, Santander Mexico’s five year sold in April 2020 was above 110. Ecopetrol’s 2030s sold later that month hit 117 by the start of June and 125 by August. This is abnormal outperformance for blue chip borrowers, and showed they had left a lot on the table.
That’s just the most extreme example. Several times over the past few years, markets have turned choppy and issuers have been encouraged — using capital markets vernacular — to “frontload” their funding, even if new issue concessions are high.
With so much cash sloshing around, however, volatility has always been short-lived, meaning plunging into tricky markets has rarely paid off. Understandably, LatAm issuers are therefore sceptical when bankers urge them to jump through any old window.
Yet 2022 may finally be the year when bookrunners’ warnings ring true. Rates are on the rise, and inflation is spiralling. The Latin American economic recovery is likely to have already peaked, and political uncertainty is only intensifying as governments look for ways to consolidate out-sized post-pandemic fiscal burdens.
Put simply, there is no reason to think this month’s volatility is a blip. There is going to be less cash available to fund LatAm borrowers, and it appears highly unlikely that funding costs are going anywhere but upwards. Already, each week of 2022 has brought progressively worse conditions for LatAm borrowers.
Issuers, be warned: even a DCM banker’s stopped clock is right twice a day. This could be the year to take their warnings seriously.