Chilean companies never used to be prolific international bond issuers. The country’s private pension system for years supported domestic bond markets that were the envy of Latin America. So when — amid an uncertain outlook for the pension system — Chilean banks and corporates suddenly turneden masseto global debt markets around September 2021, they immediately caught the eye.
At first, three quasi-sovereigns and two private sector borrowers issuing in three days was no problem. Investors had had almost two years — since the unprecedented social unrest of October 2019 — to digest the probability of policy uncertainty in Chile, which remains by far the best-rated jurisdiction in Latin America. With presidential elections at the end of last year, it looked like a standard effort to pre-fund ahead of further political change.
Nevertheless, GlobalCapital warned as far back as mid-September that Chilean borrowers needed to pace themselves. Little did they heed us. By October, investors were being explicit about the fatigue caused by Chilean supply and arguing that deals from the country needed to be singled out and offer extra-large new issue concessions.
And still, the supply remained relentless. Borrowers were equally undeterred by a polarised election campaign and by left-wing Gabriel Boric’s eventual victory. The sovereign even squeezed in an issuancebetween the first round of voting in November and the second round in December.
It turned out that not everyone had done all their fundraising before the election, and January brought yet more primary activity.
Two Chilean debutants, in particular, have struggled. Transmission company STA took two days over its inaugural deal and had to widen pricing from initial price thoughts in the low 200s over US Treasuries to a final spread of 250bp.
Then Inversiones La Construcción (ILC), the BBB+/BBB rated Chilean holding company, came to market on January 31. It paid an eye-watering 5% for its 10 year debut — a spread of around 320bp-325bp over Treasuries. By comparison, in September, Chilean telco Entel (Baa3/BBB-) had paid just 175bp over Treasuries for an 11 year bond, or a yield of 3.052%.
In November, Telefónica Móviles de Chile — also lower rated than ILC at BBB-/BBB+ — paid a spread of just 200bp, or a yield of 3.537%, for a 10 year. As recently as January 12, Chilean meat and salmon producer Agrosuper — split-rated at Ba1/BBB- — had issued at a lower spread (286bp) and yield (4.6%) than ILC did less than three weeks later.
Admittedly, this can partly be explained by the general, creeping malaise brought about by global concerns about inflation and rate increases. And ILC, perhaps, has a harder business model to understand than the other companies mentioned above.
But borrowing conditions for Chileans are deteriorating at a far faster rate than in the broader bond markets. Perhaps most shocking of all was ILC’s aftermarket performance — the bond has traded down from a reoffer level of 98.051 to below 94 within a week.
The last LatAm corporate to come to the market before ILC’s latest deal was Guatemalan telco Comcel, rated several notches lower at Ba1/BB+. Comcel’s 10 year bond, sold on January 27, is now yielding just under 5.1%, while investors can pick up 5.5% on ILC’s new BBB+/BBB- rated issue, which has the same maturity.
This pricing distortion points to a problem that goes beyond broader bond market troubles. Investors have had enough of Chile. It is a country that has never been particularly lucrative for EM bond buyers, and now — just as its previously standout macro story is losing some of its lustre — it is inundating the market with supply.
As a result, investors have attached a stigma to Chilean issuance that the issuers’ mostly robust credit stories don’t deserve. No LatAm borrower is having an easy time of it, but there is particular resistance to Chilean names. EM bond investors are sending a clear message: they do not want to keep buying Chilean paper, even if common sense would suggest there is plenty of value in the country.
Perhaps Chilean issuers are just not well-versed in tricky markets. Previously, they were known as notoriously penny-pinching — whether paying slim underwriting fees or offering minimal new issue concessions. But they got away with it because markets were in good shape and Chilean credit was scarce.
Usually, your correspondent would back the DCM banker's mantra that borrowers should jump through the first available window to raise funding. For Chilean borrowers today, however, this should only apply when strictly necessary. Otherwise, underperformance will damage the country’s standing in the debt markets.
Give investors time to cool off and start picking up some secondary market bargains, and they will soon warm to Chile again.