LatAm Letter: A new era for sovereign debt
Bankers and investors could be forgiven for having more pressing concerns than the primary market this week
After Russia’s invasion of Ukraine, Thursday was a day for Latin American bond market participants to give up any pretence of being able to navigate what was happening on the other side of the world, and sit and wait to see what’s in store.
Trading in LatAm debt was, apart from in some select liquid names, limited in reaction to the invasion. As several LatAm bankers said, issuers asking syndicates to show them new pricing levels on Thursday were wasting their own time. The market could look a lot different by the time primary activity bounces back.
Yet though some thought it somewhat frivolous to get excited about coupon step-ups given the gravity of events elsewhere, the groundwork for a potentially historic sovereign debt trade was being laid amid the turmoil. Perhaps it’s because it’s a welcome distraction, but we understand investors have been engaging enthusiastically with Chile’s proposed sustainability-linked bond (SLB), which began marketing on Wednesday and would be the first from any sovereign, anywhere.
As GlobalCapital has reported in depth, Uruguay was the first sovereign to moot the idea of an SLB, and continues to work on the design of its instrument. Yet perhaps it’s not a surprise that Chile is the one to take the lead. After all, the country is a dab hand when it comes to ESG debt, having issued over $31bn of green, social and sustainable bonds since 2019.
One would think that ESG accounts who want a piece of Chile have already had a decent fill, but some large investors have told GlobalCapital previously that they would support sovereigns in SLB endeavours. And the structure looks robust, with Sustainalytics calling the greenhouse gas emission target “ambitious” and the renewable energy target “highly ambitious”.
Even Stephen Liberatore at Nuveen, something of an SLB sceptic, told GlobalCapital he approved of the fact that Chile’s greenhouse gas emissions target was an absolute one, saying it was “far more credible” than a relative or intensity-based metric, as is common in corporate SLBs.
There’s another question, of course: what kind of execution can this landmark trade achieve if Chile opts to proceed in such choppy markets? After all, even before this week’s events the bar for success for most LatAm deals was pretty much just “get it done”.
Still, as we argued in this week’s Leader column, metrics such as oversubscription or new issue concessions pale in comparison with the longer-term importance of the deal. This is Chile pushing new frontiers, tackling a difficult format to add another layer to its sustainability commitment, and it is likely to represent the dawn of a new era for sovereign debt.
A new era is not always a good thing. Bolivia had previously enjoyed ample access to international bond markets — its last deal back in March 2017 had even priced inside Brazil. But the sovereign, which is rated two notches lower than five years ago, found itself in a rather different world on Wednesday as it finally returned with a liability management trade this week, pricing an $850m eight year deal that will be used to buy back most of its 2022 and 2023 maturity notes.
Finance minister Marcelo Montenegro gave a rather defiant and proud press conference (available in Spanish on Facebook), saying the deal in volatile markets showed investors’ confidence in the government’s economic management. He even managed a cheeky dig at the 12-month interim government that ruled for most of 2020, the only time in the last 15 years that the socialists MAS have been out of office, exclusively blaming them for Bolivia’s rating downgrades. Rating agencies disagree, but the minister was not getting into the ins and outs.
Yet the results of the tender and exchange offer show that Bolivia’s new issue offers little to no indication of what international bond buyers think of the country, nor issuance conditions for LatAm high yield sovereigns. Well over three-quarters of the new 2030s were issued thanks to domestic holders of the 2022s and 2023s simply switching into the new bonds. That left little new money to buy bonds tendered by foreign bondholders (non-Bolivian accounts could only tender their notes for cash).
Oppenheimer & Co analysts said external demand for the new issue was “muted”, though they noticed that Bolivia had at least got lucky by pricing before Russia’s invasion of Ukraine. “Investors were not as fortunate, with bonds marked in the 98-99 area the day after pricing,” said Opco.
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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: