EM bond issuers should stay suspicious of secondary levels
Stale quotes in an illiquid market can mislead potential issuers
Last week, Latin American high yield name Atento’s bonds took a tumble. Having closed on Thursday May 19 at around 91 cents on the dollar, the borrower’s 8% 2026s dipped as low as 71 on May 24, according to MarketAxess, before trading as high as 80 on Friday.
Quizzed on possible reasons, traders shrugged and said they assumed it was related to cyberattacks, which the company had suffered back in October. But there had been no update on this since Atento released seemingly disappointing first quarter results back on May 11.
Yes, a law firm is investigating potential claims of federal securities laws violations on behalf of investors in the company. But this was public on May 13. The 2026s were happily in the 90s until a week later. Why the sudden, delayed slump?
“I just don’t have an answer,” said one LatAm bond trader. “The market is just weird.”
“Weird” is a euphemism for “painfully illiquid”. Of course, EM market participants have always complained about poor liquidity, but Atento’s rollercoaster ride highlights just how unreliable numbers on a screen — or a trading run — can be today.
Some bankers have had some fun finding examples of the disjointedness of the secondary market. When JP Morgan priced a $2bn 10 year bond at 165bp over Treasuries on April 19, for example, trading runs for Chilean banks were being sent round with spreads in the low 100bps — clearly no reflection of where these banks could have priced a new issue that day.
Traders appeared to realise the silliness of these levels on the day of JP Morgan’s deal, as Chilean bank paper immediately began to sell off. Santander Chile and BCI now have 2031s trading in the low to mid-200bp area, around 80bp wider than April 19. JPM’s 10 year is below 150bp.
This is a symptom of how little trading goes on. EM investors say that they will receive quotes at one number, only to find that the bid level drops by five points if they actually want to sell $5m of paper.
All this is not just an obstacle for investors. It makes navigating a difficult new issue market even tougher for issuers too.
Take Colombian lender Davivienda, which met investors in early April ahead of a potential 10 year. It would probably have taken a look at the 2027s issued by comparable credit Banco de Bogotá. According to MarketAxess, these bonds were at a spread of around 240bp over Treasuries on April 7.
This was just 15bp wide of similar maturity bonds from the Colombian government, even though Colombian banks traditionally pay pick-ups of over 100bp versus the sovereign. One banker said he saw trading runs that morning that even put Banco de Bogotá’s spreads inside the sovereign.
Davivienda ended up not proceeding with the deal, presumably because it did not like the pricing feedback from investors. Perhaps it had been misguided by the secondary spreads of its peer?
Antofagasta, the Chilean miner, did push ahead and price a $500m 10 year early in May — one of just two dollar deals from Latin America and the Caribbean this month. It paid 287.5bp over Treasuries for the privilege, but bankers said that the company had initially been hoping to issue at a far tighter spread.
As recently as April 11, BBB/BBB+ rated Antofagasta’s October 2030s were quoted at a spread of just 138bp over. Even when it announced its roadshow in trickier conditions on April 26, the 2030s were quoted at just 210bp over.
Yet the new issue announcement triggered a sharp fall in Antofagasta’s previously stable bond price — from around 85 to around 78, according to MarketAxess. The 2030s were at 265bp the day of the deal.
Clearly, the pre-roadshow quotes had been out-of-date, but investor portfolio shuffling to make room for the new issue had then sent the 2030s to their true level. This is how Antofagasta had to comp its new issue.
Some LatAm DCM and syndicate bankers reckon that, beyond large sovereigns and major corporates like Pemex and Petrobras, there are few trustworthy quotes in the secondary market. It is not clear that all banks and issuers have fully grasped this.
If you don’t want an additional headache when turning to primary markets already afflicted by rising rates, climbing inflation, war, China lockdowns and now recession fears, beware the secondary market illusion.