Finally, signs of Latin American pragmatism
Sticker shock wearing off in LatAm is an encouraging and necessary omen
International bond deals from Latin America are few and far between these days, so it’s rare for issuers to storm the primary market at once and find themselves jostling for investor attention.
Three new issues in one day, therefore — as happened last Wednesday, September 27, when Panama, Guatemala and Brazilian sanitation company Aegea all issued in dollars — is something of an event. It even puzzled some of those DCM bankers who have spent two years pleading, often fruitlessly, for LatAm clients to move as soon as an open issuance window appears.
Why would three issuers suddenly pick the same day to announce, right in the middle of one the most torrid weeks of what is already an extraordinarily volatile time in US rates markets? After all, there are no questions about any of these reputable borrowers’ access to market.
Guatemala, in particular, surprised as it announced its deal 45 minutes after Panama was already out of the blocks.
It was quite the break from tradition, which has mostly been characterised by issuers doggedly waiting for the best possible issuance window. According to DCM and syndicate bankers, it has been particularly difficult for many of the region’s borrowers to get over the so-called “sticker shock” — the revelation that coupons have pretty much doubled in the last couple of years.
The numbers on last week’s deals certainly showed how stark the change has been. With 10-year Treasury yields, already at their highest level since January 2007, Guatemala’s 7.05% yield on a nine-year piece of paper was the highest it had paid on any bond issue since 2004.
In Panama’s case, the 6.976% it paid for a new long 12-year and the 7.45% it paid to tap its 30 year bond were both higher than the yields it had paid on any bond issue since 2007.
Better late than never
Some of the more snide syndicate bankers say that praising borrowers for issuing now is rather naïve, as they had been pushing for issuers to proceed much earlier. All comps were trading tighter just days earlier. And in January, the year’s best conditions, most LatAm issuers were conspicuous by their absence while other fixed income asset classes broke issuance records.
Yet this is certainly a case of better late than never.
Curiously, the deals went well. Panama paid almost nothing in new issue premium, and Guatemala’s NIP was mid-single digits. Aegea appeared to get cute with guidance, and could get to the bottom of the range, but still attracted some chunky European ESG orders for its second ever deal, which was both sustainable and sustainability-linked.
Moreover, for all three issuers to proceed, on the same day, in pretty terrible markets is a sign that pragmatism is taking hold.
Take a look at Panama’s rather unusual execution. It tapped its 6.85% 2054s by announcing the deal with the yield set from the beginning: 7.45%, which was flat to the bid side in the secondary market, but also as much juice as it could offer before it would have had to set the reoffer price below original issue discount (OID) limit demanded by US regulations.
There are other examples from September: Braskem issuing to boost its cash balance amid a tricky petrochemicals cycle, or Peru’s Hunt Oil taking an extra proactive approach to liability management in issuing to buy back 2028s.
It shows, first of all, that reality has hit, and that issuers have accepted the “higher for longer” rates narrative. Most encouragingly, it demonstrates that issuers are understanding that it rarely pays attempt to micro-time the market.
By plunging into tricky markets last Wednesday, these borrowers undoubtedly saved money versus what they would have paid in the days since. Treasuries on Tuesday hit another high, with the 10-year closing at 4.81% — now its highest level since early January 2007 and 12bp higher than the previous day.
Perhaps the continuation of the rates sell-off has been too much for issuance in the short term. So far have Treasury yields soared — beyond levels that even the most strident bond bears had forecast — that it seems unlikely, just a week after these three deals, that investors would even want to name a price to play in a LatAm new issue.
Yet Latin America will continue to rely on the dollar bond markets, so we should pause and applaud the indications that — once windows are open — they will be a little readier to jump through.