If DCM bankers think they’ve had it tough — with the region’s new issue volumes down 47% so far year-on-year, according to Dealogic — they should spare a thought for the buy-side.
Those who bought during January’s record $31.3bn of issuance have been severely burned. Investors bought $4.25bn of Argentina’s 5.875% 2028s at 99.07. These notes are now at 77, yielding 9.73%.
Or take the $3bn who bought Ecuador’s $3bn 7.875% 2028s at par on January 18. The bonds are now worth less than 82 and are trading above 11%.
Even away from the ropier reaches of Lat Am credits, Mexico’s 10 year from January is over eight points below reoffer, and Peruvian lender Interbank’s five year notes six down, despite a dearth of issuance in the A3/BBB+/BBB+ rated country.
Elsewhere, Brazil’s outperformance hasn’t stopped January issuers like hospital operator Rede D’Or dropping 12 points over the year.
Only psychics or miraculously lucky investors in the market have avoided losses in these circumstances.
Understandably, then, few investors are keen to add risk right now, given there is little prospect of the next few weeks making up for a pretty terrible 10 months. However, this should change in January.
The January bounce is often described to make out December 31 to be some kind of psychological hurdle, as though investors will return to their desks after Christmas refreshed and ready to dig into single B-rated hybrid perps from Mexico.
The importance of opening a new calendar is often overstated — “buy more Ecuador” is unlikely to be on any new year’s resolution lists — but this year there may be something to it.
EM debt investors are in the business of making returns and, given the extraordinarily tight levels at which borrowers were issuing in January, it was going to be hard to do so even if 2018 had been a smooth ride.
Inevitably, they will not be asking such hefty concessions to take on new paper next year as they realise the value on offer.
Technical support
Remember, too, that lower issuance this year — from $75bn so far compared to $132bn this time in 2017 — means investors have spent less cash than last. And investors say that at least a portion of the heavy selling of EM bonds this year is a result of portfolio managers anticipating outflows that, in the case of institutional investors, did not arrive in the volumes that many feared.
Moreover, the calculations of one leading Lat Am DCM house suggest that net issuance — new issuance minus amortisations, coupon payments, and tender offers and buy-backs — is negative $32bn since March.
All this suggests the technical picture should be very much in favour of issuers.
Finally, unattractive issuing conditions mean that some $90bn of dollar debt from Latin America will come due in 2019-2020. Issuers will not only realise that they cannot be as picky on pricing as they were in recent years, but they will have no choice to pay what is required.
An agreement between issuer and investor is, ultimately, all that is needed for primary markets to reactivate.
Can’t get worse
2018 was a year of US rate hikes, stock market volatility, and talk of trade wars. These troublesome external factors for EM debt are unlikely to go anywhere; but they are no longer news for Lat Am markets. Furthermore, asset prices have already adjusted hugely.
This doesn’t mean we will rush back to the heady days of 2018 when all credits flew off the shelf; given the levels in secondary, EM bond buyers have the luxury of picking and choosing the high yield paper they want, and it the hunt for yield is no longer such a intrepid task.
But it should mean bond markets should remain healthily available to the bulk of Lat Am borrowers, and that most borrowers will find investors more than willing to take a punt on their paper. Those depending on new deal flow will soon find relief.