Brazilian borrowers should step up
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Brazilian borrowers should step up

Rio de Janeiro, Selaron Steps, Brazil, LatAm

Latin America's primary bond market has had its slowest start for nine years despite strong appetite for emerging market debt. This has presented an unexpected opportunity for issuers, and those from Brazil are best placed to take advantage.

Rates are lower, spreads are tighter, and EM bond investors have shown they are willing to put money to work. Yet Latin America's borrowers have sold just $10.7bn of bonds between them — less then a third of what they had placed by this time last year and the lowest year-to-date volumes since 2010.

Lat Am bond origination bankers are asking where their clients have gone. Part of the answer is clear. Argentina's borrowers, having been market darlings for two years until last Easter, are still dealing with the fall-out of last year’s currency collapse and are contending with looming crucial elections. The sovereign has clinched IMF funding, so it has no need to issue. Even if they wanted to, most other Argentine borrowers would struggle to access bond funding.

Mexico, meanwhile, has problems of its own. Spreads have widened as investors showed their discontent with president Andrés Manuel López Obrador’s (Amlo) management of the economy and concern over Pemex’s triple-C rated balance sheet.

There is no doubt that the top Mexican credits could access markets, but they are comfortable enough that they do not need to pay the Amlo premium for a while.

Furthermore, the three major Andean economies — Colombia, Peru and Chile — are in decent shape, but even when they’re at their busiest, a strong domestic debt market means corporates from these countries barely trouble the cross-border league tables.

This answer only brings another question: where are the Brazilians?

Even amid the dire tone at the end of 2018, Lat Am DCM bankers were confident that Brazil would lead the charge in a resurgent 2019, with the sovereign and Petrobras the credits on origination bankers’ lips.

Conditions today are far better than most could have imagined two months ago, yet neither of these two big-hitters have appeared. And despite reasonable outcomes for Suzano and BTG Pactual, all other Brazilians have stayed on the sidelines.

Locals are giddy with excitement at how the new president, Jair Bolsonaro, could engineer a recovery. And though foreign buyers might have more words of caution about how quickly reform might come, impressive rallies in bonds, stocks and FX suggest there is plenty of optimism outside the country.

Some bankers suggest that they are waiting for even more spread tightening, but this is a risky strategy.

Investor optimism on Brazil is based largely on the hope that Bolsonaro will be able to pass substantial pension reform, but the timing and nature of the reform will depend largely on tricky political manoeuvering that makes it riddled with uncertainties. When markets rally on expectation, rather than achievement, there is always plenty of downside risk.

Even if there are still legs in the Brazil rally, quiet periods in Argentina and Mexico are helping to make the technical picture very strong. Low volumes are helping technicals that are already favouring issuers: last week saw the sixth consecutive week of inflows to Lat Am funds, according to one syndicate banker. Any issuers caught in the malaise of last year’s markets should have learned to make hay when the sun shines.

Any Brazilians deciding to raise funds today would have the full attention of a hungry market; they should not pass up the opportunity.

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