In 2015, more than one name from the region waited and waited after a roadshow before issuing, but rarely did patience bring benefits. In some cases, issuers saw volatility in the market, did not like the look of the new issue premium they would have to pay, and thus delayed their deals — only to find that spreads had widened by much more than the value of a new issue premium by the time they got round to issuing.
Such was the case of Fibra Uno, the Mexican Reit, which decided not to take advantage of a market window in September but then saw its spreads widen by more than 50bp before it chose to issue on the last day of November.
Moreover, with markets highly volatile and issuance windows ever narrower, the value of clinching funding at any kind of acceptable price while it is available is ever greater.
Even if new issue concessions and spreads do improve significantly in Latin America, there is still much more space for an increase than for a reduction in overall cost of funding. US Treasury yields remain at historically low levels — the 10 year ended the first trading day of 2016 at 2.27% — and though the Fed’s hiking cycle is now underway the benchmark rate remains very low. The inevitable Fed rate increases will surely wipe out any hypothetical gains in spreads from waiting for calmer markets.
Fundamental challenges
Brazil’s recession looks nailed on to continue, and Joaquim Levy, the great hope as finance minister, left office late last year.
Whatever becomes of Dilma Rousseff, the result is unlikely to be pretty: if the president remains in office the opposition party seems certain to continue to block her attempts to improve the economy and leave her as a lame duck. If she is indeed impeached, the political uncertainty can only generate volatility in markets. At the same time high profile figures such as Marcelo Odebrecht remain behind bars as the Lava Jato corruption scandal drags on.
But the rest of Latin America is hardly compensating for its large neighbour’s troubles. For a start, other countries are not immune to the problems afflicting Brazil.
In Transparency International’s 2014 Corruption Perceptions Index, Brazil scored better than relative bond market darlings Mexico, Colombia, Peru, Panamá and Dominican Republic. Investors have suggested that Brazil’s digging up of widespread, systemic corruption should cause nervousness across Latin America that copycat investigations may emerge.
Low commodity prices, another key factor in Brazil’s struggles, will continue to challenge growth models and pressure public finances in Mexico, Colombia, Peru, Chile, Ecuador and Venezuela at the very least.
Even where there is good news, grey linings appear. Argentina may be the next big thing for DCM bankers thanks to president Macri’s rapid macroeconomic reform programme, but yields may stop compressing if analyst predictions that this necessary tough love will lead to recession in the short term come true.
Elsewhere, Colombia is on course to sign a historic peace agreement with left-wing guerrilla group the Farc this year. But among the financing community this is raising grave questions over the cost of implementing peace.
Latin America has made great progress in the past decade, but in the short term its issuers may have to face up to the fact that their best hope for a significant improvement in sentiment in 2016 is the fresh look investors tend to take at the world with the advent of each new year.