An uptick in issuance by Latin America’s companies could be on the way – signalled by Friday’s announcement that Arcos Dorados Holdings has finally filed for the initial public offering (IPO) it has been planning since early last year.
Investment bankers are pushing hard during the IDB annual meetings to set up buy- and sell-side meetings, to market debt deals ahead of a predicted rate rise in the US in late 2011 or 2012.
Investors have shrugged off news from the Middle East and Japan and have focused on higher corporate earnings and lower unemployment. But in the US the uptick could be derailed if markets react to fears over the 2011 US budget and higher long-term rates in the US.
March was relatively quiet for equity deals out of Latin America, one banker told Emerging Markets, and YPF of Argentina and International Meal Company (IMC) of Brazil both priced at a discount.
Repsol of Spain raised $1.23 billion selling shares in YPF for a 2.3% discount even after the price, while IMC raised R$474 million in an IPO on March 3, which priced at the bottom of the price range.
Arcos Dorados, which is McDonald’s’s largest franchisee, plans to raise as much as $875 million in its IPO.
Investors are worried that the rotation from emerging into developed markets is likely to continue. Growth expectations between the regions are converging, with growth forecasts cut for Latin America, Antonio Miranda, LatAm fund manager at Compass Group LLC, said.
In Brazil, the region’s biggest issuer, investor concerns have also focused on capital controls, Miranda added. Brazil has imposed a 6% tax on foreign investors investing in fixed income and 2% on equities. Media have reported threats to impose quarantines on equity and other measures to slow capital inflows.
In debt markets, new issuance has slowed substantially since January although markets have never shut down, Walter Molano, head of research at BCP Securities in Greenwich, said. Cemex recently carried out a large convertible bond issue to raise $800 million, he noted.
One banker said that corporate planning to issue in US dollars should come to market before rate rises in the US bite. But Phil Suttle, chief economist at the Institute of International Finance, sees demand by issuers overall as subdued.
Many corporates have been boosted by the economic recovery, are enjoying good cash flow and don’t need to borrow, Suttle said. Issuers are more driven by debt management issues to reduce the overall cost of funding, he argued.
Moreover, debt markets have bifurcated with big companies, such as Vale of Brazil, finding it supremely easy to issue while for smaller companies, it’s a very tough environment, Suttle said. “In this cycle, the large amounts of debt issuance in 2010 was as good as it gets.
This year, there’s the spectre of rising rates.” The IIF is expecting some $240 billion in capital inflows for the region this year and next.