Huge investor demand for Latin American debt has caused spreads to tumble by a third as the party mood sucks in a host of lesser-known names, according to market experts.
The most recent deals included an oversubscribed Colombian corporate deal and the Bolivian government reiterating its intention to issue sovereign debt.
However a host of factors could undermine the investor rush including spread compression, rising issuance out of the US high-yield market, an appreciating greenback, a slowdown in China; and an oil price shock.
For now, all is rosy. Rock bottom government bond yields in the US and Europe and worries about the sovereign crisis continue. Decent, if falling, yield pick-up from Latin bonds is coupled with good economic growth prospects and relatively low debt levels.
That has allowed companies such as Transportadora de Gas Internacional (TGI) to carry out a $750 million 10-year issue, which priced better than expected on strong demand last week.
Pricing talk had been at 6% while the deal priced at 5.7% and traded up aggressively, according to Carlyle Peake, emerging markets debt syndicate head at BBVA.
Bolivia reiterated that it was keen to launch a $500 million international bond issue. The year has already seen ground-breaking deals out of Peru and Mexico while Peruvian sovereign global depositary notes ($1 billion) were very well received as was a local currency offshore Pemex GDN.
Lack of issuance out of other regions of the world has created a vacuum that Latin issuers are only too willing to take advantage of, said Walter Molano, head of research at BCP Securities in Greenwich.
Petrobras has aggressively filled the space left by the retreat of European issuers, especially banks, he notes. Alberto Ades, managing director and co-head of GEM fixed-income at Bank of America Merrill Lynch, pointed out that to access higher yields of 4-5%, one must look at Latin markets.
A recent drop in Latin supply is also pushing down yields: issuance in Latin debt capital markets has dramatically tailed off in recent weeks, after a record $30 billion in new issuance in the first six weeks of the year, Peake noted.
That has led to impressive levels of spread compression. At the start of the year, Mexican baked goods company Grupo Bimbo carried out a 10-year deal at 270 basis points over US Treasuries. “This is absolutely an attractive market for issuers because of historically low yields and spreads,” Peake said.
But after this big run-up in prices, Latin markets are vulnerable to growing competition from other regions. High-rated US debt is starting to boom and high yield issuance, which competes more directly with Latin America, is likely to follow.
Brazilian local currency deals that are sold cross-border are particularly vulnerable to the sentiment that the greenback will rise as the real remains the most over-valued currency in the region, said Molano. “Investors will be slightly reticent to continue to go to emerging markets paper unless they have higher yields or a story that is really interesting.”