Latin America’s debt bankers believe that periods of volatility caused by US interest rate rises and secondary market illiquidity will not derail the stomping progress of the region’s cross-border bond market, which is set for another record-breaking year.
As investors chased yield amid low rates, Latin American borrowers were among the biggest beneficiaries. Year-to-date new issue volumes in LatAm reached $120bn, according to Dealogic, meaning 2014 will smash last year’s record of $126bn. It would be the third consecutive record-breaking year.
With monetary tightening expected at some point, some worry markets will not be as attractive to Latin borrowers and that investors will reduce allocations to the region.
But Max Volkov, head of LatAm DCM at Bank of America Merrill Lynch, told Emerging Markets that the record issuance levels represent “the new normal — even if rates start to rise”.
And there is an increasing feeling that the rates problem may be further away than expected. Even as equities sold off this week, LatAm bonds were stable.
“Equities are plummeting as realisations about poor global growth hit home,” said one LatAm bond investor. “Therefore the LatAm bond market party goes on.”
Although growth has remained sluggish in many countries in Latin America, major economic turmoil remains restricted to Venezuela and Argentina — which have anyway provided next to no bond issuance this century.
“LatAm bonds continue to perform and conditions remain good despite volatility in equities,” said Volkov. “I cannot point out any major situation that would put major brakes on issuance or appetite to Latin America.”
This relative stability has provided LatAm with a further advantage over certain emerging markets, added Volkov: the reallocation of funds from other regions into LatAm during 2014.
FINANCING NEEDS
Mexican state-owned oil company Pemex sold $2.5bn of bonds last week, its second dollar deal of the year. Pemex’s increased bond market activity could continue as reforms in Mexico open up private investment into the energy sector.
Latin America’s oil giants like Pemex, Petrobras and Ecopetrol have continued to grow their annual bond market financing needs, and are unlikely to suddenly withdraw from the market.
“New issuers have entered the market, and the financing needs of the larger issuers are just going up, up and up to finance investment plans,” said Volkov.
The presence of such issuers is positive for LatAm supply as the market enters volatility.
“I think the market will be better for the higher-grade names as rates start to go up,” said Gordon Kingsley, head of LatAm DCM at Crédit Agricole. “You could argue that the result of this week’s Pemex trade was in a certain way due to a flight to quality, and this dynamic would support the better-rated issuers.”
Kingsley added that markets would expect a rally in Brazilian debt should Aecio Neves win the second round of presidential elections. However if Dilma is re-elected low investment would slow Brazilian issuers’ funding needs, he said.
“Unfortunately, it could mean that in the next few months Brazilian issuers will miss out on the last chance to borrow at historically low rates,” said Kingsley.
Mexican issuance in 2013 surpassed Brazilian volumes. However, so far in 2014 Brazil is ahead, with $41.9bn of issuance versus Mexico’s $34.1bn — despite expectations the sovereign downgrade, FIFA World Cup and presidential elections would hit volumes.
“The talk about low issuance activity from Brazil is not substantiated by facts,” said Volkov. “I expect issuance to remain around the same level next year.”