Going local
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Emerging Markets

Going local

Notwithstanding this month’s correction, corporate issuance in domestic markets is on the rise. But the constraints haven’t gone away


US and European banks are pouring billions of dollars into Latin America in a bid to expand their business there. Looking at the statistics, it’s easy to see why. Apart from the fact that anywhere from a third to half of all strategic inflows are now being directed at the local emerging markets, equity, corporate bond and securitization markets are also booming in countries like Mexico and Brazil. “Corporate issuance in the international markets is exceeding sovereign issuance internationally, but the really surprising trend is growth of the local capital markets,” says Dan Vallimarescu, managing director and head of Santander’s Latin American debt capital markets business. “Corporate issuance domestically used to be less than a third of all corporate and sovereign cross-border issuance. Now it’s about three-quarters of the size of cross-border capital raising.”


Aggregate domestic corporate capital market issuance volume soared 188% to $32 billion in 2006, from $11.1 billion in 2004, a figure that does not include asset-backed securities. Including securitized issues, Brazil’s local corporate market issuance alone grew to $38.3 billion in 2006, up from $23 billion in 2005. Some think it could reach almost $50 billion by the end of this year. In Mexico, corporate bond issuance in 2006 came in at around Ps143 billion. Now that the elections are out of the way, that figure is expected to jump to around Ps160 billion to Ps190 billion this year. Although international corporate bond issuance has also risen, its growth rates are dwarfed by the rise in local new issues.


Last year total Latin international bond issuance came in at $25 billion, up about 45% from 2004’s business. This year’s external Latin American corporate bond issuance is expected to come in at around $22 billion, reflecting the increasing competition the international bond market is feeling from loans and local market bonds. The international bond markets now not only have to compete with a significantly cheaper Latin loan market, which itself grew 130% last year to $62 billion of business, from $27 billion in 2004, but more cost-competitive local bond markets, as interest rates in the region come down and stay on the road towards convergence with developed markets. “A lot of corporates that probably would have sought longer-term capital in the international markets are doing that instead in the local markets,” says Robert Carlson, a senior banker in Latin American debt capital markets at Barclays Capital in New York.


Of course, the pricing varies enormously from day to day and for different credits, but in many cases, “once a corporate swaps a dollar bond raising back into local currency, it usually works out to be more expensive than had they done the deal locally,” says Carlson. There are still some constraints for issuers in the local markets. In Mexico, only blue chip issuers or those rated AA locally and above seem able to come to the local peso bond market for funds up to 10 years. In Brazil, corporate debentures are non-existent. Corporate bonds usually float over the interbank CDI rate in Brazil, or have their coupon payments linked to the IPCA consumer price index. Tenors are usually five years and in, although seven-year debentures have been done, and soon eight- and 10-year tenors could be introduced, now that the government has issued a nominal 2017 NTN-F fixed-rate issue. Brazilian investors are increasingly taking on second-tier credits as local rates steadily come down, and the booming FIDC asset-backed securities market has made it possible for lower-rated Brazilian entities to access the local markets for small, short-dated local currency structured deals.


Often those issuers are either too obscure or their needs too small to access the international markets. The depth of the local Brazilian market has also improved. CVRD issued a groundbreaking R$5.5 billion ($2.2 billion) debenture offer of four- and seven-year tranches in December last year, the biggest debenture deal to date. “I think international investors are still more cautious of buying corporates in local currency debt,” says Cindy Powell, emerging market syndicate manager at JP Morgan in New York. “Investors are happy to buy Brazil’s real-denominated globals because they are big and liquid. Small corporate deals would not hold the same appeal.” The 15% withholding tax that’s grossed up onto the pricing of the corporate’s bond issue is also a barrier, says Powell. “We have looked at some issuers who have said that just because of the withholding tax it was still cheaper for them to issue reals locally, and if they don’t need to raise a lot, then it’s definitely cheaper to do a real deal at home rather than abroad.”

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