Colombia, Mexico and Petrobras jumpstarted the LatAm cross-border market this week by issuing $3.25 billion in total - a flurry designed to duck potentially higher premiums triggered by the onset of a full-blown US recession later on in the year.
Colombia reopened its 2017 and 2037 Globals for a $1 billion worth of dollar-denominated bonds on Tuesday. The sovereign priced $650m in 7.375% 2017 notes to yield 5.997%, 222bp over US Treasuries. Additionally, $350m tap in 7.375% 2037 notes was priced to yield 6.601%, 229bp over US Treasuries.
The Ba2/BB+ transaction attracted $1.4 billion in demand, with the 2017 tap receiving $850 million from 80 investors while the 2037 tap captured $550 million from 65 investors.
The pricing matched the guidance secured in the beginning of the day - 109.5 on the 2017 and 110 on the 2037.
Bookrunners Credit Suisse and Merrill Lynch executed the deal in one day, aided by the sovereign’s announcement that the reopening would not be upsized.
Colombia decided to launch two taps since it “wanted to size up their existing 10 and 30-year benchmarks rather than creating a new benchmark, which would have been subject to a high new issue premium under the current market environment,” said a banker on the deal.
Albert Bernal, Latin American fixed income analyst at Bear Stearns in New York, believes that the sovereign premium versus Brazil provides opportunities for investors and recommends exposure in both the long end and the belly of Colombia’s 10 and 30-year yield curve.
“Colombia ’37s still present the investor with a pick-up of +50 bps over Brazil ’37s; we consider that relationship to be extreme. The spread between the Brazil and Colombian ’17s also stands at a sizable +30 bp,” he said. “Colombia’s fiscal and growth fundamentals are considerably more positive than Brazil’s,” he argued.
According to Colombia’s 2008 Financial Plan, the government plans to raise $2.3 billion from external sources this year, securing $1.3 billion from IFIs and $1 billion from global markets – which has now been completed.
The proceeds of the bond sale will be used to pay the sovereign’s external debt service with external amortizations in 2008 amounting to $1.7 billion.
In addition, the government will continue its strategy of increasing the proportion of local currency in its debt portfolio, with analysts predicting a reopening of the Global TES curve later in the year.
On the same day (Tuesday), Mexico opportunistically braved tempestuous market waters to fulfil its financing plans for 2008. The sovereign sold $1.5 billion in dollar-denominated global bonds due 2040 priced at 99.930 yielding 6.055%, 170 bp above US Treasuries. Bookrunners Credit Suisse and Deutsche Bank helped attract $2.8 billion worth of demand from 160 investors. Of these, 67% were from the US, 19% from Europe, and 14% from Latin America with the investor profile comprising 62% fund managers, 16% insurance firms, 13% pension funds and 9% banks.
“As a high grade name, EM name and LatAm name, Mexico attracts a wide range of investors,” a banker involved in the deal said.
The BBB+ sovereign opted for the 32-year benchmark since “the 2034 is a very liquid benchmark so there was no need to add to that. What’s more, the execution cost of this new benchmark is cheap,” he explained.
The 6.055% yield is the lowest rate for a Mexican sovereign bond of that maturity. In September last year during the height of the credit turmoil triggered by the US subprime crisis, Mexico reopened its 10-year and 30 -year global bonds with a new 30 -year issue yielding 6.122%.
“We had very positive results in the midst of a very complicated backdrop,” Gerardo Rodriguez, head of public credit at the finance ministry said about this week’s deal.
“What Colombia and Mexico achieved vis a viz a new issue discount is unbelievably impressive versus US and European comparables,” said one DCM head.
On the same day (Tuesday), AAA-rated General Electric Capital sold a 30-year $6 billion deal with the second $4 billion tranche yielding 5.976%, a spread of 165 bp above US Treasuries.
“When you stop to think that BBB+ rated Mexico was only 5 bp behind the GE deal – it has been a very good week for LatAm credits,” said one New York-based banker.
Mexico has slashed its foreign debt burden from 9% of GDP in 2000 to 4.4% of GDP by the end of 2007 and has sought to increase the proportion of peso-denominated securities in its debt portfolio. The federal government also plans to buy back $500 million in global bonds this year.
Investors are stepping up exposure to Mexican credit, banking on improved macro-economic fundamentals in the medium-term. Analysts have hailed Mexico president Felipe Calderon’s structural reform efforts including the passage of a fiscal reform package in Congress last year and streamlining of the government pension system – moves that led Standard & Poor’s upgrade of the sovereign to BBB+ from BBB in October.
With Colombia and Mexico completing their external financing requirements this year, rumours are flying over Brazil’s intentions following its postponement of a retap of its 2017 and 2037 dollar-denominated bonds November last year.
This week’s deals show there is strong demand for at least a $1 billion opening for the high-grade name. Market participants are goading the issuer to tap the global market now a sovereign pricing benchmark for 2008 has been established and before market conditions deteriorate further. But the credit is well known for its reluctance.
“Brazil tends to be hyper-sensitive and I am not sure if they will feel comfortable with any new issue premium,” said one bond syndicate head.
Meanwhile, Venezuela’s external financing plans this year have been thrown into doubt after the resignation of finance minister Rodrigo Cabezas. New finance minister Rafael Isea explained the sovereign was reviewing its debt management strategy. A planned $1.2 billion external issue in Q108 will now be “examined” but Isea added that $4.6 billion will be issued in total this year.
- Petrobras reopened the LatAm corporate market with a $750 million issue this week, beating fellow Brazilian issuer Usiminas to the global markets.
The oil giant sold $750 million of its 2018 bond with a yield of 5.86%, 205bp over US Treasuries. This is compared to the original sale of the $1 billion 2018 bond in November last year, which yielded 6.06%.
Bookrunners Citigroup and HSBC led the BBB-/Baa1 deal with bankers praising the transaction. “This priced at the low end of the 205-210bp guidance so it was a very fair deal, especially compared with the GE offer that spread 165bp over US Treasuries.”
Meanwhile, steel company Usiminas is out with a 7.375% price guidance for its $300 - 400 million 10-year global bond, which will be priced today (Friday) having roadshowed this week. JPMorgan and UBS are managing the 144A/Reg S and Baa3/BBB- rated deal.
Given the competitive borrowing costs secured for this week’s sovereign and corporate credits, observers maintain there is clear appetite for investment grade borrowers in LatAm, overriding fears that a US recession could imperil the region’s economic resurgence.
“Okay these names were the obvious high-graders but it tells potential issuers that things can get done, there is cash available if you are comfortable to pay the new issue premium. And if you think that volatility in the market place is going to continue, you may as well try to go the market now,” said one DCM head.
Despite improved market conditions this week, it is unclear whether there is sufficient risk appetite and whether issue premiums are reasonable enough for second tier companies in the region in order to jolt them out of the languishing deal pipeline.
“Mexico is a high BBB+ credit so you can’t extrapolate from that whether investors are ready to target a single B credit,” said one bond syndicate head.