Western bankers are begging Latin American borrowers to accept that the era for audaciously tight spreads and daringly price sensitive demands has ended. Foreign investors, bankers say, are awakening to the diminishing relative value of the region’s credits.
Their appeals follow an explosive trading week that has forced corporates, many from Brazil, to postpone their international bond deals once more and redouble local funding strategies.
“LatAm borrowers just don’t get that things have changed. They have been on such a good run for the last 5 years but they still think they can grapple with just 1bp premium here and there. But it is now over,” said one DCM head.
As EuroWeek reported last week, investors are banking on spreads to widen and a significant price correction for the region’s credits, in line with bonds for Western banks and high-yield US debt.
But market participants fear that the investor scramble for LatAm issuers over the last five years has left borrowers thinking it can continue to command ever-aggressive pricing terms to an obliging investor base.
“High-grade US corporates will pay the market clearing level and are less price-sensitive than EM names – that is completely counter-intuitive. These borrowers, particularly LatAm, are making everyone’s lives more challenging,” said the banker.
Some point to weak institutional development and human resource deficiencies of funding departments at corporate institutions and government debt management offices.
“There is a lot of rotation within EM corporates and government treasuries – these guys have only seen the good times and not the bad times, and the staff aren’t aware of broader market conditions,” said one bond syndicate head.
Nevertheless, Western bankers are less concerned with ensuring tighter credit structures and normalisation of prices – and are more fearful of local banks winning yet more mandates.
If the six-month languishing deal pipeline continues, a purge of emerging market DCM teams could be on the cards - as investment banks continue to haemorrhage staff in other departments.
“If the lack of deal flow continues, then I am going to be very worried,” said one bond syndicate banker in New York.
Furthermore, volatility on global stock markets this week, triggered by increased fears of a US recession, has alerted investors that the so-called EM decoupling thesis is at best premature.
Thinner liquidity
As a result, borrowers will not just have to reconcile themselves to the higher cost of capital, but thinner liquidity as real cash institutional investors and dedicated EM funds refuse to take positions under current market stress.
“We have taken some credits on roadshows and investors say to us that they really like our credits but are too scared to take a position. Given the sell-off on global EM bourses on Tuesday, I don’t blame them,” said one banker.
Such risk aversion continued to upset plans for LatAm high-yielders to launch modestly sized bond deals this week despite much-trumpeted marketing blitzes.
“Issuers are clearly in the wait-and-see mode and are waiting for things to settle down. They have been forced to talk with investors but not about any specific deal terms,” said one bond syndicate banker.
Colombian state-owned telephone company ETB was set to price its $300mn peso-denominated global bond this week, after postponing the deal in September.
But despite the Federal Reserve’s slashing the policy rate by 75bp on Tuesday, there was little momentum to jolt the issuer to test market waters and set a pricing benchmark for corporates this week.
“Investors are sitting on the sideline to ride out these episodes of extreme volatility, so we didn’t see much enthusiasm for the sale - though they all said they liked the credit,” a banker involved in the deal explained.
“They have their marketing effort out of the way, now it is just about identifying the specific window of opportunity.”
There is speculation that pricing guidance could see ETB paying 100bp-150bp wide to the benchmark City of Bogota’s $300m (equivalent) 9.75% 2028 issue in July 2007 that is now trading at 10.90%.
Uncertain times
But the credit is unsure whether this is value for money in this uncertain environment.
“They haven’t got a level in mind at the moment. They are just waiting for things to settle down,” the banker said.
Also this week, Brazilian cable operator Net Servicos roadshowed its $200m in BB-rated 2018 global bonds through Deutsche Bank and Santander. The corporate marketed its sale in London, New York, finishing in Boston on Wednesday.
Similarly, double B-/Ba3 Costa Rican retailer Grupo M roadshowed its 150m - $200 m 10-year bond via Merrill Lynch this week. The timing for the deal, originally scheduled in November, is also unclear given the spike in volatility.
On Wednesday, Brazilian electric company Duke Energy Paranapanema announced it would postpone plans to issue $416 million in real-denominated non-convertible debentures for at least two months.
Meanwhile, pricing rumours was rife for Brazilian bank BicBanco’s 3-year bond deal, though the size has yet to be determined. The Ba1/BB- issuer via UBS hopes for a 8.375% sale for the 144A Reg S senior fixed rate notes.
But a banker away from the sale said: “I would be surprised with this level, unless the bond was a small size. Investor sentiment has become more defensive over the last week and the fact that they have not launched makes me believe there is not too much traction”.
Bucking this negative trend, Argentinean transportation company TGN has approved a $400 million global debt program. It is looking to issue non-convertible bonds in dollar tranches, or in other currencies if cheaper, to refinance its debt obligations.
Similarly, Andean development bank Corporacion Andina de Fomento (CAF) announced a $250m retap of its 2017’s yesterday morning (Thursday).
As EuroWeek was going to press, the policy lender is out with price guidance on its 10-year 5.75% bonds at 235bp over US Treasuries via Credit Suisse and the sale is due to be completed by the end of play on Thursday.
The issue is now worth $500 million, following its similar $250m retap on its 2017’s in January 2007 that priced at 99.503 to yield 5.816%, 102bp over US Treasuries.
But the SEC registered A1/A+/A+ lender is far removed from the region’s sub-investment grade credits and holds little clues on market sentiment, observers say.
- Contagion from the troubled bond insurance industry has spread into Latin America, after Standard & Poor’s said last Friday it may downgrade triple-A rated Ambac Assurance Corporation, citing the bond insurer’s scrapped $1 billion equity issue. The agency has placed three Mexican residential mortgage-backed securities insured by Ambac onto negative watch – a $100m issue from Su Casita as well as a $224m and $264m issue from Patrimonia. A total of 22 emerging market securities have been affected including debt backed by future cash receivables from Banco de Credito del Peru and securities backed by diversified payment rights from Banco Itau and Banco do Brasil.