The unpredictable succession of worrying financial and economic news that has rocked global markets this year is deterring cross-border bond deals in Latin America – as much as the liquidity strain itself, bankers say.
“The issue is not about sensitivity to spreads anymore, it is do-ability for those who can’t do a deal in a day. You can’t do a one week roadshow without something bad being announced every other day,” said one LatAm DCM head in New York.
The much-expected 50bp cut by the Federal Reserve on Wednesday was not enough to jolt any issuers to the market this week as volatility in equity and fixed income markets continued to rage.
Furthermore, unpredictable events such as the continuing crisis in the monoline insurance industry and huge bank write-downs frustrated corporate borrowers as they struggled to find a window of opportunity to launch modestly sized deals.
Over the last two weeks, high-yield names such as Colombian state-owned telephone company ETB, Costa Rican retailer Grupo M and Brazilian cable operator Net Servicos have launched costly non-deal roadshows to market their credits, after postponing their deals at the end of 2007.
However Western bankers, monitoring the rough and tumbles of global financial markets for their price sensitive clients, were unable to open up their order books and set any stable pricing guidance due to the market distress this week.
“I am not inclined to put on a real roadshow for a new creditor or high-yielder at the moment since one day you think you can secure a price at 9% and the next thing you will be begging for is 11%,” said one banker.
The market did start the week with an upbeat note with Andean development bank Corporacion Andina de Fomento (CAF) launching a $250 million retap of its 5.75% 2017 bonds last Thursday (24 January) that priced at 98.007 to yield 6.041% or 235bp over US Treasuries.
This was a 15bp–20bp concession to secondary levels, significantly more than its $250m retap for the same bond January last year that come in at 99.503 to yield 5.816% or 102bp over US Treasuries – a concession of 1bp–2bp.
Nevertheless, observers were still comforted to see some liquidity unleashed in the region.
On Tuesday, the market was similarly reassured about the continued appetite for EM debt after the Philippines successfully launched a $500 million bond, which was more than eight times oversubscribed.
However, UBS’s $4 billion write-down revealed on Wednesday and Fitch’s downgrade of monoline insurer FGIC on Thursday as well as MBIA’s $2.3 billion net loss for the last quarter of 2007 each shattered any market confidence that may have been spurred by the Fed’s rate cut.
Bankers say this week’s string of negative financial news – characteristic of the market distress since the beginning of the year – has fundamentally impacted market psychology and the attitude of issuers to risk.
“Issuers, bankers and investors now have to go into the market with a different mindset. When do you foresee a reduction in the volatility so people can focus on something for more than one day? This is not a pricing issue but it’s about market sentiment,” said one bond syndicate head.
Notwithstanding the market uncertainty, there is sufficient appetite for sovereign and well-known high-grade corporates, according to market participants.
“I just want the blue-chip companies in the region and high-graders like Petrobras, TelMex, America Movil, CVRD to come to the market now,” said one banker.
Nevertheless, Guatemalan Banco Industrial added its name to the despondent pipeline of high yield names this week, kicking off a non-deal roadshow in Asia today (Friday) and the US next week via Credit Suisse.
But there is little hope that these issuers will come to the market any time soon.
A banker away from ETB’s planned $300mn peso-denominated global bond, postponed since September 2007, said: “they are clearly not having very much traction and might have to seek alternative sources of funding”.
Similarly, the outlook is bleak for Net Servicos potential $200 million 10-year deal via Deutsche Bank and Santander.
“It is a high quality company and it could be the next one to come out but it is certainly not much in rush,” said a banker involved in the deal.
At this point, it is unclear whether any corporate will be prepared to pay the market clearing premium next week as they await further bad news.