There was little activity in Latin American cross-border debt markets this week as issuers returned from the long carnival holidays on Wednesday and mulled the current state of the credit meltdown as well as the appetite for emerging market assets.
As Emerging Markets reported last week, portfolio managers predict EM spreads on investment and sub-investment corporate bonds will drag wider with defaults spiking up at the end of the year. As a result, investors are unsure whether current market premiums for primary market deals offer value for money and are building up cash.
This has sparked a diminishing supply of new bond issuance. Last week, Brazilian bank BicBanco was forced to postpone its three-year deal, while Bancolombia cancelled its $300m peso-denominated bond due to the liquidity crisis.
With a growing number of bond deals scrapped or on hold – many since September 2007 - bankers are advising issuers to actively seek alternative funding strategies.
“We are now advising issuers not to have a single track mind and look aggressively into alternatives. Namely, the shift away from bond market into syndicated loans and other capital infusions,” revealed one DCM head in New York.
In this context of tight liquidity, volatile secondary market conditions and the unpredictable flurry of negative financial news, private placements look set to soar this year, according to market participants.
“I am now involved in lots of private placement deals because of it offers agility in execution, confidentiality and flexibility,” said one bond syndicate head.
Borrowers are still able to secure anything from $10m-$500m with the stability and ease of the transaction now overriding concerns about costs, said one market source.
“Its now about getting these transactions completed in a timely and predictable fashion as opposed to being exposed to the ebbs and flows of the broader market in the public space.”
Nevertheless, Brazilian bank Banco Cruzeiro do Sul is seeking to access the bond market, roadshowing this week its 18-month $30m bond to yield 7.50% via BCP. The issue should be out on February 20, according to a banker involved on the deal.
The sovereign bond market will also slow down this year, according to Standard & Poor’s. The agency predicts that government borrowing in the region - accessed from both multilaterals and capital markets – will fall to $290 billion from $322 billion last year.
This is not necessarily down to deteriorating external market conditions since sovereigns are still able to command ever-aggressive terms to a complaint market due to the scarcity of sovereign paper.
Instead, improved fiscal policies in the region and longer bond tenors have reduced refinancing needs.
S&P predicts that Brazil should continue to be the biggest issuer this year, followed by Mexico, Colombia, and Venezuela.
It is rumoured that Mexico could issue another $1.5 billion in external markets in the first half of this year, following its successful sale in dollar denominated 2040 bonds in January for the same amount.
Meanwhile, Peru has announced a tender offer for its outstanding PDI Brady bonds that mature in 2017, paying 70% of par plus the accrued interest up to the redemption date.
The sovereign expects a high take up of this offer that expires on 8 March, according to José Miguel Ugarte, the debt director at the country’s finance ministry.
“We are not in a position to issue debt and since we have already done this last year. We are just accumulating cash to execute the Brady call. 2008 has so far been a very bad year for the market but the macro-economic conditions in Peru are very strong,” he told Emerging Markets.
He expressed confidence that surplus tax revenues along with local market borrowing will go the whole way in repaying this debt as well as the par bonds due March 2027.
He also argued that since local debt markets were now a buffer to external market conditions, it validated Peru’s aggressive strategy of converting dollar-denominated debt into local currency.
Nevertheless, financial market turmoil - specifically a further decline in the value of the US dollar could in fact boost LatAm sovereign ratings, according to Moody’s.
“The effects would be particularly noticeable in Latin America, which is unsurprising given the high proportion of US dollar-denominated debt of some countries in the region. In Uruguay’s case, debts ratios would decrease significantly, by more than 10%.”
A weaker dollar would also boost debt metrics in Brazil, Colombia and Peru, the agency adds. However, a sharp and disorderly descent of the dollar would substantially erode competitiveness and imperil the region’s economic resurgence.
“Since countries not pegged to the US dollar would lose out to the benefit of dollar-pegged economies, it is likely that Europe and Latin America would predominantly lose and Asia would gain,” Moody’s said.
With issuers, bankers and investors preoccupied with making top-down calls about how the ongoing financial market turmoil will impact pricing and risk appetite later in the year, bankers don’t expect a flurry of cross-border bond issues from sub-investment grade names anytime soon.