Facing both rampant external volatility and fierce competition from loans and local financiers, Latin America’s beleaguered cross-border markets received a welcome boost when Colombian gas company TGI kicked off its global bond last November. The deal’s nimble execution, flexible pricing and healthy aftermarket performance place it in a class of its own amid a storm that has scuppered cross-border issuance in the region. The offer also highlighted the fact that even in distressed markets, there is still plenty of appetite for LatAm corporate paper at the right price, as TGI opened the door for fellow sub-investment grade borrowers.
TGI is Colombia’s single largest utility company, delivering 49% of the gas consumed in the country and 80% owned by the city of Bogota. As a quasi-sovereign, its funding strategies were influenced by the benchmark City of Bogota issue in June. The nation’s capital demonstrated the demand for peso paper by issuing a $300 million local currency amortizing 2028 bond at par that yielded 9.75%.
TGI road-showed a $900 million deal later the same month comprising a medium-tenor dollar tranche and a long-dated Colombian peso portion. But the offer was initially thrown off by the headwinds sweeping across global credit cycles.Over the summer, sole bookrunner ABN Amro and leads BBVA, Calyon and Mizuho restructured the deal, seeking feedback for a potential $250 million, 9.5%, 10-year US dollar tranche and a $300 million, peso-denominated, 20 year with a coupon of 12%. But after speaking with investors, the local currency format was scrapped. By then, risk aversion had sparked a flight to dollars, while the Colombian peso strengthened and weakened in tandem with global market distress. Investors were also concerned about the relative value between the dollar and peso portion and the illiquidity of local currency markets.
In the Timing
Finally in early September, TGI put its head above the parapet, capturing investor interest at the right moment and successfully launching a 10-year, $750 million non-call five bond. Despite the downsize, this remains Colombia’s largest international corporate offering ever – and one of its most liquid benchmarks.In the week of the transaction, leads went out with an initial $250 million offer that was quickly upsized to $300 million, $500 million and finally $750 million due to overwhelming demand. The country ceiling underpinned the pricing guidance, but bankers were unsure whether the market would view TGI as a quasi-sovereign, since it was a debut issuance. “We looked at a combination of where Colombian sovereign 10 years were trading, and at where similar sovereigns – for example, Brazil – were trading versus double-B corporates from those countries,” says Pablo Venturino, head of LatAm fixed income markets at ABN Amro.
But doubts over market-clearing premiums in the midst of the credit crisis further complicated credit work. “In the absence of liquid Colombian corporate benchmarks and in the context of a fragile market, relative value analysis included a new issue premium versus other comparably leveraged and rated Latin American comparables and a concession for the new industry and regulatory environment.”
In the end, the 144A/RegS offering priced at par to yield 9.50%, 487bp over the 4.75% US Treasuries due August 2017, in line with price guidance of 9.50%. The BB-rated deal saw 150 investors and $2 billion-worth of orders. Real money fund managers bought about 50% of the trade, with the rest going to insurance companies and banks (35%) and hedge funds (10%). The paper was placed mainly in the US (55%) and Europe (30%), with the rest going to Asia and Latin America.
Cheap?
The issue has since been dogged by accusations that it was priced too cheaply. The aftermarket bid broke the 9.50% window with spreads tightening to 325bp–350bp over the sovereign, and trading up to around 102bp. But Venturino is standing firm: “The secondary performance of the bond was a testament to the quality of the company’s management and TGI’s strong underlying credit,” he says. “Investors who did not participate in the primary market were strong buyers in the secondary, as soon as it became clear that the transaction had been widely distributed into quality accounts and would continue to be well supported in spite of the overall market volatility.”
Crucially, TGI are still happy with the deal. “Before the market deteriorated we were expecting to pay 8.5% in June,” Leopoldo Montanez, president of TGI, tells Emerging Markets. “But we were prepared to accept 9.5% because this was simply the price necessary to open up the market at the time with that global volatility. Every bond out there has its own characteristics, and the secondary market has its own unpredictable dynamics,” Montanez says.
TGI’s flexibility contrasts with the unrealistic and stubborn price sensitivity of some corporates in the region, and serves as a lesson to credits currently languishing in the deal pipeline: if the price is right, deals can get done. By establishing a benchmark and positive momentum, the sale also unleashed a tide of liquidity for junk debt in November. That month, Mexican packaging company Corporacion Durango issued a $520 million, 10-year deal, followed by Argentine power distribution company Edenor’s $220 million, 10-year offer and Grupo Senda’s $150 million, eight year.
The proceeds of TGI’s deal have been used to partly pay off a $1.46 billion, nine-month bridging loan to parent Empresa de Energia de Bogota (EEB). But Montanez says the company will only access external markets for a retap when financial market conditions normalize.
As Colombia’s economy rockets, driven by booming domestic consumption, a flurry of global bonds by local corporates is expected over the next two years, especially since global peso deals are often cheaper than TES benchmarks. “Corporate bonds in Colombia are increasing because our regulatory, fiscal and political regimes are improving day by day. Also a lot of dollars are coming from the entire world and we have the revaluation of the peso,” says Montanez.
TGI’s example shows there is clear demand for corporate bonds in the region. But until bankers and issuers can calms fears over the relative value of peso and dollar tranches, as well as secondary market liquidity levels, local currency bonds in the current climate will have a cool reception.