High new issue premiums, low refinancing needs and investor risk aversion will continue to deter price sensitive Latin American companies from launching external bonds until September, bankers said this week.
Market tone has improved in recent days with CDS for bellwethers such as Brazil 2040s tightening over four consecutive days. However, issuers are said to be aghast at the stubbornly high price demands from investors despite the region’s economic buoyancy.
Crucially, eastern European and Russian firms are paying through the nose for new external bond issues in order to attract risk-averse investors, posing a relative value problem for Latin American issuers. "These emerging European credits are prepared to pay on average 150bp to 200bp more than Latin American corporates, so investors are demanding similar levels," said an emerging markets debt syndicate banker in New York.
A fortnight ago, Ukrainian bank Ukrsibbank (BB-) launched a $250m 9.25% 2011 offering at par. By contrast, Brazil’s Banco Daycoval (BB-) priced a 2011 bond, yielding just 7.375%. This week Brazilian bank Parana Banco (B+) has been eyeing market conditions for its 3-year bond via Queluz Securities, with size rumoured to be around $50m-$150m.
A banker away from the transaction said: "While emerging European credits have been launching deals between $500m and $1bn, most big corporates and sovereigns in Latin America have already wrapped up their funding requirements for the first half of the year. So these small deals are not capturing investors’ interest due to concerns over secondary market liquidity."
New issuance for the first half of this year is down 61% from last year, totalling just $3.3bn compared with $8.7bn in the first half of 2007, according to a recent research report from ING. It says: "We expect a slow H2 in terms of new deals as recession fears and low refinancing needs — around 10% of LatAm corporate debt outstanding matures in less than two years — have kept investors and firms on the sidelines."
A host of corporate issuers are languishing in the deal pipeline awaiting improved market conditions. For example, at the end of last month, Brazilian rice and beans producer Camil Alimentos (BB-/Ba3) roadshowed across Asia, Europe and the US a $150m bond with an intermediate maturity via ABN Amro and Santander. But a banker on the deal explained: "We would be completely irresponsible if we opened our order books now since the issuer would probably have to pay a 10% or 11% coupon. This is way too much given the issuer’s strong fundamentals." Bankers say apart from Parana Banco’s expected issue next week, it is unlikely that any other cross-border deal will be launched over the next fortnight.