Latin American high grade credits tightened modestly this week, however, the near term outlook is grim as global investors reduce allocation to emerging markets and wait to see how illiquid market conditions will affect corporate solvency next year.
This week’s historic US interest rate cut to effectively zero boosted sovereign paper with Brazil’s 2040 global bond soaring 2.438 points to 122.563, its highest level in more than two months. However, in general, Latin bonds saw only minimal price movements and relatively thin trading in credit default swaps.
Investors and traders are wrapping up for the holiday season and mulling market strategies for January. Origination bankers are advising their clients that once sovereign issuance gathers pace in January and liquidity is unleashed to the asset class, top-tier Mexican and Brazilian companies could price new risk. But as credit costs remain sky-high, market players are awaiting an avalanche of rating downgrades and debt defaults next year that will affect pricing and risk appetite for corporate credits.
Medium-tier Brazilian financial institutions in particular have been hit by the reduced access to financing. Last week, Moody’s downgraded Banco Bonsucesso to Ba3 from Ba2 while downgrading its peer, Banco Cruzeiro do Sul to Ba2 from Ba1. The same ratings action was taken for fellow Brazilian mid-cap Banco BMG last week. Since the collapse of Lehman Brothers in September, the market confidence for banks reliant on wholesale funding rather than retail deposits is at an all-time low. Before the onset of the global credit crunch in August 2007, debt capital market bankers predicted that Brazilian banks would issue a flurry of global bonds over the next two years. Currently, these banks have less than 10% of their funding from foreign sources.
But a prolonged liquidity strain will reduce bank profitability and asset base expansion as well as shelving external bond issuance. As a result, if the primary market eventually opens for sub-investment grade names at the end of next year, extremely high premiums would be demanded for such banks.
Chile’s state-owned oil and gas utility ENAP is receiving request-for proposal pitches from bankers to launch a benchmark deal for a maximum 10 years maturity if a primary market window opens early next year. One New York-based origination banker involved with the client admitted: "The process is going slowly and its government-owned status has curbed its appetite to launch anything risky next year". In addition, the cyclical commodities downturn has sapped previously resilient investor enthusiasm for the sector. Last week, Moody’s downgraded ENAP to A3 from A2, citing reduced profitability.
Contagion from the US property market crash engulfed Panama’s Newland International Properties this week as Fitch downgraded its $220m senior secured notes to B+ from BB. The developer is building the Trump Ocean Club International Hotel & Tower in Panama City. The rating agency said despite good solvency prospects in the long term, "short term liquidity stress could arise when cash on hand is not sufficient to cover timely payment of interest on the notes".
In addition, Dominican Republic’s real estate developer Cap Cana has been forced to reassure market confidence and investor interest by pursuing a debt restructuring programme this week. Weston Funding LLC has kick started a cash offer to purchase up to $100m aggregate principal amount of Cap Cana’s 9.625% senior secured notes due 2013. As of December 16, 2008, the aggregate principal amount of the notes outstanding was $250m and minimum purchase price is $334 per $1,000 principal amount. The purchase offer is scheduled to expire at 1:00 pm, Eastern Time, on December 24, 2008, unless extended.
Renewed fears of the Republic of Argentina’s ability to service its debt in recent weeks have imperilled domestic corporate credit quality. The country’s bonds have been trading at distressed levels over concerns that the country will not be able to meet debt payments in 2009. Last month, the country nationalised its pension system providing the sovereign with some capital to roll over bonds and loans.
This week, there was some market relief after the government made a $1.3bn payment on GDP-linked bonds. Latin America’s economic outlier is now mulling a proposal from Citi, Deutsche Bank and Barclays Capital to launch a fresh debt swap for its holdout creditors who rejected a 2005 debt restructuring. There are growing calls for timely resolution after a US judge last week issued an injunction to freeze $553m of Argentina’s recently nationalised private pension funds located in the United States. These events have savaged Argentine companies. The country’s brewer Cerveceria y Malteria Quilmes’s $120m 7.375% 2012 is now quoted at around 70 while many corporate bonds now trade 50 below par.
Debt capital market bankers expect to be relatively busy in corporate restructuring in the first half of 2009 as global illiquidity rapidly undermines the funding base for even the most solvent of corporates.