Chile’s state-owned copper producer Coldelco bravely reopened the Latin American corporate bond market this week with a $600m global issue at a fair but sizeable premium, illustrating investor demand for high-quality paper with juicy yields.
The strong aftermarket performance of the 7.500% 10-year paper as developed equity markets plunged also confirmed its decent pricing and the market hospitality for elite Latin corporate issuers.
The (A1/A/A) mining company priced a $600m 10-year bond at 98.229 with a 7.5% coupon to yield 7.759%, or 537.5bp over US Treasuries via HSBC and JPMorgan. The near-collapse of the international banking system in September halted the borrower’s plans to enter cross-border markets in the last quarter of 2008. But after updating its books in January, the borrower has been in constant contact with bankers on how to follow the liquidity trail paved by Latin sovereigns that have priced new deals this year.
At 9am on Tuesday, leads embarked on a 4-hour marathon of conference calls with investors and thinly spread ‘whispers’ of a $500m benchmark in the low 500bp area. A bookrunner on the deal said they were conscious of the dangers of providing overly- specific and aggressive pricing whispers early on in the transaction — issues that blighted Brazil’s 2019 deal in the second week of the year. "We did not want to necessarily lead with pricing whispers and wanted to have a host of one-on-one conference calls to educate investors about the credit."
After investor feedback, official pricing guidance of between 537.5bp and 550bp was released at 1pm. The 144a/RegS senior unsecured notes sucked in around $1.25bn of orders in just half an hour. This demand allowed the leads to upsize the deal to the borrower’s $600m ceiling and to price at the tight end of official guidance.
Pricing was fraught with difficulties since Coldelco has few outstanding bonds, which are also illiquid and see little trading. Its 4.75% 2014 notes were trading at around 485bp on Tuesday morning while its 6.15% 2036 notes were around 500bp. A banker on the transaction estimates that on the interpolated yield curve the deal implies around a 35bp to 45bp new issue premium. Bankers away from the transaction generally agreed but one added that given that the long end of the 2036 curve is illiquid and effectively flat, a concession of around 50bp is more accurate.
"In addition, Chile is an infrequent borrower in the international capital markets, while "risk-averse investors are distinguishing between sovereigns and state-owned corporates more and more now, so pricing off the sovereign was not possible," said the banker.
In the end, 73% of the paper was bought in North America, 14% in Europe and 12% in Latin America and Asia. By investor type, 50% were fund managers, 20% pension funds, 13.5% insurance companies and 16.5% others.
The deal was not registered or marketed in Chile but there were some large, last-minute local orders that were around 20% fulfilled. However, the country has an illiquid swap market at the long end of the curve so local investors are effectively unable to convert the deal into local format. This left only those fund mangers with the spare regulatory capital for such foreign currency exposure to participate.
Attractive yields
One analyst noted that there was a sizeable investment from emerging market equity-focused real money accounts. This highlights the attractive yields new deals now offer and the relative value of credit markets versus equity, which "is a riskier market for emerging market investors while stock markets may not offer such type of returns over the next couple of years," said the analyst.
Nevertheless, the US presidential inauguration and prior Martin Luther King national holiday on Monday proved a distraction for some investors.
"Even though we know the pricing was pretty much fair to cheap, the deal was announced early in the morning and our analysts were pre-occupied with the new Obama administration to have the time to do the required analysis on the credit and the copper sector in general," said one US fund manager that did not buy the paper.
Copper prices plunged around 4% this week after grim global economic data and the decision by BHP Billiton, the world’s largest miner, to close a nickel mine is a sign of rapidly contracting global demand. In addition, last week Moody’s downgraded Codelco to A1 from Aa3 in response to falling copper prices.
Nevertheless, one investor that snapped up the debt issue said: "The company has solid state support, has an attractive yield and we find the 10-year tenor comfortable." The firm will see no increase in its debt this year and its $2bn in capex has half been covered by the government and this debt sale will partially help refinance these liabilities as well as power capital expenditures in 2009.
Rival bankers suggest that HSBC and JPMorgan won the mandate for the deal after clubbing together to provide a sizeable loan to the copper giant in November.
Separately, a banker that unsuccessfully pitched for the deal revealed: "I was told my fees were double what the issuer was prepared to pay. I thought the days of unfairly low compensation would be over now. It seems I was wrong."
Smaller incentive
Market players speculated only 15bp in fees were paid. They said low compensation for deals would, in general, reduce the financial incentive to commit capital to support the bond in the aftermarket and prove difficult to justify to bank management that are already looking to reduce balance sheet commitments.
Nevertheless, the deal immediately traded up at 525bp over US Treasuries.Bankers away from the transaction were broadly complimentary. "It was a fair trade, the issuer paid enough of a premium to confirm what we have been saying for months: the market is open for high-quality credits that are willing to pay the price," said one.
A New York banker who managed Coldelco’s last debt sale in 2006 with a 30-year $500m 6.15% offering said: "After coming wide of initial pricing whispers, the deal was pushed back but performed well. However, the fact that this deal came cheap even though it is state-owned will be traumatic for some corporate issuers."
The demand and stable aftermarket performance of the paper in the face of the collapse of developed bank stocks this week gave bankers and investors some comfort that top-notch Latin blue-chip companies can fairly comfortably come to the market.
Despite the quasi-sovereign Chilean corporate issue this week, no new government paper is expected soonas the country enjoys a large stockpile of foreign exchange reserves.
In addition, the resignation of Peru’s market-friendly finance minister Luis Valdiviesco and replacement with Jose Luis Carranza this week may further delay the sovereign’s expected $600m to $1bn 10 year or 30 year benchmark.