New formats offer LatAm issuers new possibilities
Latin American companies have been busily diversifying their funding sources in recent years, attracting strong demand for local currency bonds sold to global investors. That demand is having a big effect on what is achievable: coupons have fallen and tenors have risen, making global local deals a viable alternative. Philip Moore reports.
Latin American local debt markets have been attracting foreign inflows at a rapid clip since the 2008-09 financial crisis, according to research published by HSBC. Peru and Mexico, notes HSBC, are now the markets with the highest level of foreign participation in the region, with 56% and 37% of foreign ownership as a percentage of domestic debt outstanding, respectively.
“Of the four largest local markets in LatAm,” HSBC adds, “Colombia remains the one where foreign investors are the least involved. We expect that the recent easing of foreign investors’ taxation will significantly change that.”
Katia Bouazza, managing director and co-head of capital markets for the Americas at HSBC in New York, says that the recent evolution of the market for globally targeted local currency bonds in Latin America can be traced back to 2007. “Back in 2007 we opened this market with deals for América Móvil and Televisa, both of which captured demand from the international investor community by issuing in Europeso format,” she says. “That was a popular and efficient way for international investors to gain exposure to the currency.”
Today, says Bouazza, this successful template has evolved into what she describes as a new, improved version. “This is the global format, with dual registration with the CMV locally (for Mexico) and the SEC in the US,” she says. “The new format is the most liquid and most attractive way to sell local debt internationally, but this does not mean it will be the only way to do so.”
Corporate borrowers from the region have made innovative use of increasingly liquid local currency debt markets to diversify their funding sources. Last November, for example, América Móvil tapped into the broadest possible investor base when it launched the largest ever cross-border corporate bond from the region at the time. This was a Ps15bn 10 year deal registered with both the SEC and the Mexican regulator. The bonds can be settled both through Euroclear and the local clearer, Indeval, and the issue generated total demand of $4bn. “América Móvil has acted as a pioneer in a number of markets, and this structure was very different from standard Europeso issuance,” says Bouazza.
In April, meanwhile, fast-growing retailer Falabella broke new ground when it became the first corporate to issue a cross-border bond denominated in Chilean pesos. Falabella currently has 298 stores in Chile, Peru, Colombia and Argentina and has recently entered the Brazilian market. Between 2013 and 2017, it plans to open 231 stores and 20 malls, calling for a total investment of $3.9bn.
Falabella’s $500m 10 year and $200m-equivalent Chilean peso issue for the same maturity was led by Citi, HSBC and Itaú and generated total demand of more than $4bn.
International investors’ appetite for exposure to Latin American currency risk before the announcement in May by Federal Reserve chairman Ben Bernanke that the US might look to reduce its bond buying this year was in evidence the following month, when BRF Brasil Foods chose to add an R$500m five year tranche to a $500m 10 year transaction.
Regional diversification of supply of globally-targeted debt issuance was also provided in January with a rare issue from the Colombian corporate sector. This was a debut $300m-equivalent 10 year Colombian peso 144A issue from the fixed line telephone and broadband company, Empresa de Telecomunicaciones de Bogota (ETB), which is 88% owned by the District of Bogota. Led by Deutsche Bank and Goldman Sachs, the ETB transaction priced at a 7% coupon, well below the guidance range of 7.25%-7.5%, having generated demand of almost $2.5bn.
Some 140 investors participated in the ETB issue, with the US accounting for 58% of demand. Of the balance, 19% was placed in Latin America, 15% into the UK, 6% in Continental Europe and 2% in Asia. Demand was led by fund managers and pension funds, which bought 72%, with hedge funds taking 18% and private banks 7%.
Among other LatAm corporates, Mexican road concessionaire Red de Carreteras de Occidente (RCO) chalked up a notable landmark in May when it became the first borrower from the region to issue a structured transaction in global pesos. This Ps7.5bn ($602m) issue, led by Goldman Sachs and Morgan Stanley, with BBVA, HSBC and Santander acting as passive bookrunners, was secured against toll roads.
Priced with a 9% coupon, the tight end of guidance, this novel transaction was another vivid illustration of the strength of demand for issuance in global local format, generating orders in excess of Ps11bn. About half of the bonds were placed with US investors, with 30% distributed in Latin America and the rest sold in Europe.
Long dated milestone
Another indication of the growing capacity of the market across the yield curve came in May, when Televisa stretched the maturity in the peso market out to 30 years, issuing a Ps6.5bn 30 year bond led by Citi, Deutsche, HSBC and Morgan Stanley that generated demand of Ps40bn. The transaction was issued off Televisa’s Ps10bn programme, which has dual registration with the SEC and the CNBV, creating a fungible instrument between the international and local markets and thereby broadening its accessibility for regional as well as international investors.
The long dated Televisa deal represented an important milestone for the local global market because as the first 30 year Europeso transaction, it effectively opened the long end of the peso financing market. Oversubscribed within an hour, the Televisa bond was priced at a coupon of 7.25%, which according to HSBC was the lowest coupon on any 30 year global local currency notes issued by a Latin American corporate. 60% of the bonds were distributed in North America, with 30% sold in Latin America and 10% in Europe and Asia.
As in other regions, simultaneously generating demand for local currency issuance from different pockets of investors, local and international, ought to optimise a borrower’s funding costs by creating price tension. “Any time you broaden the investor base, be it through dollars or local currency, you automatically create a benefit for the issuer,” says Bouazza. “But that’s only half the story. The main benefits these issuers have been able to generate are size and tenor.”
“The Televisa deal is a classic example of that,” she says. “It would not have been able to issue a 30 year bond in anything like the size it achieved had it not been for the strong participation of international investors. When companies look at their funding strategy, they look for strategies that can help them meet criteria, such as a broader investor base, pricing advantage, tenor and appropriate size for the issue.”
The trend of Latin American borrowers targeting local currency issuance at the international investor base has dovetailed with a rise in overseas allocation by the region’s pension funds, which have encouraged more investment in regional markets as well as dollars. Chile’s pension funds, for example, have close to 40% of their assets overseas.
“We’ve started to see some borrowers issue on a cross-border basis within the region, which is the next logical step for the market’s development,” says Bouazza. As an example, she points to Banco BCI, which in May 2011 became the first Chilean bank to issue in the Mexican peso market, printing a Ps2bn three year deal. In 2012, BCI returned with a shorter Ps1bn two year transaction.
|Despite the volatility, foreign investors still like Brazil|
|Sovereign borrowers have been among the most active users of the global-local issuance format. For Brazil, it has been a structure that has played a pivotal role in helping to diversify international ownership of the republic’s debt, enhance liquidity in its global real curve and simultaneously to reduce the government’s funding costs.
It achieved all three objectives in April 2012 when it launched a R$3.15bn 2024 transaction at a yield of 8.6%, which was a historic low for Brazil in the global real market.
The order book for the Brazilian global reached R$5.5bn, allowing for pricing to be set at the tight end of its revised guidance of 8.6%-8.65%, and for the deal to be increased from an originally planned R$2bn.
According to research published by HSBC, there is now about $7bn of global real bonds outstanding, providing investors that have no access to local debt instruments in Brazil with exposure to Brazilian local yields. “Though formally external debt, global BRL-denominated bonds have become popular with international investors because these provide exposure to local rates without being subject to access constraints and taxes associated with domestic debt instruments.
“Hence, global BRL bonds trade at a significantly lower yield than their domestic counterparts,” adds the HSBC note.
More broadly, however, Brazil remains committed to increasing the participation of overseas investors in its domestic local currency market, which accounts for 95% of the government’s debt. Paulo Fontoura Valle, deputy treasury secretary at the Brazilian National Treasury in Brasilia, says that as of the end of July, foreign investors’ share of real-denominated government debt had reached 15.5%.
This total participation is still well below overseas investors’ holdings of Mexican government debt, but comfortably above international ownership of Chilean local currency bonds — demonstrating that local currency debt does not need to be Euroclearable (as Mexico’s is) to attract international investors.
Valle says that far from choosing to reduce their exposure to real debt in the wake of the threat of US tapering and unrest in Brazil earlier this year, foreign investors have continued to add to their holdings. “Foreign participation has been increasing gradually since 2006,” he says.
Although US investors are unsurprisingly the main constituents of the international buyer base for real bonds, Valle says that demand has been strong from all areas of the globe. Asian investors ranging from Japanese retail fund managers through to large government-owned institutions such as CIC in China and GIC in Singapore have all been increasingly active participants in the real market. These investors have also become noticeably better informed about Brazil’s economic fundamentals, and about the local currency auction process.
“When we’ve roadshowed in Asia, I’ve been very impressed at how knowledgeable investors are about the local market, and at how detailed and specific their questions have been about our auction process,” says Valle.
Andre Proite, manager of investor relations at the Brazilian Treasury, says that the strength of demand for domestic local currency debt suggests that Euroclearability seems to be a “minor” influence on investment flows into Brazilian real debt.
More decisive factors, he says, are higher yields twinned with liquidity in the domestic market. “Size matters,” he says. “While we have issued almost R$15bn in a single regular auction in the domestic market, it would be hard to see offshore operations reaching such meaningful amounts for debt financing objectives. Thus, liquidity is much higher in the local debt market.”
Valle acknowledges, however, that recent months have been challenging for Brazil’s local currency market. “We haven’t seen wholesale withdrawals from the market, but we have clearly been affected by rising volatility,” says Valle. “We have introduced a number of measures to counter this volatility, such as buying back some longer dated debt in order to reduce overall duration.”
Valle says that although he has no target for foreign ownership of real bonds, he believes the share of overseas investors in the local currency market will continue to expand, especially now that the 6% IOF tax on foreign purchases has been scrapped.
“It was necessary to introduce the IOF back in 2009 in order to reduce short term inflows which were putting upward pressure on the currency,” says Valle. “But we believe that by eliminating the IOF we will attract a number of investors who were deterred by the tax. This, combined with the fact that Brazilian rates are now very competitive, makes BRL bonds attractive to foreign investors.”