Dire market conditions and fears over US growth continue to overwhelm Latin American issuers in the new year, with bankers praying high grade corporates will emerge from the ever-increasing deal pipeline and set a pricing benchmark.
“I think the market will continue to be dead until a good credit comes out and unleashes some liquidity,” said one New York-based bond syndicate head. Participants are hoping that a high-grade corporate will jumpstart the local-currency and dollar-denominated debt market by issuing a “substantial size deal that trading houses can deal with and that effectively sets a benchmark for the market,” he said.
But with most bankers and issuers still on holiday, any real activity is not expected until mid-January. One participant predicts that financial institutions from Latin America’s largest economy Brazil will test the market waters. “Top tier Brazilian banks that are mainly involved in private banking may access the market first.”
On the sovereign side, Peru is likely to issue local debt in the first quarter of the year and it is rumoured that Brazil will tap existing dollar denominated bonds for an extra $500 million - $1 billion this month.
These good credits will be followed by cash-strapped lower rated names, observers predict. In this scenario, efficient price discovery and stable secondary market liquidity may be difficult to achieve.
Nevertheless, BancoEstado reopened the Chilean local market yesterday (Thursday) by issuing $316 million in five and 10-year bonds. The bank issued the equivalent of $157.8 million in inflation-linked Chilean Unidad de Fomentos at a yield of 3.4% and a $157.8 million 10 –year deal at a yield of 3.48%.
Deals in the pipeline include Colombian state-owned telephone company ETB, which plans to sell a $300 million global bond this month after postponing the deal in September, Caribbean resort firm Cap Cana’s $500m 10-year deal and Brazilian sugar-cane processor Grupo Unialco’s $150m 7-10 year offering.
One banker voiced frustration that these borrowers are not prepared to accept that the era of cheap and abundant credit is over. “Issuers in the region have been so spoilt over the last couple of years and used to tight spreads that they are not prepared to accept anything less.”
But a New-York based market participant said: “these corporates obviously don’t want to see these terrifying spreads so they are in a wait-and-see mode. There is no reason for them to endure the penalty of poor market conditions and open the door for others.”
With this grim backdrop, it is doubtful that DCM activity in the region will continue its upward trend this year with deals amounting to $79.2bn in 2007 from $74.9bn in 2006, Dealogic announced on Wednesday.
Bankers are pessimistic that they will receive anything like the $433 million they generated in fees last year. “I am just preparing for possible roadshows but borrowers I have spent the last couple of weeks talking to are not that forthcoming. This casts doubt on the year ahead,” said one DCM head.
Nevertheless, one observer was more optimistic “You just need one good name to get the ball rolling, then we may see a flurry of issuers emerging.”