Fixed-income investors responded warmly last week to a $1.5 billion five- and ten-year bond from Gazprom, Russia’s largest company – but markets remained shut for lower-rated Latin American corporates, and higher-grade issuers remained unwilling to pay high premiums.
Gazprom captured a massive $10 billion worth of orders. But it had to pay higher interest rates – 19 basis points (bps) more for the five year tranche, and 30 bps more for the ten year tranche – than on its comparable previous bonds.
The deal highlighted clear liquid demand for emerging market assets, with other Russian credits such as Sberbank, Vneshtorgbank (VTB) and Rosneft predicted to follow.
In Latin America, there was some cross-border activity last week: Mexico successfully completed its warrant exchange programme and Brazil’s state-controlled oil company Petrobras wrapped up a non-deal roadshow.
But Gazprom’s willingness to pay up to cover its financing needs contrasts with the price sensitivity of Latin American borrowers who are refusing to pay more.
Investors are now demanding expensive new issue premiums, irrespective of credit quality. Since Latin American paper is more expensive than US high yield bonds, this is derailing new issues.
Latin American spreads have widened over the last two months amid the global liquidity drought. Petrobras’s 2018 bond has widened from 225bp in February to around 285bp this month.
Before the global credit crunch, “LatAm corporates on average were trading 25bp below US high yield; now they are 200-250bp below. So the region’s credits are very expensive,” Max Volkov, head of Latin American debt capital markets at Merrill Lynch, said.
“If yields in the secondary market widened to the extent [that they have] in the US, then we would see more activity on the new issuance front, because there would not be a relative value problem,” he explained.
As a result, investors are now more reluctant to price off the secondary market, fearing spreads will widen. They are now demanding higher premiums as “compensation to protect their bid offers,” says Volkov.
Latin American corporate bonds are being priced more tightly than those from other emerging markets, though.
“Latam corporates continue to have lower spreads than its global peer groups, reflecting what we believe to be a market perception of superior credit quality,” Diego Torres, corporate debt analyst at ING, said.
New issuance from Latin America was a paltry $4.25 billion in the first quarter of the year: $2.5 billion from sovereigns Mexico and Colombia, and the rest from high-grade corporates Usiminas and Petrobras, all in January.
This was less than one-third of issuance in the first quarter of 2007, which was $15.32 billion, including $3.3 billion by investment-grade corporates and $3.05 billion from junk borrowers, according to Dealogic.
Poor market access, and the difficulty in determining prices, are most acute for lower-rated names. “There is a dichotomy between top-grade blue chip companies and sovereigns, and mid-tier BB corporates, in terms of how open the market is”, Chris Gilfond, Citigroup’s co-head of Latin American debt capital markets, said. “This middle space is struggling.”
With tumbleweeds blowing through the global new issuance market, bankers are now debating how long capital-hungry companies can feed themselves on alternative financing sources.