A new breed of investor has emerged for Latin American credits. For the first time Asian investors, both institutional and retail, are buying bond deals placed by Latin American borrowers. Flush with cash and on the hunt for yield, Asia's private banks, investment managers and mutual funds are expanding their horizons.
With the indigenous high yield market under-developed, Asian investors are turning their attention to emerging markets. This trend began early last year, initially in Russia. Now Asian accounts, mainly based in Hong Kong and Singapore but also in Taiwan, Malaysia and Thailand, are looking further afield.
For Latin American borrowers the timing could not be better. Many have relied on traditional investors in the US, and to a lesser extent in Europe, almost to the point of saturation. The emergence of the Asian investor means that the best Latin American credits can build a truly global investor base.
No surprise
Bankers are not surprised at the turn of events. At a macroeconomic level there is growing cooperation between countries in the two regions. These improving relations are trickling down to a micro level. With many Latin American corporates improving their credit profiles, it's natural that Asian money is gravitating towards them.
So far less than a handful of transactions have targeted Asian accounts, although Gerardo Mato, head of Latin American fixed income at HSBC, reckons there may be 10 potential borrowers in Latin America that could prove attractive to an investor base that is still pretty conservative in its outlook. What these borrowers must have are strong financials, compelling growth stories and high credit ratings. "There's a lot of liquidity in Asia, and investors there are diversifying, but they will focus on the stongest credits first," says Mato.
The start
The first Latin company to issue a bond targeting Asian investors was state-owned Mexican oil major Pemex, last September. At $1.75 billion, it was the biggest unsecured corporate bond launched by a Latin American corporate. But, as remarkable as the size is, the transaction's groundbreaking characteristic was its distribution.
The idea was first put to Pemex by Merrill Lynch, which co-lead managed the bond with Citigroup and HSBC. Although Pemex is a strong corporate, its dependence on its US investor base was detrimentally affecting its spreads in the dollar market. It needed to diversify its investor base. At the same time, the investment banks noticed that there was a pocket of demand in Asia, mostly on the retail side. In order to appeal to these investors, Pemex issued a bond with no definite maturity date but crucially included the option to pay the debt after five years. The bond's 7.75% coupon also proved attractive.
The deal was launched in Hong Kong and had $500 million in orders within a few hours. It eventually garnered total orders of $4.9 billion – and was almost five times oversubscribed. About two-thirds of the demand came from Asia and 30% from Europe, with retail investors and private banks accounting for 75% of the transaction. Other buyers included fund managers and commercial banks.
The strength of the deal was demonstrated the day following its launch when a new 30-year bond from Mexico started to fare poorly. The Pemex bond, however, held its own. "It has significantly outperformed versus the Pemex US dollar curve," says Mato.
Gruma follow on
Pemex's pioneering transaction was followed three months later by a $300 million bond from Mexican tortilla group Gruma. Although Gruma is not as well known as Pemex outside Latin America, the firm's credit profile is relatively strong. The company's growth has been robust; it has limited debt; it generates plenty of cash, and its debt is rated investment grade. This was sufficient to attract Asian interest.
In addition, Gruma copied the Pemex bond's maturity structure, which had proved so successful. The tortilla group's transaction, however, differed in one respect and that was in distribution. Gruma adopted a more global approach, though Asia accounted for slightly more demand than Europe and the US.
"We knew there was a lot of demand in Asia because of Pemex's success," says Jack Gunn, head of Pacific Rim new issues at Merrill Lynch, which lead managed the bond. "The structure is well-known and the coupon [at 7.75%] offered enough yield to attract Asian retail investors. In fact, the deal was oversubscribed on the back of Asian demand alone."
"The Pemex and Gruma deals are among the first transactions from non-Asian emerging market borrowers to predicate their distribution strategies on Asian demand," adds Gunn.
Copper bond
In between the Pemex and Gruma bonds was a $500 million, 10-year transaction by Chilean copper producer Codelco. This deal differed markedly from the other two. Although it attracted Asian investors for the first time, and demand from the region was relatively strong with $215 million of total orders, most of the paper was placed in the US. About one-quarter of the bond was distributed to Asia, while the US accounted for 70%.
At the same time, the bond's more conventional maturity structure and a coupon of just 4.45% meant it appealed more to institutional investors, such as insurance companies, fund managers and pension funds in Hong Kong and Singapore, rather than retail accounts located throughout the region. "The tight coupon and 10-year maturity is less attractive to private banks and more appealing to institutionals," says Mato, who worked on the deal.
Looking ahead, both Mato and Gunn reckon the trend is set and that even non-investment grade Latin American borrowers might have a chance to issue bonds if their credit profiles and reputations are strong enough. "It's a matter of accommodating the issuer's needs with those of the investor," says Mato.