Latin corporate issuance is on the rise as sovereign dealflow wanes
Liability management has been the principal goal of nearly all major Latin American sovereign borrowers over the last year, as well as one of the biggest sources of fees for Latin bond houses.
Mexico, Brazil, Venezuela, Peru and Colombia have all reduced their issuance and are focusing on domestic securities. Sovereign issuers are coming of age. The demise of the Brady bond – restructured sovereign loans backed by US Treasury bills, which were created to help overcome the Latin American debt crisis of the 1980s – heralds one of the most profound changes in the Latin market.
Mexico became the first country to retire all of its Brady debt in 2003, and many sovereigns are now keen to retire this debt. Brazil has said it will call all of its $6.6 billion in Brady bonds. Venezuela announced that it will buy back the outstanding $3.9 billion.
Colombia too is looking to buy back up to $4 billion of short-dated global bonds. Meanwhile, Mexico has started on a new phase of liability management – although its recent $3 billion, 2017 global bond issue – intended to pay for a buyback of other dollar and euro denominated bonds across the curve – dropped heavily following volatility in the markets earlier this month.
Shrinking supply
While the flurry of sovereign debt buybacks bodes well for governments, sovereign market issuance is drying up. The supply of emerging market bonds is disappearing while demand is surging – contributing to the rise in prices.
“Sovereign debt is declining as an asset class. It’s going to become much less of a concentrated plain vanilla asset class. We’re moving into an environment where the asset class is much more diversified,” says Marc Balston, an analyst at Deutsche Bank in London.
“What we’re seeing is a change in the acceptability of the asset class,” says Kasper Bartholdy, emerging market analyst at Credit Suisse.
The reduction in sovereign debt obligations means several important changes in the emerging markets, according to Walter Molano, head of research at BCP Securities. “The first will be lower correlation between US interest rates and the performance of emerging market bonds – given that the reduction in debt will mitigate roll-over risk.”
Molano believes that this lower correlation will allow Latin American central banks to enjoy more autonomy over their monetary policies, improving their abilities to control their business cycles. “The reprofiling process will also allow for the creation of a local yield curve, adding new elements of risk into the emerging markets. It will also generate more demand for Latin American corporates,” he says.
On the upswing
“We should see the evolution of a high yield and high grade Latin American corporate market. Last of all, we should see a wholesale improvement in credit ratings,” he says.
Last year the corporate issuer reigned across Latin America. This was partly the result of portfolio diversification from US high grade and high yield markets, but also indicative of the deeper evolution of the markets.
Brazilian companies found strong demand for perpetual non-call five securities among Asian retail investors, and true high yield credits from the region staked a claim in US junk bonds. Big issuers like Pemex and America Movil saw demand surge for their issues. Even Digicel, a Jamaican wireless company, saw its deal for a $300 million, seven non-call four-year offering oversubscribed – by $3 billion.
“We’ll certainly see more corporate issuance than sovereign issuance this year,” says Jerome Booth at Ashmore. In line with that trend, one thing’s for sure: emerging market analysts will need to beef up their corporate credit research.