Changing market expectations about when the US Federal Reserve will begin tapering off its quantitative easing programme have caused investors to reassess – and in many cases reprice – Latin American equity and fixed income.
The last international deal to close was on June 11, a ¥24 billion ($253 million) Euroyen bond for Banco del Estado de Chile. As volatility began to affect dollar-denominated deals, Carlos Martabit, Banco Estado’s CFO, visited Tokyo to oversee the first-ever Chilean bond in the Japanese market. Joint lead managers Citi and Daiwa “achieved the lowest five-year yield from Latin America and well below even JBIC-guaranteed issuance for LatAm borrowers,” says Chris Gilfond, managing director, co-head of Latin America credit markets at Citi.
There have been no international DCM transactions subsequent to Federal Reserve Chairman Ben Bernanke’s comments in June 19, which were widely interpreted as an indication that the Fed would begin to lower its current $85 billion bond-buying programme sooner than expected.
However, one DCM arranger believes it is erroneous to characterize the markets as being closed to Latin American issuers: “If you had a high-grade issuer that was willing to pay a pretty hefty large new-issue premium – and it was a credit that investors liked – I think the deal would go fine. But if the issuer’s expectations were that they could come out with a deal like we saw a couple of months ago – a very small new-issue concession, tight pricing and a big book – then I think that, in this market, it would be difficult.”
However, there seems little likelihood that such an issuer will be compelled to come to market to test this hypothesis. The benign DCM conditions available to Latin American issuers in recent years mean that there are very few good credits on the sidelines with funding needs. “We have been saying [to issuers] for the past couple of years that the market was at a record low, so let’s go [to market],” says a New York-based DCM banker. “Then we go back and say it’s another record, let’s go again. And many pre-funded through 2013 and even 2014. Companies have the liquidity to sit and wait out [the current volatility]. Plus everyone is reassessing global growth. Things appear to be cooling down for emerging markets generally – and more specifically for Brazil – and so the amount of cash required is smaller.”
The changing appetite for Latin American credit is shown by data from EPFR. Emerging market-dedicated bond funds lost $2.64 billion in outflows during the week that ended June 19. Outflows from emerging market bond funds were the highest since late in the third quarter of 2011, and emerging market corporate bond funds posted consecutive weekly outflows for the first time since the second quarter of 2012. However, while emerging market bond funds still have year-to-date net inflows of $22 billion, Latin American equity funds have a net loss year-to-date of $3.71 billion.
For the full article go to Euromoney’s August issue