Europe Casts Shadow Over 2012 DCM Prospects

An upbeat mood in the European stock markets Monday set a positive tone for the start of 2012, but the uncertainty over the continent’s debt problems are expected to dampen LatAm cross-border bond volumes this year. If sentiment continues to improve, however, bankers are preparing for another round of local currency trades as well as a wave of project bonds, not to mention big dollar trades from the likes of Petrobras. “We expect lower issuance in the first half of the year due to European driven volatility in the secondary markets, reaching more normal levels over the course of the year,” says Anne Milne, head of global emerging markets corporate credit at Bank of America Merrill Lynch (BAML). Milne forecasts $70bn in new issuance from LatAm in 2012. That is a slight drop from the $75bn she calculated for the entire 2011, but far off the $93bn estimated with Dealogic data. Either way, most DCM bankers are hard-pressed to predict record issuance in the year ahead. “In the best case it will be flat to 2011,” notes one LatAm syndicate head. “From what we’ve seen from August 2011 onwards, it will continue with windows opening and closing.” Taking a bet on how the situation evolves in Europe, borrowers may want to wait for better pricing. The sale of dollar assets by European financial institutions could weigh on pricing for credit overall, and indeed create more supply in the bond markets as corporates seek funding alternatives. While many LatAm corporates can afford to wait, high-grade issuers with big capex needs like oil companies Petrobras and Pemex are sure to make another round in the dollar markets this year. For now, however, the market is closed to junk names, with exception perhaps of interesting or rare BB credits. Volatile FX markets also raise doubts about more global local currency trades, though several such mandates mean a relatively large pipeline. This comes after a mini revival in the asset class last year. “Local currency made a comeback. We saw $8.