Latin American credits are likely to hold off on new securities issuances this week after the swell in the US dollar prompted a sell-off in emerging market currencies last week.
Argentina’s decision, meanwhile, to hike its benchmark interest rate three times in roughly a week to 40% from 27.25% also prompted a couple of the country’s corporate issuers to opt out of bond sales.
Peru’s Camposol also took the conservative route, extending a tender offer for outstanding 10.5% 2021 notes, following Paraguay’s Banco Regional, which stretched its liability management exercise last week.
“This week I think it is a matter of coming in, digesting what happened last week and try now to read the tea leaves,” one DCM banker said on Monday.
While Argentina tackles a depreciating peso, high inflation and large deficits, issuers around the region are assessing the latest US jobs data and if a higher oil price will impact the marketplace.
The US economy added fewer jobs than expected last month, but the unemployment rate dropped to 3.9%. Crude oil meanwhile, peaked at $75.9 a barrel on Monday amid increased tension between the US and Iran.
Aside from US monetary and foreign policy, issuers are tackling timing concerns and determining whether it is worth printing new paper so close to presidential elections in LatAm jurisdictions, a second banker said.
“In some places, particularly Brazil and Mexico, there is no need to risk coming to market so close to elections,” he said.
Amid the volatility, any new LatAm issuer is effectively conducting an exercise in price discovery.
“The market is not closed by any means, but pricing expectations have changed,” a second source added. “Issuers may still be price sensitive, so they may have to put off issuing bonds until they are comfortable with the price they are getting.”
New issuers are also entering an increasingly buyer-friendly marketplace, across both debt and equities.
“In terms of new issuance, it is definitely more of a buyers market,” said Sean Newman, a fixed income portfolio manager at Invesco. “Investors can now be a bit more selective.”
Overdue correction
With interest rates on track to increase, market sources are under no illusions that issuance levels will slow down this year.
While higher-rated corporates and sovereigns will continue to execute their capital markets plans, the number of first-time issuers and those credits seeking rare debt structures will decrease.
“Those that are not as credit worthy will face a higher premium,” a second investor said.
The same source said this year marks an “overdue” correction, reiterating the need for issuers to contemplate a different pricing paradigm. “Narrow this down to technicals,” the source added. “The dollar is rallying, rates are rising, so this exacerbates the ‘clean-up’ the marketplace is having.”
Despite the headwinds, a third buyside source stopped short of describing the sell-off as a near crisis.
“This is a stretch,” he said of concerns that emerging markets were in crisis mode. “Maybe appetite will wane, but the investor base is much larger today in emerging markets and more have a tolerance for risk.”
Also, those LatAm issuers willing to pay the higher premium, offer investors a greater chance at switching into higher-yielding assets.
“There is no question that issuers front-loaded [over the last year],” the second investor said. “But now things have repriced to where they should be and markets are factoring in idiosyncratic risks… Risk premium needs to reflect that.”