In the week ended November 12, investors pulled $1.31bn out of EM bond funds, a 5.1% loss, says EPFR Global. “Emerging markets bond funds have now posted 14 straight weeks of outflows totaling $13.3bn as their commodities export story unravels and those with shaky public finances scramble to plug growing gaps,” says the fund tracker. High yield bond funds meanwhile took in a net $186m. EM debt funds are still losing money, posting a 2.57% drop in the week ended November 13, according to Lipper. The fund class is the worst performer of all world income funds, which on average dropped 0.79% for the week, according to Lipper. Global income funds registered a 0.24% drop and international income funds grew slightly by 0.33%. Year to date, EM debt funds have slid 23.17%, the worst of all world income funds.
Category: Daily Brief
LatAm Banks Seen Prepared For Challenge
The external environment continues to get worse, but LatAm banks gathered in Panama City for Felaban meetings over the weekend remain optimistic about their prospects. “We have not been impacted at all by the financial crisis,” Roopnarine Oumade Singh, general manager, treasury at Trinidad’s Republic Bank, tells LatinFinance. “We don’t expect to have any impact on the financial side. I guess the impact is going to come from the real side, as the world economy slows down,” Singh adds. He and other senior retail bank executives boast a strong liquidity position and say they are well placed to survive the global slump. A Moody’s report on the effect of the global financial downturn on LatAm banks forecasts that although they face challenges, they are well prepared to weather the storm. Moody’s assumes fundamental credit conditions in LatAm banking systems for the next 12-18 months are negative, predicated on a scenario of potential global stagnation and deleveraging. However, the agency also points out that financial institutions are relatively well placed, and that many could prove resilient amid today’s turbulence, particularly because many have limited exposure to troubled offshore assets, as well as reduced dependence on foreign currency financing.
LatAm Equity Flow Turns Marginally Positive
LatAm equity funds reversed a 21 week losing streak in the 7 days to November 12, taking in a net $1m, according to EPFR Global. “The recent weekly equity flows have the look of investor exhaustion with fund redemptions,” says EPFR MD Brad Durham, speaking of equity flows generally. “Perhaps it’s because there’s so little left to sell after October’s historic sell-off, which may be a hopeful sign.” By contrast, GEM funds lost $196m. LatAm equity benefited from news that Chinese demand for the region’s commodity exports could be bolstered, says EPFR. LatAm had lost $7.3bn in 20 weeks of outflows.
Equity Fund Returns Tick Higher
LatAm equity funds showed positive growth of 2.50% in the week ended November 13, beating the world equity fund average of 0.88%, Lipper data shows. However, LatAm funds are still down 57.15% year-to-date, making them the worst performers of all three categories of world equity funds tracked by the service. Meanwhile, EM funds registered a 0.23% drop and global small and mid-cap funds dropped 0.47 for the week.
Mexican Local Borrowers Forced Short
The planned issuance of up to MXP5.7bn in 2-year bonds by Cemex as part of a liability management exercise highlights the constraints on Mexican duration faced even by its blue chips. The domestic market, virtually shut since September, may be creeping open. But issuers will have to rely on shorter-term debt – in some cases a year or less – for some time. “Next year is going to be very tough,” Tonatiuh Rodriguez, who oversees about MXP40bn at pension fund Afore XXI, tells LatinFinance. “I expect the long-tenor issue market will reopen in the second half or in the last quarter of 2009.” Short-term issuance will dominate the first half, and a return to the 20-year and 30-year local tenors of the past may be years away, Rodriguez says, with issuers getting 10 years at most when the market revives. Though his and other Afores are not normally short-term debt buyers, Rodriguez explains they do have an interest in providing liquidity by participating in short-term funding to companies, especially for names whose longer bonds they hold. To fulfill long-term needs early next year, he says Afores can look to infrastructure offerings coming from the Fonadin fund and other federal and state government programs.
Ecuador to Gain Little from Default
Rafael Correa’s government has little to gain by missing a $31m interest payment on 2012 dollar bonds due this past weekend, analysts say. The government announced Friday that it would skip the payment and use the 30-day grace period to decide whether to honor the debt. The government has been threatening to stop paying its 2012, 2015 and 2030 bonds, after a special commission report – due to be made public November 20 – found the debt to be “illegitimate.” “Ecuador has much more to lose than to gain by defaulting,” says Eduardo Checa, CEO at Ecuadorian boutique Analytica Securities. He says the risks are future credit lines to the country being closed and a further weakening of interest from foreign investors. “This is not a problem of cashflow or reserves,” Checa says, noting that falling oil prices have not yet impacted the country’s budget plans. “There is little upside (financially or politically) and, potentially, a large downside from not paying the public debt service. If Ecuador were to default, holders of defaulted bonds could try to attach the assets of the government abroad (for example, Petroecuador’s oil tankers),” Credit Suisse says in a report. A debt moratorium would only save Ecuador about $470m in 2009, according to Analytica. The sovereign is also heard preparing to challenge creditors in Ecuadorian and international courts in an unorthodox pre-emptive strike.
Agencies Chop Ecuador
S&P has cut its sovereign rating on Ecuador to CCC minus from B minus and Moody’s chopped to Caa1 from B3, both implying a very high default probability. The moves were motivated by the government’s announcement Friday that it planned to miss a $31m payment due the following day, and use a 30-day grace period to determine whether to pay. “The combination of sharply lower oil prices and an expected hit to economic growth resulting from lower exports and remittances is expected to pressure fiscal accounts in 2009. However, willingness, not capacity, to pay is currently the overwhelming credit weakness,” S&P says. Ecuador has repeatedly emphasized that if faced with a trade-off between implementing its ambitious social agenda and meeting debt obligations, it would forego debt payments. However, “given the extraordinarily good performance of Ecuador’s fiscal accounts so far this year and the sizeable accumulation of government deposits, the timing of this decision is surprising as it is clear that such a trade-off does not currently exist,” Moody’s says. Both shops have the sovereign under review for further downgrade.
Cemex Tackles Loan Hump
Mexico-based cement multinational Cemex is renegotiating terms on some $10bn in bank debt in an effort to relieve pressure building for 2009. Covenants and pricing are being revised for 6 facilities, and margins are likely to jump by up to 150bp, in some cases to the 200bp over Libor area, estimates a banker close to the process. BBVA, Citi, HSBC, RBS and Santander are leading the rescheduling. The company, which suffers exposure to housing and construction, has seen Ebitda fall, forcing up leverage ratios. Cemex earlier this month lost its investment grade rating from Fitch, which cut to BB+, and has some $6bn in loans due in 2009, or roughly 43% of total outstanding debt, says an executive familiar with the firm. Cemex’s bank debt due in 2009 and 2010 is being termed out by 12-24 months, depending on the facility. Fees will be paid up front to participants, say bankers. Tenors on up to 4 syndicated or club facilities are being extended, while terms on 2 more bilateral loans are also being renegotiated. That does not include the liquidity premium banks have imposed to compensate for higher funding costs. The renegotiation is aimed at buying time to restructure the Cemex balance sheet, sell assets and tackle other parts of the capital structure. Cemex apparently wants to wrap up the process by year-end in an effort to begin 2009 with breathing room to address other concerns. A banker who attended a recent meeting with the cement giant says the firm is being very transparent, but that lenders have little choice but to agree terms. The main bank group is too exposed to let Cemex fail, adds the banker.
Colombia to Boost Local Debt Sales
Colombia plans to sell an additional COP2trn ($860m) of TES bonds before the end of the year, says the finance ministry. The government will place 2011, 2013 and 2018 fixed-rate bonds and 2013 and 2023 bonds linked to the UVR inflation rate. The funds will go toward pre-financing 2009. The government also indicates that the issuance plan for 2009 will be reduced by about $900m, plus an additional $220m from lower debt amortizations next year – through recent liability management operations – so that the new budget plan for next year is about $9.5bn of TES, from a previous $10.6bn. “Given that we see clear upside risks to the official fiscal deficit forecast for 2009, our assessment is that the government is pre-financing next year’s borrowing requirements taking into account the risk of eventually being forced to issue more than suggested by current official plans,” JPMorgan says in a report.
Goldman Sees Weaker LatAm Currency
Goldman Sachs sees greater weakness than it had previously calculated for LatAm currencies in the next 12 months, mostly due to a significant deceleration in global growth in 2009, a steep drop in commodity prices, weaker demand for non-commodity exports and exigent external financing conditions. As a result, it revised its 12-month forecast, valuing the ARP at 3.90 from a previous estimate of 3.30, the BRL at 2.20 from 2.00, the CLP at 660 from 520, the COP at 2,550 from 2,150, the MXP at 12.75 from 12.30 and the PEN at 3.10 from 2.85. On Nov. 13, the ARP traded at 3.31, the BRL at 2.33, the CLP at 637, the COP at 2,329, the MXP at 12.91 and the PEN at 3.09.