Traders are knocking more stuffing out of LatAm markets amid spillover from what looks like panic selling in some US asset classes, including high yield bonds. The Mexican bolsa fell 3.56% Thursday and the Bovespa was 3.78% weaker, both off the lows of the day which tracked a 300 point drop in the Dow. Bond spreads widened and currencies also softened, compounding losses of the previous session. Large cross-over accounts are heard offloading assets in bulk and there is no immediate end in sight to this shakeout, which will halt LatAm debt issuance plans. The downside will likely overshoot since many of these markets are illiquid and a lot of participants have no experience of a real downturn. Credit Suisse maintains that there will be a gradual lifting of subprime-related concerns and a recovery in the markets for EM sovereign debt over the coming months. But, in a report issued Thursday, it also notes “. . . an intensifying risk of a lasting seizure in credit, with potentially serious negative ramifications for global growth and prices of EM assets, beyond the price declines that have already happened.” After so many months of froth, a shakeout is long overdue and should result in a healthy repricing of corporate assets back in line with fundamentals. Those investors who assumed LatAm was a one way ticket higher will continue to take chips off the table. The dedicated cash waiting to buy dips will not try to catch a falling knife, but it should prevent a meltdown once the panic subsides.
Category: Regions
Mexico Leaves Monetary Policy Unchanged
The central bank of Mexico left monetary policy unchanged Friday, with the floor on the overnight rate unchanged at 7.25%. The decision was generally in line with market expectations.
Unwarranted Optimism on Mexican Bonos, Says BBVA
Fixed income analysts at BBVA Securities warn that long-dated Mexican Bonos may not be compensating holders properly given the potential for a significant pickup in inflation and the possibility of a flight to quality away from government bonds in the short term. The market’s projections for second half inflation of 2.99% and full year 2007 inflation at 3.57% are too optimistic given the recent rise in food prices and strong demand coming from China, says BBVA. And while the spreads of EMBI+ Mexico and Fannie Mae bonds have widened considerably, that of the MBono has barely moved, suggesting “unwarranted optimism” based on a benign view of the benefits of expected fiscal reforms and lower inflation pressures, the shop adds. “We think most of the good news is over . . . and maintain our view that long-term domestic yields ought to increase 20bp to compensate investors for the risks we perceive . . . over the next six months.”
Colombia Raises Rates, May Pause
Colombia raised rates 25bp to 9.25% Friday, in line with expectations. Analysts viewed the move as a positive underscoring of Central Bank’s battle against inflation. Goldman Sachs views the post meeting statement as relatively dovish, with hints of a slowdown in inflation. “We expect the July inflation print to also be favorable (under 0.1% MoM) which should reinforce the disinflation trend seen during May-June,” says Goldman. “Against this backdrop, with the inflation dynamics having stabilized somewhat at the margin, we believe the central bank is close to pause the long monetary tightening cycle,” it adds. However, it does not rule out another hike in August, which it says would most likely be the last one for the year. In a note issued before the hike, BBVA tipped the Colombia TES curve as one of the first opportunities in EM amid the sell-off. It recommended the TES July 2020 for a conservative 8.4% dollar return by year end. It sees lower inflation and trending higher real rates for the rest of 2007. BBVA also predicts an extra 25bp rate hike, to 9.50% in August.
EEB Financing May Come in September
A bond offering from Colombia’s EEB, a part owner of TGI, may also come in September. The company has financing needs of up to $550m, with at least $300m expected in the bond market and the remainder to come either in bonds or from a syndicated loan, according to a banker away from the deal. Bankers close to the deal, however, say terms are far from decided and that the entire financing could be done in the bank market, among other options. ABN is also leading that deal.
Fitch Raises Bolivia Outlook
Fitch also revised the outlook on Bolivia’s long-term foreign and local currency sovereign IDR to stable from negative following public debt reductions under the Multilateral Debt Relief Initiative (MDRI). The agency also praises Bolivia’s maintenance of macroeconomic stability and positive economic prospects, underpinned by a favorable external environment. Political, social and policy challenges will continue to weigh on Bolivia’s ratings, Fitch adds. Bolivia’s public debt/GDP ratio declined to 32% by year-end 2006 from a peak of 60% at year-end 2004. Further debt relief from the IDB totaling $1.2bn will cut the public debt/GDP ratio to below 20% of GDP this year.
TGI Guidance Expected Next Week
Colombia’s TGI Thursday wrapped up a roadshow for $900m in 2017 bonds, to be denominated in both pesos and dollars and guidance should emerge next week. Over a week and a half ago, TGI said it may price this week. But bankers on the deal say roadshow meetings and conference calls were being held through the early afternoon yesterday. Given volatile market conditions, the issuer is waiting to see how the next few sessions play out. If the market worsens, the transaction, which bankers say has garnered a lot of interest in Europe and the East and West Coasts, could even wait until September. Proceeds are being used to refinance debt. ABN AMRO is leading with BBVA, Mizuho and Calyon as joint leads.
Lamosa Launches $675m Loan in USD, Pesos
Mexico’s Lamosa, which makes interior homebuilding products, has launched a $675m loan with a 4.7 year average life, according to bankers off the deal. It is denominated in pesos and dollars and to finance an acquisition. The A tranche, with a 3-year maturity revolver, includes $40m in dollars and $35m equivalent in pesos. The B tranche, with a 6-year maturity, includes a $350m dollar piece and a $250m equivalent peso portion. The margin is on a total debt to EBITDA grid that pays the following over Libor: 200bp at 3.0x-3.5x, 155bp at 2.5x-3.0x, 110bp at 2.0x-2.5x, 90bp at 1.5-2.0x and 75bp at anything under 1.5x. Scotiabank is leading with BBVA as a joint bookrunner.
Correa Replaces Patiño
Ecuador’s President, Rafael Correa, has replaced his controversial finance minister, Ricardo Patiño, moving him to a newly created ministry of coastal affairs. His post will be filled by Fausto Ortiz, currently number two at the finance ministry. The markets have generally welcomed the move as Ortiz is seen as more flexible and market friendly, although unlikely to change policy in any significant way. Goldman Sachs analyst Alberto Ramos commented: “even if the core of the current heterodox policy objectives should remain intact the process to achieve them could be substantially smoother and less disruptive than would have been the case under the leadership of Minister Patiño”. Patiño, who has been outspoken regarding the issue of a possible debt restructuring, was censured by Congress earlier this month in connection with allegations of market manipulation and was increasingly under attack from the opposition.
Goldman Group Bags Mexico Toll Roads
LatinFinance hears that Goldman Sachs Infrastructure Partners and ICA, Mexico’s largest construction firm, have won a $4.1bn concession to run four toll roads in Mexico, after being named a preferred bidder by the Mexican government. Although, the Mexican government officially announces the winner August 6, people in the market say the Goldman consortium won with the highest of six offers presented. It bid MXP44bn for the first package of toll roads to be awarded by Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas (FARAC), a trust fund owned by the Mexican Government. The 30-year concession is to build, operate, exploit, conserve, and maintain four tollroads, which have a total length of 548km. The Goldman group trumped a bid from Australia’s Macquarie Infrastructure Group (MIG) and Carlos Slim’s Impulsora del Desarollo de America Latina (IDEAL) structured as a 60/40 partnership between IDEAL and MIG. Proposals from other bidders reported in the Mexican press include Brisa of Portugal, CCR of Brazil and Grupo Hermes, and three separate bids from consortiums led by Spanish firms OHL, FCC and Abertis. Goldman Sachs acted as financial advisor to the Goldman/ICA consortium.