The Latin debt markets have had all year to get used to the gloom of wide spreads, short tenors, and infrequent – if any – issuance. So after what looks likely to be the worst September for debt issuance in recent memory, what’s another few weeks? As LatinFinance went to press, catastrophes at Merrill, Lehman and AIG and a no-cut decision by the US Federal Reserve were looking to freeze out issuers for a while longer.
The full effect remains to be seen, but investors are jittery. They withdrew a net $1.1 billion from emerging markets bond funds during the week ending September 10, according to EPFR Global. This was the fifth straight week of net outflow, the biggest weekly outflow since August 2007 and an overwhelming chunk of the $1.5 billion net outflow year-to date. EM funds tracked by EPFR have an average of 46% exposure to LatAm.
As of mid-September, Brad Durham, managing director at EPFR told LatinFinance he expected at least one more big outflow week in September before things settle down. US funds, according to EPFR data, were running on five consecutive weeks of net inflow as of September 10, seeing a year-to-date net inflow of $8.8 billion.
EM debt funds lost 1.32% during the week ended Septermber 11, according to Lipper, their third straight week of net losses. The loss came versus a 0.86% global drop in debt funds, and brought the year-to-date EM debt fund loss to about 2.39%.
The biggest problem most LatAm corporate borrowers will face is having to sacrifice growth plans, says Aaron Holsberg, head of LatAm credit research at ABN AMRO, noting that as of mid-September, it was still too early to fully assess the impact. Most corporates and sovereigns appear well placed to weather the storm, with decent cash positions and manageable maturity schedules. But some may start to feel the strain if markets stay closed for a long time.
Telemar was the lone foolhardy issuer at the beginning of September, but its proposed three part $1.5 billion deal was amended to $1 billion without a 30-year tranche before being scrapped entirely. Bankers on the deal say a jittery investor base convinced the company to take a step back. The high grade borrower’s failure to generate enough interest bodes ill for the long line of hopeful issuers waiting in the wings.
And even if markets had not frozen, the hefty new issue premium suggested by price guidance was unlikely to encourage other borrowers waiting since spring. Seeking another large piece of the 13 billion real acquisition of Brasil Telecom, the Telemar Norte Leste unit hoped to clinch 10-year bonds at 8.50% and five-year bonds at 7.75%.
Telemar would also have run the risk of seeing new bonds trade down, which has negative implications for future issuance. It could still return when conditions improve, but analysts say that is unlikely in the near term. Bankers say the company has alternative sources of financing to fall back on, namely the Brazilian loan market. Citi, Santander, Banco do Brasil, Bradesco and Itaú were hired to lead the transaction, Telemar’s first since December 2003.
Telemar was not alone. Even tiny Aruba had to postpone a $57 million 2013 bond, for which it had been slowly building books via RBTT.
Mexicans Go Short
Tenors in Mexico’s local bond market have been shrinking in reaction to global jitters. After pricing 5.5 billion pesos in 2013 bonds at TIIE plus 43 basis points in June, retailer Soriana followed up with 2010 bonds for the second 4.6 billion peso piece of its Gigante acquisition financing, priced at TIIE plus 48 basis points. Demand of 7.2 billion pesos on the deal through Inbursa, JPMorgan and Banamex was healthy, but the short notes will leave Soriana looking to take out in just over a year financing that was itself a takeout of a bridge done for the December acquisition.
Cemex was meanwhile preparing to sell up to 2 billion pesos in 2010 floating-rate notes in September. Even the banks were going for shorter paper, as BBVA priced 2.4 billion pesos in 2010 bonds at three basis points through TIIE, its shortest deal of the year.
The month’s likely champion, América Móvil pulled off 5.1 billion pesos in 2013s, but paid more than it would have liked, at Cetes plus 55 basis points for a 3 billion peso tranche and 60 basis points over the five-year Udibono for a 2.1 billion peso inflation-linked tranche. Bankers on the deal said the spreads were a bit wider than hoped for.
Elsewhere, Pemex’s La Muralla III, its first deepwater offshore platform, has closed a $600 million project finance loan. The deal consists of a 2.5-year construction period at Libor plus 175 basis points and a five-year post-completion at the same price. Pemex offtake is a strong point for the deal, which saw terms and conditions remain the same throughout syndication. BBVA and WestLB led. LF