by Ben Miller
Asia’s vast buy-side potential has really yet to be exploited by Latin American issuers looking to diversify their funding bases. This is slowly changing, however, as the region becomes more than just an afterthought through greenshoe options on dollar bonds, and after América Móvil (AMX) ventured into the renminbi market this year to mark LatAm’s first-ever renminbi-denominated Dim Sum deal.
Yet, lack of familiarity with LatAm credits, an historic distrust of the region and an inability to assess high-yield credits means that Asian investors are only likely to welcome but a handful of Latin names, despite having considerable sums of money to put to work.
América Móvil’s 1 billion yuan ($160 million) bond sold in Hong Kong in February represented LatAm’s entrance into a new market. The three-year so-called Dim Sum bond could be the first of several for the telecom, and other high-grade issuers with commercial links to China.
“We want to establish a more regular presence in this market, with funding that can be used to cover our inputs of Chinese goods,” América Móvil CFO Carlos García Moreno says. “This is not meant to be a one-off transaction.”
With the telecom’s vendor network growing considerably in recent years, the company has been looking to raise financing in a currency that better matches this commercial relationship. A similar logic prevailed when in 2009 it secured a $1 billion 10-year loan from the China Development Bank.
The seasoned borrower has been at the forefront of breaking down barriers in Asia. Last year, it also tapped Japan’s Samurai bond market, which had largely been the domain of a small group of LatAm sovereigns.
América Móvil only raised ¥12 billion ($156 million) through a dual-tranche offering, but the telecom went one step further than its sovereign counterparts by selling paper without a guarantee from Japan’s JBIC government bank, largely thanks to its high single A ratings.
“About a year ago we prepaid that [China Development Bank] loan, and at the time we saw the Dim Sum market was beginning [to grow],” García Moreno says. “There was a clear intention by the Chinese government to develop the renminbi market with the idea that more people would buy more Chinese products and pay for them in the Chinese currency.”
Room for Sum More
América Móvil drew 2 billion yuan in orders for the Dim Sum sale, and priced at par to yield 3.5%. It joins a select group of EM and multinationals such as McDonald’s and Caterpillar that have tapped into this asset class. McDonald’s, for instance, raised a smaller 200 million yuan three-year at 3% in 2010, and more recently China Development Bank came with three and five-year Dim Sum bonds at 3.10% and 3.45%, respectively.
“América Móvil is well-known and followed by investors globally. It is a good first time issuer to lead this effort [for LatAm],” says Katia Bouazza, co-head of global capital markets, Americas at HSBC, sole bookrunner on the transaction.
Marking a new twist to Dim Sum deals, AMX’s bond also registered the paper with the SEC, opening the door to a broader group of US investors. Asian retail and institutional accounts comprised the vast majority of buyers, as the deal was largely executed during Asian hours, but US and European investors participated as well.
“For Asian investors, this is already an important market,” says Bouazza. “For Europeans and US accounts it is still an educational process.”
Like European investors who are trying to diversify their portfolios beyond familiar local names, Asian accounts are also looking to branch out into credits outside of their own region. América Móvil can provide such investors with exposure to all of LatAm, explains García Moreno. While the Dim Sum investor base is arguably more diversified than the retail-dominated perp market, it is still comparatively small.
The growing Dim Sum bond market could easily accommodate more LatAm borrowers, though followers of América Móvil’s recent foray into the renminbi-denominated instruments could take some time in getting there.
“There will be tremendous room for Brazilian companies to come and raise capital,” says George Ding, CEO of Hua An Fund Management in Hong Kong. He notes that the market is expected to be at the center of the Chinese government’s five-year drive to internationalize the yuan, and more LatAm issuers could come to this market in 2012 if they so chose, he adds.
Local bank deposits of some 630 billion yuan ($99 billion) with very low interest rates means that investors will likely be willing to buy higher-yielding LatAm bonds denominated in a currency that looks set to appreciate going forward.
“There is room for more foreign issuers,” says João Paulo Loyola, who works in Bradesco’s fixed-income sales in Hong Kong. “There is an amount outstanding of 150 billion yuan in bonds, so the potential demand is four times.”
Still a Foreign Concept
For now, however, the Dim Sum market remains the domain of high-grade issuers only, limiting access to a broader swathe of LatAm credits.
One hurdle is Asian investors’ lack of familiarity with LatAm credits. Buyers in Asia look first to China and other Asian emerging markets, then to the US, and only then perhaps to Latin American issuers.
Though there is interest in diversifying, lack of research capability often means an inability to look past a few sovereigns and perhaps quasi-sovereign names like Pemex and Petrobras. LatAm entities issuing bonds directly in the Hong Kong market and cross-listing equity there – as Brazil’s Vale did in late 2010 – are a good start.
“It has to be a cascading process, starting with the high-quality names and going down to more exotic names,” says Ding.
There are not many long-dated Dim Sum bonds at present, though Ding says there may be some institutional investors in search of longer-term bonds. Large global houses have a good understanding of EM, but for China-based managers there is more of a learning curve.
“As you get more comfortable with your home market, you look elsewhere to add return,” says Jiang You Heng, head of investment strategy at China’s Guotai Junan International.
Though LatAm is still somewhat unfamiliar, Jiang recommends more Dim Sum issuance, as there is certainly money waiting to be put to work in that market. For Asian investors eyeing possible LatAm investments, political stability remains a concern, as is the region’s history of debt restructurings.
“Those of us who have been around these markets a long time are skeptical, because we’re not sure this time is going to be different,” Jiang says. “Politics is harder for those of us who don’t sit there to figure it out.”
Ju Sung Cheol, a fixed-income portfolio manager at Daewoo Securities in Hong Kong, which has about $1 billion under management in EM debt, echoes such sentiments. “The problem is we have limited knowledge and access,” he says.
Cheol’s shop takes a top-down approach to LatAm, picking countries and then sectors and focusing on high-grade credits. However, it has no high-yield credit analysts, making the process of buying lower grade credits difficult and often making Daewoo pass on such deals even when they want to put them in their portfolio.
With the Dim Sum bond market, liquidity is also a concern, Cheol says, as evidenced by the small size of América Móvil’s issuance. This is less of an issue in the Japanese Samurai market, which is more buy-and-hold.
With the more liquid dollar-denominated bond sales, Cheol says lead managers don’t need to spend much time marketing to Asians, and geography means participation comes through overnight greenshoes for large sales.
However, Asian investors are becoming less of an afterthought as leads take more time to sell dollar deals in the region. This happened with Petrobras’s $7 billion four-part bond sale in January, which was kept open overnight after launch to have a window that accommodated Asian, European and US buyers.
Meanwhile, sovereigns continue to look to Asia as an alternative funding pool, mostly in Japan’s Samurai market. Juan Pablo Newman, the director of debt issuance at Mexico’s finance ministry, has reiterated his government’s wish to issue a non-guaranteed Samurai this year.
With yields remaining low in Japan, LatAm issuers are poised to keep taking advantage of the Japanese market. This, too, has been a process of gaining familiarity. “Investors know Mexico now, and can do the more specific analysis required of non-guaranteed issues,” Newman says. Mexico met investors late last year with Nomura, Mitsubishi UFJ and Mizuho, but decided against issuing. LF