by Karen Schwartz

Santiago may have become an essential stop for many Latin American borrowers selling US dollar or other local currency bonds to large local institutional investors like pension funds. But efforts to broaden the credit spectrum of Chile’s domestic bond markets and integrate them with the outside world have been slower to succeed despite the implementation of more flexible regulations.

There have been growing signs of interest in the so-called Huaso market designed to allow foreign entities to issue locally, with Mexican homebuilder GEO expressing its intention of tapping these instruments, and last year saw an unusual sub-investment grade Chilean retailer tap the domestic markets thanks to a growing demand from family offices.

Yet recent regulatory changes designed to lure a broader range of foreign borrowers, including lower grade credits, into the Huaso arena have failed to take off so far, leaving local fixed-income investors increasingly looking abroad for diversity. Nor has an accounting scandal at retailer La Polar left the buy-side enamored with lower grade credits, dampening the prospects for the development of a domestic high-yield market.

Under the old Huaso regime only two borrowers had tapped this market. Mexican telecom América Móvil completed two such trades to date, while Peruvian bank BCP added a third.

Realizing that investment-grade names have access to a wide range of markets that probably offer cheaper forms of funding, local authorities turned their attention to adapting new regulations to attract middle-tier credits that don’t necessarily have access to larger US dollar markets but may find the options in Chile attractive.

Mexico’s Corporación GEO, which has filed a $100 million-equivalent bond shelf in Chile for a 10-year UF-denominated issue, in theory falls under this category. The company is unable to issue such lengthy maturities at home and this has led it to seek other markets for longer tenors and more attractive funding costs.

“We are undertaking this process to open windows to access financing,†Roberto Torres, the homebuilder’s head of capital markets, tells LatinFinance.

Though GEO is not yet planning a specific transaction, it sees opportunities available in the Chilean market, and if necessary, could use proceeds from a sale to refinance debt. An issue would be swapped back into Mexican pesos. “We are confident that this process [the swap] is simple and accessible,†Torres says.

GEO, which has two BBB Chilean national ratings, as well as being rated BB minus on an international scale, may be the kind of issuer Chile would like to see.

Despite Torres’ upbeat view, the additional costs incurred from what is often an illiquid cross-currency swap market could potentially deter issuers from proceeding. According to Soledad Ramírez, a corporate finance manager at Scotiabank in Chile, the expense of a swap could make a local Chilean bond less efficient versus, say, a dollar bond.

Still, there are other reasons for taking the Huaso route, adds Ramírez. “One of the attractive features of the Chilean market compared to others in Latin America is that it offers tenors of 20 years plus and has very interesting volumes,†she says.

According to local shop Celfin Capital, average daily trading volumes in Chile’s fixed-income market were $395 million last year and are expected to jump to close to $500 million, though only 30% of that involved corporate bonds, with the rest being generated through sovereign debt.

Regulatory improvements for the Huaso market that were enacted in April last year also included provisions to broaden the issuer base to other government agencies and supranational entities. The Inter-American Development Bank (IDB) was reportedly considering this option, while more concrete plans are being hatched for a Huaso bond from Panama-based Banco Latinoamericano de Comercio Exterior (Bladex) via BBVA.

Still as of late February, none of these potential issues had materialized. Regulators have set certain guidelines that may be viewed as deterrents, but such hurdles are unlikely to discourage companies from raising money in Chile. For instance, foreign corporate issuers must come from countries that have three ratings and be members of an organization dedicated to combating money laundering and terrorism.

At the end of the day, say sources, cost is the principal stumbling block. Observers note that as long as it is cheaper to borrow in dollars, peso-denominated Huaso issues will likely lay dormant until this market becomes cost efficient.

High Hopes for High-Yield

Meanwhile, hopes are on the rise that a local high-yield bond market may be beginning to emerge. This comes after Chilean retailer AD Retail, rated BB+/BBB in the local market, sold in January a UF2 million ($87 million) 9.5-year bond at par to yield 6.05% through local shop IMTrust.

The bond may have been small, but it was noteworthy not least because investors have taken a hands-off approach to retailers ever since the La Polar accounting scandal heighted risk aversion around this sector. It was also the first corporate bond with a BB+ national scale rating to issue debt in a local market dominated by high-grade names.

“This process shows the deepness and sophistication of the local capital market considering this was the first BB+ risk rating bond issuance,†says a company source.

He explains that the issuance proceeds are to be used to finance ABCDIN’s new store expansion plan, invest in its loan portfolio and support its strategic plan development, as well as to refinance debt.

Due to regulatory limits, pension funds and insurance companies cannot or are less inclined to venture too far down the credit spectrum, but there is growing group of investors, such as family offices, which are willing and able to do so. AD Retail is seen as proof of this.

Still, just because AD Retail, which specializes in consumer electronics and home decorative products, under the ABCDIN name, was able to issue may not necessarily mean other sub-investment grade credits will soon make their way out of the gate.

Broader market instability since that time and the La Polar upset in June may have caused institutional investors to become more careful, especially with regard to issuers rated A and below. “I think that they are more conservative, more cautious,†says Scotiabank’s Ramirez.

That doesn’t mean it’s not possible to issue, she goes on to explain, but rather that more extensive and deeper due diligence will be required, and that the final investment decision will rest in the credit quality of the issuer rather than be based solely on the rating itself.

Pension funds and other investors have the option to move into lower-grade territory, but such deals will not be printed with ease, says Gonzalo Ferrer, managing director and head of DCM at Celfin.

“I honestly believe it will depend on the names and it will depend on the yields,†he says. “It’s a relation between the credit risk and the appetite for yield of the investors.†LF