After a wave of issuances in May and early June, including the first bonds from Brazil this year, Latin American cross-border deals slowed as fruitless negotiations over a financial lifeline to Greece froze troubled markets. However, DCM sources say that issuers are putting in healthy pipelines and that they expect activity to pick up in the second half of the year, even if the US Federal Reserve raises borrowing costs.
With a possible hike in US rates looming this autumn, borrowers jumped in the market in May and June, issuing a swath of deals including re-openings, liability management exercises and structured transactions.
In mid-May, Latam Airlines sold the region’s first enhanced equipment trust certificates (EETCs), raising $1.02 billion from its $664 million target. Less than three weeks later, the airliner tapped the market again by selling a 7.25% $500 million 2020 note as part of a liability management exercise.
The Chilean airliner wasn’t alone in its refinancing plans. Grupo Posadas, Oi, the Province of Buenos Aires, AES Panama and BRF all made visits to the market during the two-month period.
On the securitized front, Metro de Lima Línea 2 sold a 5.875% $1.155 billion 2034 note with backing from the Peruvian government. The note followed Red Dorsal’s March sale of a $273.7 million 2031 variable funding notes, which garnered the same pricing.
With a new round of quantitative easing, Votorantim Cimentos and BRF took advantage of yield-starved investors in Europe. The issuers sold a 3.5% €500 million ($664 million) and a 2.75% €500 million 2022, respectively, during the two-month period.
“It’s really driven by the dynamics in the European market where rates are low and issuers are able to get attractive funding in euros and investors are showing strong appetite for anything that gives them some slightly incremental yield,” says Dan Vallimarescu, head of Americas debt capital markets at Santander.
Petrobras surprised markets by selling a rare century bond in June. The state-controlled oil company raised $2.5 billion at a yield of 8.45%.
But by mid-June, the market slowed as Greece and the Troika – the ECB, IMF and European Commission – entered talks to avoid a Greek default on its payments to the IMF. By July 6, the Greek people voted down a proposed austerity plan and the country’s finance minister resigned.
“Clearly there are macro events that will influence the overall markets and volatility in the overall markets beyond LatAm’s control,” says Vallimarescu.
The road ahead
During the first six months of the year, LatAm issuers sold 38% less debt in the cross-border bond market than in the first half in 2014, data from Dealogic shows.
DCM sources point to weak issuances from Brazil as the culprit behind the decrease in volume. From November 2014 to April of this year, Brazilian issuers skirted the market as the country’s largest company, Petrobras, was effectively barred from the international debt markets until it posted a write-down for losses due to bribery. Meanwhile, DCM sources say they expect more from LatAm in the following six months.
“We are pretty optimistic. We believe that issuance in Brazil will become more active. We are seeing a very healthy calendar,” says Max Volkov, head of LatAm debt capital markets at Bank of America-Merrill Lynch.
Jamaica is expected to follow in the Dominican Republic’s footsteps and tap the international bond market to pay off some its debt to Venezuela’s state-controlled oil company PDSA. The deal is expected to be about $2 billion, LatinFinance heard. América Móvil’s newly created subsidiary Telesites is expected to come to the market with a global Mexican peso transaction, along with a possible dollar tranche. Heading into the summer, bankers, issuers and investors continue to eye a possible hike in US interest rates.
“This year we are very optimistic. We don’t see the Fed moving too aggressively in terms of hikes, but 2016 is a different ballgame,” says Volkov. LF