Mark Tuttle, Co-Head of Investment Banking, Mizuho
Expect the slowdown in cross-border bond issuance to carry into the second half now that many companies have already satisfied their refinancing needs and don’t plan any big new investments in light of slower economic growth, according to Mark Tuttle, co-head of investment banking at Mizuho.
“If you look at the volume that we had in 2016 into 2017, we had a broad selection of issuers in the region taking advantage of low rates and a great issuance environment to get out in front of investment, get out in front of refinancing and take advantage of longer tenors,” he says.
There’s also some lingering concern among potential issuers about the new administrations in Brazil and Mexico, which account for the majority of issuance, he says. Still, he doesn’t rule out a sovereign issue by Brazil in the third quarter if the government makes headway on pension reform.
Alternative sources of financing are also dampening activity in the cross-border market, according to Tuttle. He points out that tenors grew longer in Brazil’s local market as the central bank kept its benchmark Selic rate low.
“We’ve seen tenors go from five to seven years, and we’re starting to see some longer tenors with the advent of things like infrastructure debentures and the real estate (receivable certificates),” says Tuttle.
Likewise, borrowers are turning to the loan market instead of bonds because rates remain attractive and banks are fully liquid. “Issuers are refinancing some of their current loan stock. They’re putting revolving credit facilities in place. Petrobras, Raizen, Klabin, people like that, so we’re seeing some of that volume that you might have seen go into the capital markets get picked up by the loan market,” says Tuttle.
Facundo Vazquez, Head of Latin American Equity Capital Markets, Goldman Sachs
Will they or won’t they? That’s on the minds of investors in the Brazil stock market heading into the second half as they question the timing and size of pension reform. “I think the tale of what happens in the next six months is inextricably tied to pension reform,” says Facundo Vazquez, head of Latin American ECM at Goldman Sachs.
Back in January, equities seemed like a solid bet as the incoming administration of Jair Bolsonaro took office with promises of market-friendly policies, especially long-awaited pension reform. But the slowing economy and the inability of the Bolsonaro administration to reach a deal with lawmakers now weigh on the market.
Domestic investors have been active, according to Vazquez. “A lot of new and legacy funds are able to raise a significant amount of (assets under management) in this new period,” he says. “Domestic investors have been active in the last six months, but now they really want to believe that Brazil is going to do the reform this time around to deploy additional capital in Brazilian equities.”
International investors have been more active but are limiting themselves to technology-related shares. For the most part, they are avoiding stocks that are exposed to the economy, says Vazquez. “When it comes to sectors exposed to GDP expansion, including banks, utilities, consumer products and infrastructure, international investors have not been relevant players thus far,” he says.
That selectivity is a common theme throughout the region, according to Vazquez. “It’s one of those years in which investors are taking a country-by-country instead of a pan-regional view,” he says. “Investors and issuers usually ask, ‘how do you see Latin America?’ But now they want to know how we see Colombia, Chile, Peru, etc.”
Leon Valera, Managing Director of Loan Syndications, Sociéte Générale
The volume of new loans in the second half likely won’t match the pace of borrowing in recent months, but new market participants will mean more variety in transactions, according to Leon Valera, managing director of loan syndication at Société Générale.
“There’s seems to be a slight slowdown for the second half of the year, but it’s not yet clear where it’s going to go. There’s a slight uncertainty on the flow,” says Valera. Still, he sees more activity from regional and local development banks and institutions that are increasing competition.
In Mexico, he sees fewer deals with sovereign and quasi-sovereign borrowers but expects an uptick from corporates. Still, “there’s a shift in political risk and right now it is an unknown quantum,” says Valera.
He also sees “Chile continuing to be strong with a good pipeline. I would say it’s split 50/50 between bonds and loans.”
“What is not clear right now is what are the market conditions in the bank market right now,” he says. “There seems to be liquidity and long tenors, but there’s also pressure for banks to do shorter tenors.”
As the region emerges from the Odebrecht scandal, Valera expects more opportunities in infrastructure.
He also expects the volume of green loans to increase. “We’re hoping to see more of them given that there are a fair number of renewables in the region, so I think you’re going to see more green loans,” says Valera. “They seem to be providing additional liquidity thus far, which was the goal.”
And in the power sector, he sees a shift from government to corporate power purchase agreements or at least requests, which is fairly new and represents a different credit risk, he says.
Roderick Greenlees, Global Head of Investment Banking, Itaú BBA
While Roderick Greenlees sees a possible uptick in deal-making in the second half, the global head of investment banking at Itaú BBA, doubts it will reverse the overall slowdown in M&A volume this year.
True, the acquisition of Fibria by Suzano for 36 billion reais ($9.3 billion) skews the comparison. Announced last year, the deal closed in 2019’s first quarter. “But I don’t think you will see volumes in line with last year,” says Greenlees. “It’s likely we end up 10% to 20% below last year in Latin America as a whole.”
Slowing economies are to blame, according to Greenlees. The anticipated boost to the Brazilian economy after the election of President Jair Bolsonaro never materialized. “Despite having inflation under control and interest rates at their lowest level ever, M&A activity is not as strong as last year,” he says.
Meanwhile, in Mexico, investors remain cautious about leftist President Andrés Manuel López Obrador.
Privatizations in Brazil could help deal flow, but Greenlees says it will take time for federal and state governments to finalize their offerings. “The bulk will more likely come in 2020 than 2019,” he says.
There are bright spots. Power continues to attract attention. “Generation, distribution and transmission are areas of interest to foreign buyers,” he says. “And I see quite a few interested sellers.”
Chinese companies are looking at power utilities, as well as infrastructure and agribusiness, says Greenlees, who doubts the US-China trade dispute will have any impact.
He also believes private equity and venture capital will remain active in the tech sector though most will be smaller deals.