COUNTRY FOCUS: WINDOW OF OPPORTUNITY

Chilean companies are stepping up their activity in the bond market months after bloody street protests and despite lower forecasts for economic growth

Editor’s note: We set out to cover green finance and COVID-19 caused an upheaval. The digital edition reflects what went to printing press just prior to the extraordinary measures western governments have put in place to fight this pathogen. While green finance remains a relevant topic, we ask that you keep in mind the comments given by experts in preparation for this edition were given as a reasonable reflection of the world prior to the novel coronavirus derailing, temporarily, the flow of everyday life.

Chilean debt issuers are rushing back to the market in early 2020. Many companies that had postponed offerings amid last year’s riots and political implosion rushed to take advantage of attractive interest rates and the relative calm on Chile’s streets.

But what comes next depends on the country’s uncertain political outlook. Does the first quarter signal a return to normal or is Chile merely experiencing a brief respite that will dissolve into renewed civil unrest and economic lethargy?

By mid-February, companies had issued bonds worth more than $1.75 billion, up a whopping 66% over the same period last year.

Image: Chilean President Sebastián Piñera

Infrastructure fund manager Brookfield Americas and highway concessionaire Ruta del Algarrobo raised more than $300 million each.

Many of this year’s issuers had lined up to sell debt in 2019. Chile’s corporate finance sector was enjoying an energetic season as companies took advantage of low interest rates and falling domestic spreads to refinance debt and fund new investments. By the end of September, issuers had raised some $3.8 billion, putting them on course for a record year.

But the financing surge ground to a halt in mid-October when a wave of protests swept the country. Demonstrations against a hike in metro ticket prices in Santiago spilled over into the worst unrest seen in South America’s most prosperous economy in more than a generation. As TV screens showed supermarkets in flames and protesters injured by police rubber bullets, Chilean share prices tumbled and corporate bond yield spreads ballooned.

In the face of such volatility, many would-be issuers slammed on the brakes. Ratings agency Feller Rate estimates that bonds worth $1.4 billion planned for the final quarter were delayed as a result.

The few issues that did go ahead had agreed on conditions pre-crisis, or timed their offerings as precisely as if they were threading a needle. Small-business lender Incofin launched a $35 million, 10-year bond issue on November 15, just two days after the Central Bank unveiled a $4 billion intervention to boost liquidity in money markets and hours after lawmakers reached a key late-night agreement on a process to write a new constitution.

The measures helped calm the streets and financial markets, creating what many feared would only be a brief window of opportunity.

“We brought forward the operation by a couple of days as a precautionary measure,” says Incofin CEO Christian Cook, highlighting the risk that violence could flare just as the bond sale was about to close.

Other companies were unable to launch their offerings, especially those perceived as riskier bets. Department store operator, AD Retail, downgraded to junk status by Feller Rate before the unrest decimated sales, was forced to seek bankruptcy protection in December as it struggled to refinance debts of more than $600 million.

Since December, an uneasy calm has taken hold in Chile. Protests and street clashes have subsided after the government rolled out a new social agenda addressing many protester demands, from rising living costs to low pensions and wages. A 9.8% hike in public spending will be partly funded by a $2 billion tax hike on the wealthy which was approved by lawmakers in January.

Beyond the lag from last quarter, the most recent rush of issues reflects concern about what the rest of 2020 will bring.

Caja de Compensacion Los Andes, Chile’s sixth largest consumer lender, is one of those that decided to go to market, raising $78.5 million in six-year bonds at 2.55% on the day before Christmas.

“The rate was higher than if we had issued before the social crisis,” says Maria Luisa Aguayo, the company’s finance director. “But we decided to issue in December to ensure funds for the company during 2020, especially given that the social and political context could change.”

A number of companies that registered for bond sales last year, including mining group CAP and water utility Aguas Nuevas, have yet to issue them.

While financial conditions remain favorable for the time being, several factors could eliminate the conditions which spurred the recent spate of issuance activity.

In some situations, foreign money offers an alternative. Global interest rates are falling even as local spreads have widened since October. Local borrowing remains more expensive but attractive, especially for higher risk borrowers, says Pablo Zamorano, managing director for corporate finance at BICE Inversiones in Santiago

In addition, liquidity among local institutional investors remains high, says Heinrich Lessau, head of corporate finance at Santiago-based Credicorp Capital.

The unrest dealt a major blow to Chile’s economic outlook, says Rodrigo Aravena, chief economist at Banco de Chile. After contracting in the final quarter of 2019, analysts now expect the economy to grow by just 1% this year, compared to a 2.5% growth trajectory before the unrest, and said growth could be even slower in 2020. Almost 200,000 jobs have been shed since October.

To be sure, a slower economy could depress demand for capital from corporate borrowers. A Central Bank survey published in December found the overwhelming majority of businesses have shelved or are reevaluating investments planned for this year.

Construction is likely to be among the sectors worst hit, accounting for more than a third of jobs lost in recent months. “Companies that had 10 projects in development may now only build five,” explains BICE’s Zamorano.

“Conditions have changed since the unrest, increasing uncertainty and creating difficulties for investment,” modular builder Tecno Fast says in a statement. The company issued bonds worth more than $70 million in February. But the new scenario could help its rental business as clients choose to lease rather than buy. Meanwhile, Tecno Fast is studying expansion into other markets in the region.

The weakened labor market is expected to hit retail sales. But, faced with growing competition from e-commerce, brick-and-mortar retailers may be unwilling to slow the investment needed to draw shoppers to stores or expand their online presence.

The weaker peso should benefit Chile’s exporters, especially agricultural producers. However, confidence has been shaken by the disruption triggered by the coronavirus outbreak in China, the country’s biggest export market.

Under the parliamentary deal sealed in November, Chileans will vote on April 26 on whether they want a new constitution. If approved, and polls suggest a significant majority favor change, voters will choose members of a constitutional convention to draw up the new constitution next October. The document will be put to a second referendum in either late 2021 or early 2022.

Investors are as unruffled as they can be about such a complete rewrite of Chile’s rulebook, says Aravena. The two-thirds majority required to approve each article of the new constitution should preserve basic tenants of the Chilean model, such as property rights or Central Bank independence, he points out.

But each step on the path is likely to heighten political tensions, could draw protesters back onto the streets, and send tremors through markets.

Companies will be following events closely.

Protesters, overwhelmingly in favor of constitutional change, have already announced marches and strikes beginning in early March when Chileans return to work and school from the summer vacation.

Incofin had been planning to revisit the debt markets early this year, but has now put the offering on hold. “Given current market conditions, this issue will be delayed until the middle or end of the year,” explains CEO Cook.

By then, he and others hope, Chileans will have put the worst behind them.