Latin American debt markets rebounded sharply from their COVID-19 pandemic-related shuttering at the end of the first quarter of 2020. The expectation is that after sovereigns rushed to get back into the market at attractive rates, the corporate sector will use the second half of the year to tap investor’s dry powder, said Dennis Eisele, head of debt capital markets for Latin America at Credit Suisse.
After hitting a record of $39 billion in January, issuance in the region plunged as the spread of the coronavirus pandemic and fears of economic slowdown brought panic to the markets. Placements were short of $2 billion in February and below $4 billion in March, according to data provider Dealogic.
But in April, activity sprung back to life. Latin American issuers placed $16 billion in April and $8.5 billion in May. To put that it in context, April issuance in 2020 was higher than in 2019, 2018 or 2017. Meanwhile, May of this year was as active as the same period last year.
“We’re all positively surprised in terms of how quickly the market seems to have bounced back from the COVID-19 crisis,” Eisele said. “Impressively, for many borrowers, yields today are at or even lower than where they were at the start of the year.”
There is momentum in the market. “The trend is very favorable and it leads us to believe that we will see more issuances in the second half of the year,” said Eisele.
Up to now, the bulk of the supply has been comprised of sovereign deals. But there is a trend towards a broader range of issuers.
“The market has proven very resilient, going from investment grade sovereigns all the way to high yield corporates in four to five weeks,” Eisele said.
The market opened, as expected, with investment grade sovereign issuers, followed by investment grade corporates and sub-investment grade sovereigns. National champions like Chile’s Codelco and Colombia’s Ecopetrol came to market. Then, more recently, high yield corporates like Mexico’s Cemex have begun to issue.
Many sectors like transportation, tourism, lodging, energy, non-bank financials and entertainment remain under pressure or are lagging behind due to the spread of the coronavirus, but most issuers that previously enjoyed capital markets access in Latin America have regained that access, Eisele said.
Because many sovereigns have already come to market, Eisele expects the composition of issuers to shift a little towards corporates and banks. “The market will be less dominated by sovereigns than what we’ve seen over the past two months,” he said.
The rapid recovery of the Latin American cross-border market may be traced back to unprecedented global central bank intervention.
“In a way, the market feels as though the (US Federal Reserve) has provided a backstop for many asset classes, and that has been providing major tailwinds to the market,” Eisele said, referring to increased investor risk appetite.
As spreads compress and US Treasury yields remain ultra-low due to extraordinary monetary policy accommodation in the United States and Europe, investor appetite is expected to dip down the rating spectrum and down the capital structure in search of incrementally higher yields.
“As the market improves, we expect to see more interest and greater access for high yield corporates,” said Eisele. “I would expect to see the market for Tier-2 or AT1 capital securities to come back online in the second half of the year as well.”
“The market will be busy to the extent that the recent trend remains uninterrupted, but the world has proven recently, and humbled us, that guessing where the market will be in six months’ time is like a fool’s errand,” he said.
At the beginning of the year, Eisele estimated that issuance in 2020 would be close to the 2017 historic record in Latin America. “Nobody thought that any of this would have unfolded,” he said.
For Eisele, it is too early to tell how things will normalize. It depends on how long it takes for economic activity to settle. And there may be more volatility, he said.
“Recently, beyond COVID-19, there’s been social unrest, protests. How do those play out? How will the US elections play out? There are many factors that ultimately will drive market sentiment throughout the second half of 2020,” he said.