Expect robust amounts of bond issuance in Latin America during the last quarter of 2020, with much of it coming from the corporate sector provided the US presidential election unfolds relatively smoothly and has a clear outcome, says Gordon Kingsley, head of Latin America DCM origination at Credit Agricole CIB.
“This is a very busy time for Latin America. There’s a lot coming back to the market now,” Kingsley said from New York, adding: “The pipeline for corporates is quite active.”
Latin American corporates had been slow to come to market in the aftermath of the COVID-19 outbreak. In March and April, when the US Federal Reserve and other central banks lowered interest rates and injected massive amounts of liquidity to prevent market disruptions caused by the pandemic, US issuers rushed to the market. But Latin American treasurers, being used to volatility, took a more subtle, patient approach, Kingsley said.
“What we heard from them was, ‘look, interest rates are low, but spreads have widened. I wouldn’t normally issue at these levels, and I don’t feel the pressure to do so,’” he said, describing the general tenor of conversations with corporate officers in the region.
For Kingsley the waiting strategy was, in retrospect, wise. Markets have calmed down after the initial volatility sparked by the health-related lockdowns of daily life in many nations. Latin American corporates are now seeing a more attractive market.
“In many cases absolute rates have come back to levels that we saw at the beginning of the year, in January and early February, when overall coupons were low,” Kingsley said.
At these rates, Latin American companies see an opportunity to refinance medium term obligations with longer term maturities and to pay down revolving credit facilities that they had been drawing on to secure liquidity during the lockdown, he said.
September kicked off with a bang for Latin American issuers. In just the four days following the US Labor Day holiday, private issuers in the region placed more than $3 billion.
“Since Labor Day, a good mix of sovereign, financial institutions and, especially, corporate issuers has come to market with strong support from investors,” Kingsley said.
But he expects even more activity in October and November.
“A lot of US companies are front-loading in September, getting ahead of US elections, getting ahead of next year, so we think that’s going to leave space for Latin America in October and November, when investors will still be looking for assets,” said Kingsley. “Latin America is a particularly favorite stomping ground for investors who’ve bought their safe investments in the US and are looking for yield pickup.”
Kingsley does not expect Latin American financial institutions to issue as much as corporates in the last quarter because, for them, the cost of cross-border funding is still high.
“We see financial institutions that issued at the beginning of the year whose yields have now tightened to below where they issued, but the spread they are paying over Libor, which is what they care about because they’re either swapping into Libor or swapping into local currency is still elevated. So, for them, the cost of funding looks high,” he said.
In local markets, interest rates dropped, and liquidity from central banks increased during the pandemic, giving financial institutions access to an inexpensive funding alternative. Also, most assets for financial institutions are local currency, and their portfolios, which are tied to economic growth, have been contracting.
Some financial institutions may nevertheless issue.
“There are some issuers that may decide that the spreads are close enough to their targets. Others may want to keep their flags flying internationally,” Kingsley said.
Kingsley expects sovereigns to continue issuing in the last quarter, but with a lower participation in total issuance than in the first six months of the year. From late March through July, many sovereign issuers came to market in response to the need for fiscal stimulus and for spending related to COVID-19 relief.
“It looks like there will be ongoing funding needs among sovereign issuers. The question is what will be their mix of international debt versus local market debt versus trying to instill fiscal discipline,” he said.