With interest rates on the rise, international bond deals have plunged in Latin America. It’s likely to stay that way for a while as issuers turn instead to the local market.
Latin American primary bond sales are expected to be subdued in the fourth quarter of 2022 as high global inflation, rising interest rates and instability in the capital markets make it harder and more expensive to borrow, analysts say.
“You are probably looking at a slower pace of issuance at least for the next one or two months,” says Aayush Sonthalia, a fixed income portfolio manager for emerging markets at PGIM in Newark, New Jersey. “From the companies’ perspective, and we’ve spoken to a bunch of sell-side syndicate shops as well, it’s not the most attractive time to issue bonds given the higher spreads and risk-free rate.”
How long it is until conditions improve is uncertain.
“Things may get worse before they get better,” says André Silva, head of debt capital markets for Latin America at BNP Paribas in New York. “We’re hoping that at some point in the first quarter next year the worst will be behind us.”
A lot hinges on how the US Federal Reserve reacts to try to contain inflation, which hit 9.3% in June – the highest in more than 40 years – before dropping to 8.3% in August. The Fed responded this year by hiking its monetary policy interest rate by 75 basis points for three times in a row, taking it to a range of 3% and 3.25% in September, the highest since early 2008.
Image: André Silva
“I still think next year we’ll be in an environment in which the cost of funding is going to be higher,” Silva says. “But markets will probably stabilize and hopefully at some point late next year there will be room for rates to start to go down.”
As inflation continues to rise, international bond sales by Latin American issuers have dwindled.
“Issuers in emerging markets look at this argument and say they don’t really need the money at the moment, and they don’t want to be the first ones to test the waters,” Silva says. “Last year at the height of the market, issuers were getting away with very low concessions from 0 to 5 basis points. Today is anyone’s guess, but to give you a sense of how much [sovereigns and corporates] are paying is anywhere between 35 and 45 basis points,” Silva says.
International bond sales by Latin American issuers tumbled 65% to $74.3 billion in the first eight months of 2022 from $214.9 billion in the year-earlier period, according to data from Refinitiv. The number of issues plunged to 130 from 357 over the same period, the data shows.
The latest issuer to come to market was the US subsidiary of Brazilian meatpacker JBS on September 12 when it added $2 billion to three series of bonds.
If a window of opportunity opens in the fourth quarter, investment-grade sovereign and corporate names could lead a pickup in issues.
“Among investment-grade sovereigns, I would say Peru, Mexico, Chile and Colombia could come to the market, of which I think Colombia will,” says Laszlo Lueska, a partner and portfolio manager at São Paulo-based investment firm Octante Capital.
FUNDING ALTERNATIVES
With borrowing costs increasing abroad, Latin American issuers are looking for other alternatives like tapping the local markets.
“The credit spreads in the local markets are much lower than in the offshore markets, so companies prefer issuing there rather than issuing outside,” Lueska says. “On top of that, some of them are issuing in the local markets to repurchase outstanding bonds in the offshore markets.”
Bond sales by issuers in the region fell far less than international deals, dropping to 12% to $18.5 billion in the first eight months of this year from $21.1 billion a year earlier, with the number down by about the same to 217 from 245, according to Refinitiv.
Other sources of funding include taking out loans from commercial banks or multilaterals such as the Inter-American Development Bank and the World Bank.
“The whole widening in curves and spreads in institutional markets has been very visible, but the bank market tends to react a little bit slower than the capital markets,” BNP Paribas’ Silva says. “Issuers have been very active in getting bilateral loans, syndicated loans and renewing their revolving credit facilities.”
BUYING BACK BONDS
Issuers with excess cash took advantage of the low spreads on their outstanding bonds to repurchase them or pay them off at a discount or low premium in the third quarter of this year, and the trend is expected to continue in the fourth quarter.
“I do see this happening because they will buy back the bonds in the secondary market below par,” Lueska says.
In July, Brazilian state-owned oil company Petrobras bought back $350 million in 12 series of bonds that mature between 2024 and 2034, and $446 million in eight series that come due between 2040 and 2115. Mexican mass media company Grupo Televisa repurchased $292 million in three series bonds that mature between 2025 and 2049 the following month, while in September Mexican bottling company Coca-Cola Femsa used cash to redeem $250 million in bonds that mature in 2030 and 2043.
While this is a good opportunity to repurchase bonds at discount, many issuers are concerned instead about preserving liquidity in times of crisis.
“There is this struggle between keeping your liquidity high,” Silva says, “or making short-term profits by buying back bonds that are trading at very low levels.” LF