A rally in the bond markets early this year seemed to signal better times ahead, encouraging Latin American issuers to sell bonds. It didn’t last long. Issuers must now wait for a general easing in market conditions or draw on the innovative strategies they honed during a dry spell last year to raise capital.
It’s been a hell of a ride. For the past year and a half, high inflation and rising interest rates have battered financial markets around the world. Investors have lost money and pulled out of riskier assets. The steady flow of cheap capital since the mid-2000s dried up, and borrowers in Latin America and the Caribbean are feeling the pinch.
When will market conditions ease? The answer seemed to come early this year. Bonds and stocks rallied in the first six weeks of the year on expectations that the US Federal Reserve would start moderate its aggressive increases in interest rates in the first half of the year.
That enthusiasm, however, petered out almost as quickly as it had begun. Strong labor market numbers in the United States and sticky inflation rates across the developed world have once again cooled investors’ fervor for emerging market debt, depressing dealmaking. Only 33 deals by Latin American and Caribbean issuers hit the domestic and international market in the first 45 days of this year, down from 60 in the same period of 2022 and 67 in 2021, according to data from Refinitiv. The volume of new bonds placed in that period this year totaled $20.5 billion, roughly half as much as two years before.
And then there was the collapse of Silicon Valley Bank and Signature Bank in the United States in early March. This sparked concerns about the health of the banking system that soon spread globally after beleaguered Swiss lender Credit Suisse suffered a blow in its reorganization efforts. While global markets tumbled, expectations have gained that the Fed may ease its monetary tightening campaign sooner than had been expected to avoid more banks – or companies – from failing.
A TIME OF DECLINE
This wait for an easing in monetary conditions, no matter how long it will take, would normally fluster issuers, but many in Latin America had prepared for the worst, says Lisandro Miguens, head of debt capital markets for Latin America at JPMorgan.
“Most issuers in Latin America refinanced their short-term maturities during 2020 and 2021, anticipating the Fed’s tightening cycle. They will have to start addressing that well into the second half of 2023 and the first half of 2024,” he says. “On the other hand, 2025 coupons are pretty low, so nobody is in a rush to refinance them today, when coupons would be much higher.”
Some issuers, of course, may still feel the need to sell debt or spot the opportunity to do so, even in this wobbly market. It’s not impossible, not by a long shot. A string of innovative and well-timed deals last year show how corporates and sovereigns can access fresh financing from reluctant investors, a strategy that’s bound to carry on this year.
Photo: Lisandro Miguens
Sacyr Concesiones is one. The road concessionaire, a unit of Spanish construction company Sacyr, raised $800 million in February last year to refinance loans for its Rumichaca-Pasto toll road in Colombia. The company issued a hybrid of bonds and loans in local currency and US dollars, including a 19-year social bond in a local unit of account that fluctuates with inflation. Another novelty in the deal was a hard mini-perm loan in local currency.
The deal – the first in Colombia – proved a big help for attracting investors by eliminating currency risk, says Rodrigo Jiménez-Alfaro, Sacyr Concesiones’ CFO.
Mexican telecommunications company América Móvil also came up with a first with a so-called travel bond in April last year. The $1 billion bond was structured to raise money for a subsidiary without increasing the parent company’s debt. América Móvil transferred the bond to Sitios Latinoamérica, a spin-off created at the time to manage telecommunications towers and other infrastructure outside Mexico.
THE LURE OF ESG
Sovereigns also structured bonds in fresh ways to attract investors. In November 2021, when liquidity was already dwindling and interest rates rising, Belize placed a $364 million blue bond that slashed its debt burden and made some $184 million available for ocean conservation. A few months later, Chile issued a $2.2 billion sustainability-linked bond, the first of its kind for a sovereign worldwide. Chile’s finance minister, Mario Marcel, says that tying environmental, social and corporate governance (ESG) to performance targets helped overcome investors’ timidity, demonstrating that it can use this strategy going forward.
“Generally speaking, the effect of deteriorating market conditions on ESG bonds tends to be low due to the relative scarcity of these bonds in the market,” Marcel says. “Although more and more issuers are entering the ESG market, we observed a strong appetite still for our ESG securities, and we don’t foresee a material change in the near future.”
He’s not alone in this belief. Mexican building materials maker Cemex wants to have 50% of its debt linked to ESG goals by 2025 and 80% by 2030.
“There are increasingly bigger buckets of ESG-linked financing in Europe and in the US,” Cemex CFO Maher Al-Haffar said at LatinFinance’s Latin American Capital Markets Summit in New York in January. If borrowers are not doing this, “you won’t get the money, or you will pay a lot for it.”
According to S&P Global Ratings, a total of $24.4 billion worth of ESG bonds were placed by Latin American issuers in 2022. Despite the bear bond market, it was the second-highest volume ever in the region, only behind the $46.84 billion in 2021. ESG bonds represented 28.3% of all bond placements in the region last year, in line with the 29% in 2021 and up from 8.1% in 2020. The ratings agency expects sustainable issuances to grow this year.
IT’S IN THE TIMING
Timing when to go to the markets has emerged as another strategy for raising money or paying down debt at times of scarce liquidity.
Mexico, for example, opened 2022 with a $5.8 billion debt placement in international markets to raise a large chunk of its financing needs for the year, helping to limit its need to borrow abroad at higher rates later on.
Brazilian mining group Vale also found the right time last June to buy back $1.3 billion worth of bonds, tapping into investors’ growing thirst for liquidity. “In a moment where we were generating plenty of cash, the company spotted an opportunity to make the bond purchase offer with the goal of reducing leverage and further optimizing our capital structure,” says CFO Gustavo Pimenta.
The big question now is: when will be the best time to go back to the capital markets?
Markets started this year on a more positive note despite the stubborn inflation and high interest rates, a global economic slowdown, and the lingering uncertainty of the war in Ukraine and tensions between China and the United States. This improvement in sentiment could benefit the several Latin American economies such as Brazil and Chile that are ahead of the monetary tightening cycle.
“The strength of the markets, the stability of the currencies and the fact that most central banks were ahead of the rate raising curve portend well for the interest of investors in Latin America,” says John Moore, head of Latin America at Morgan Stanley in New York.
WAITING IT OUT
Danilo Garcez, CFO at Brazilian petrochemical producer Braskem Idesa, says that both macro and micro factors will influence his company’s decision to go back to the market.
“The first step is to understand the new dynamic of interest rate policies. We have seen a more stable perspective for long term interest rates, and we are waiting to see how markets and central banks will position themselves from a liquidity perspective,” he says. “From the point of view of the petrochemical industry, we need to move on from the current low-spread cycle. Spreads have shrunk due to higher supply and slower growth of demand.”
For now, Garcez says that he is more focused on liability management than on selling new debt as the petrochemical industry goes through a slow cycle.
Yet for many industries, the volatility in the global financial markets is creating new opportunities for both issuers and investors. Take the wave of deglobalization that is gaining strength. Disruptions in the supply chain stemming first from the pandemic and worsened by the Ukraine war and a flare-up of tension between China and the United States has convinced many corporations to relocate their supply chains to friendlier markets closer to the United States, namely Latin America and the Caribbean.
“We see plenty of opportunities in the region linked to geopolitical developments,” says Juan Pablo Mata, CEO at Grupo Mariposa, a Guatemala-based food and beverage group. “Nearshoring will create opportunities.”
In general, experts say that the outlook for Latin America’s capital markets is healthy, although a full-fledged recovery may not come as quickly as many people had hoped back in January.
“High levels of inflation around the world are already showing signs of reversal in some economies, which with weakening global demand would lead to a continued reduction in inflation during 2023. The above factors would drive a reduction in the long-term rates of the emerging countries and, therewith, a positive performance in the bond market,” Chile’s Marcel says.
And even though, for a change, it seems, several Latin American sovereigns acted preemptively to enter the downturn in a better position than in previous crises, the fates of their capital markets remain linked to what will happen in more mature economies like the United States and Europe.
“When we see a return of the market on a global basis, we will begin to see a return of global investors to emerging markets,” Morgan Stanley’s Moore says. LF