Market Talk: Bonds

The primary bond market is poised to revive in Latin America, but when and how fast still hinges on an easing in global financial conditions, bankers say.

Latin American primary bond sales are expected to gain in the fourth quarter of this year, but the pace of dealmaking depends on a decline in US interest rates, an analyst says.

“We are working with a number of issuers, monitoring the market, waiting for the right opportunity. They have financing needs, and so they are just trying to pick the right time to go and tap the market,” says Reggie de Villiers, head of structured debt capital markets for Latin American DCM at UBS.

This timing depends largely on inflation coming under control in the United States, a trigger for the US Federal Reserve to start easing its monetary policy.

“As we get more certainty on the Fed policy, that’s only going to help the market,” de Villiers says.

Although the US inflation rate slid in the first half of the year, dropping to 2.97% in June from a peak of 9.1% in the same month the previous year, inflation accelerated again to 3.18% in July and 3.67% in August. The Fed has hiked its monetary policy rate by 25 basis points four times so far this year to fight inflation, taking it to 5.5%, well above the 0.25% when the tightening cycle began in March 2022.

On September 20, Fed Chair Jerome Powell said they would hold interest rates steady, but at least one more hike would be made by the end of the year.

When there is more certainty about that peak rate, issuance will grow at a faster clip, de Villiers says.

There were 83 international bond issues totaling $65.9 billion out of Latin America and the Caribbean in the period from January 1 to September 15, according to data from Refinitiv. While that was only one more deal than in the year-earlier period, the volume rose 27% from $51.7 billion.

Brazil was the busiest source of issuance with 40 deals for a total of $13.1 billion, trailed by Chile for $8.1 billion and Bermuda for $3.3 billion, the data show. The US subsidiary of Brazilian meatpacker JBS topped the ranking at $2.5 billion, followed by Chile with a US dollar-denominated bond for $2.2 billion and a Chilean peso-denominated note for $2.1 billion. The other big deals were by Chilean miner Codelco for $2 billion and Colombian oil company Ecopetrol, Bermuda-based rum maker Bacardi and Brazilian miner Vale at $1.5 billion each, the Refinitiv data show.

There was a sharp rise in deals in September, led by the JBS and Codelco issues, as well as one by the Dominican Republic for $1.25 billion, according to Refinitiv.

“Investors had dry powder available, which we still see today. And now you get to the traditional post-Labor Day issuances, you see a number of deals with healthy order books, probably three to five times oversubscribed,” de Villiers says. “You’ve seen some spread compression. That shows that we have a healthy market that I think it’s going to encourage more issuance.”

De Villiers says he expects Brazilian corporates will continue to be active in the primary bond market, while Colombian and Mexican issuers could issue in the fourth quarter.

The lure of sustainability

In terms of bond structures, he says he expects more local currency-denominated issues in the international market.

“A lot of the local currencies have been performing well versus the dollar and so investors have allocated more funds in local currency,” de Villiers says.

This is helping to find more demand, as are bonds linked to environmental, social and governance factors.

“What we’ve seen in our experience is when you do have an ESG or sustainability-linked issuance, you broaden your investor base looking at that particular issue and it really helps with getting a tighter pricing,” de Villiers says. “Access to more investors reduces the execution risk and maxims the potential demand for the issuance.” LF