Latin American primary bond sales are expected to remain robust in the second quarter of 2024 after the market saw a pickup in deals in the first two months, analysts say.
“Several sovereigns are monitoring opportunities, and a few corporates and banks are looking to refinance upcoming maturities,” says Rodrigo González, director of debt capital markets for Latin America at BNP Paribas in New York. “I expect a busy first half of the year.”
International bond sales from Latin America and the Caribbean kicked off 2024 with 19 deals totaling $29.5 billion in January and $4.6 billion in nine deals in the first two weeks of February, according to information from the London Stock Exchange Group (LSEG). That took the total to $34 billion raised from 28 deals in the first six weeks of the year, up 71% from $19.9 billion from 23 transactions in the year-earlier period, the data showed.
González says the main driver of the increase has been growing expectations of a decline in US interest rates, which has led to a tightening in long-term US Treasury rates. The 10-year rate dropped more than 100 basis points to below 4% at the end of January from a peak of 5% in October 2023.
While the 10-year Treasury rate has since climbed to 4.3% in late February, a decline in US inflation is fueling expectations that the US Federal Reserve will cut its monetary policy rate. The US inflation rate dropped to 2.9% in June 2023 from a peak of 9.1% a year earlier, but inflation accelerated again to 3.7% in September and fluctuated in the 3% to 4% range before coming down to 3.09% in January. This is fueling expectations of an easing in the Fed’s tightening cycle that would bring down the rate from 5.5%.
“Since the beginning of the year we’ve seen a slight up-tick in Treasury rates,” González says. “Despite the volatility, this has not deterred issuers from accessing the market or investors from piling in the new supply.”
He says he expects the first cut in the Fed rate to come in June and for there to be a total of four cuts to take the rate to 4.25% to 4.50% by the end of the year, he adds.
LIABILITY MANAGEMENT
Paula La Greca, senior corporate research analyst at TPCG Valores in Buenos Aires, says she expects corporates to tap the market this year for liability management rather than for funding new investments.
“Latin American companies have had a very good performance in recent years and have generated a lot of cash,” La Greca says. “Eventually in 2025 or 2026 there will be issues to finance investment projects.”
In the first six weeks of this year, Mexico topped the ranking on the sovereign side with its biggest ever cross-border issue at $7.5 billion, followed by Brazil with its biggest deal in four years at $4.5 billion. The other big issues were by Chilean state owned copper miner Codelco for $2 billion and Colombian state-owned oil company Ecopetrol for $1.85 billion, according to LSEG.
“Sovereign and corporate issuers took advantage of the reduction in rates and spreads to tap the markets. Conditions proved to be quite supportive with record deals in terms of size as high over subscriptions and reduced new issue concessions,” González says.
The latest sovereign issuer to tap the international was Panama with a three-part deal that totaled a record $3.1 billion on February 22, while Inversiones CMPC, the investment division of Chilean pulp and paper producer CPMC, was the latest corporate with a $500 million green sustainability linked bond deal on February 21.
Roger Horn, senior credit strategist at Mariva Capital Markets in New York, says he expects the flow of deals to continue.
“When new issues start, you always start with the higher quality names,” he says. “Conversely, you have some high-yield companies that need to come to the market, but that will take a couple of months.”
A harbinger of the increased issuance to come is the quality of the deals and variety of issuers so far this year, from corporates to sovereigns, and investment grade to sub investment grade.
“The fact that there hasn’t been an unsuccessful transaction year-to-date is a clear indication of the strength of the market,” González says. “I believe most issuers have realized that the current long term rate levels are probably here to stay, so unless they have the flexibility to wait several years, they are becoming comfortable with the current financing costs. Additionally, the upcoming elections in the US and in the region may result in higher volatility in the second part of the year.”. LF
