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18 | October 2010 | ifr special report LATAM INTERNATIONAL BONDS Reaching new heights

International bond issuance volumes out of Latin America are set to break records this year. Borrowers are returning in droves, tapping everything from core US dollar markets, to perps and local currency plays. Some investors have been calling a peak to the euphoria, but bankers reckon it will continue, albeit at a slower pace. Paul Kilby reports.


t has been a busy year for Latin American issuers. By late September, they placed a little over US$72bn in the international bond market in 2010. According to bankers, there is more on the way as long as the broader sentiment holds. Those volumes have already exceeded last year’s record US$71bn and are comfortably above the US$55.43bn seen during the region last high water mark in 2007.

Latin America has certainly benefited from increased flows toward EM and fixed- income markets in general, as weaker US and European economies lose favour. The continent’s strengthening fundamentals and investors’ love of all things Brazilian have helped draw a crowd in the primary markets. And with secondaries still very illiquid, new issues have been the only way accounts can buy in any size.

Even market pariah Argentina looks set to regain its footing. It successfully completed an exchange reopening that has brought over 90% of holdouts back into the fold, preparing the ground for the sovereign’s first international bond in 10-years. With conditions so ripe, Argentine corporates and provinces are not waiting for the government to step forward. Some have decided to jump while high beta credits are still the favoured choice among yield-seeking accounts. However, evidence of some frothiness had clearly come to the fore by late September, after volumes had reached US$15bn for that month alone. Talk of a century bond from Mexico, an overly crowded perp market, suggested the market was reaching its peak, said one investor. This was compounded by more chatter about an unusual Peruvian sol denominated issue from Morgan Stanley. With long tradition of tapping the market at its tightest, Brazil’s deft US$500m retap of its 2041s was a clear indication that pricing could only widen from here.

Slow off the blocks In such a low rate environment, it has been surprising how slow Latin American borrowers were to respond to the opportu- nities post summer. But they soon made up for lost time: they have transacted 24 issues in September alone. Borrowers have also been starting to diversify outside core dollar markets, with LatAm companies and sovereigns also

“We are seeing more crossover participation than ever before. This is not only from high-grade accounts but also from traditional high-yield investors, who more than ever are taking a serious look at EM deals.”

returning to the euro market. Global local currency issues have also started to make a comeback for the first time since the global financial crisis scared investors away from this relatively illiquid asset class. The investor base has also widened. Crossover accounts are taking an increas- ingly larger component of LatAm bond issues, said bankers, as they seek yields away from their own ultra-tight markets. “We are seeing more crossover participa- tion than ever before,” said one syndicate official. “This is not only from high-grade accounts but also from traditional high- yield investors, who more than ever are taking a serious look at EM deals.”

With perhaps the exception of a name like Caribbean telecom Digicel which has its own special following in the US high- yield market, sub-investment grade LatAm names have typically remained the domain of dedicated accounts. But this is changing as US investors see yields on new issues nearing record lows. LatAm may be one of the tightest regions in the EM universe, but it is certainly benefiting from this phenomenon.

It is a similar story with US high-grade

investors as they seek value outside their home turf. While it is not unusual to have US high-grade participation in LatAm deals, interest has typically been focused on sovereigns and corporates with some US exposure. Now bankers are seeing such accounts show an increased interest in names that do not have those US links. The same is increasingly true of Asian accounts, which are also buying the region’s issues in larger numbers. This is not only true in standard US dollar issues, but in the perp market as well. Perhaps nowhere have the recent oppor- tunities been as enticing as in the perp market, where if a company had a first mover advantage it could achieve extra tight yields to refinance existing perps. It could also lock in extra cheap funding for perpetuity, with a virtually free call should market conditions improve. With 24 LatAm borrowers having issued some US$11.7bn in perps during the last wave in this market, it is hardly surprising that they wanted to jump on the bandwagon. They will also have been lured by the success of CSN in September, when it refinanced its 9.5% perp with a tight new issue. After generating some US$7bn in demand, the Brazilian steelmaker both upsized and tightened its perp to raise US$1bn with a yield and coupon of 7% after starting with guidance of 7.00%-7.25%. However, by pushing on both price and size, CSN was thought to have threatened

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