October 2010 | ifr special report | 19 LATAM INTERNATIONAL BONDS Latin America new issuance volumes
the other perp hopefuls in the pipeline after the bond slipped to 98.5 in the secondary.
Opportunity knocks At 7%, CSN came almost flat, if not tighter, than a new 30-year. It essentially broke the standard rule of thumb that perps should price 75bp–100bp back to a long bond if the borrower is to pay for the privilege of perpetuity and the call option. But Asian and European retail investors who buy these instruments do not think like the institutional accounts that make such calculations. They are more enthralled with the coupon, especially one that pays 7%, and this certainly helped CSN. Borrowers and bankers have been quick to seize on this opportunity while it lasts, knowing that the perp market can close just as quickly as it opened. Arguably excessively quick: just before Brazilian con- struction and engineering firm Odebrecht made a second try in this market post summer, there was considerable scepticism that the market was ready for such instruments, considering the uncertain global backdrop. But since then the momentum has gained, with Mexican state-owned oil company Pemex quickly following CSN despite the latter’s poor secondary performance.
While Pemex had to sacrifice on size and come at a smaller than expected US$750m, it priced its non-call five par at 6.625%, marking the tightest ever deal of this kind to emerge from the region.
The only exception to this was the step- up structure tried by Brazilian media giant Globo, which essentially kicked off the trend of perp refinancing in April. However, it tried a perp with a step up in year five, allowing it to trade like a shorter bond, hence targeting institutional accounts that don’t typically buy these instruments. Hence Globo’s perp came with an even tighter 6.25% coupon. Still there was some evidence the perp market was losing steam after Brazilian petrochemical company Braskem tried its luck. It followed Pemex, which had come with a smaller US$450m non-call five that generated some US$2bn, but dipped in the grey after launch and closed lower in the secondaries on the day of pricing at 99.25- 99.35. The 7.375% yield and coupon was thought to be just a little too tight. Retail investors, who have so faithfully supported the perp market, have been parking their money in the fixed-income market ever since they lost faith in equities earlier this year, said one banker. But they
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*2010 YTD – September Source: IFR
The perp market is starting to get too crowded. Not only LatAm issuers, but borrowers from outside the region such as Glencore, are also taking a stab at it. By late September Votorantim Cimentos and BR Properties had joined the throng of borrowers eying the market.
could just as easily head for the exits should they decide to follow institutional accounts back into stocks.
The perp market is starting to get too crowded. Not only LatAm issuers, but borrowers from outside the region such as Glencore, are also taking a stab at it. By late September Votorantim Cimentos and BR Properties had joined the throng of borrowers eying the market. This comes amid complaints in the broader LatAm market that strong technicals have warped pricing on certain
credits. This is particularly true of those from the market darling Brazil, which can do no wrong as far as many are concerned these days. “Technicals are outweighing fundamen- tals. So we are now seeing pockets of bubbles in different countries like Brazilian steelmakers. I am talking about prices and relative value rather than the fundamentals of the steelmakers,” said one disgruntled investor. Yet while volumes have certainly exceeded the last pre-crisis issuance boom in the 2006 and 2007, the region has yet to see the diversity of credits and types of instruments seen during that period. In 2007 investors were also on the hunt for yield. This was reflected in the diversity of credits as well as the frequency of lower- grade names. That year saw some US$26bn of corporate issuance, of which US$8.6bn came from issuers with single B ratings and below, US$6.8bn from BB names and another US$10.24bn from investment grade.
Up until September 2010, corporates had issued some US$49bn of debt, about US$11.5bn from single A and up, about US$25bn from triple B credits, close to US$12bn from double B names and US$5bn.
So far the proportion of Single B credits remains relatively small, though that may partly reflect the region’s improving credit story. Nor has the string of Argentine local currency deals that were commonplace just prior to the global financial crisis been seen again. Taken together, the indications are that the boom in new issuance has yet to reach the frothiness seen in 2007.
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