Famine has turned to feast for investment bankers doing deals out of Latin America. For one thing, local economies are growing and stock markets are rising, and there has been a marked lack of disaster in the volatile region since the Argentine default of 2001. For another, historically low US interest rates have fuelled a wild enthusiasm for anything with an emerging market label, causing investors to pour money into the asset class.
The stars, it seems, are in a unique alignment for Latin American issuers – and anyone who can is rushing to take advantage.
“The pace of activity has been quite frenetic,” says Steve Cunningham, head of Latin American investment banking at Morgan Stanley.
Last year, international debt issued out of the region more than doubled, to $43bn, as regulars such as Mexico took advantage of low spreads to raise vast amounts of money and issuers shut out of the market for years came back to cash in on the renewed appetite for high-yield emerging market debt.
By the end of the year, even the moribund market for international equity issues was beginning to show signs of life.
Steve Cunningham: ‘frenetic pace of activity’
Bond bandwagon
Nor has the start of 2004 disappointed. By the end of January, Latin American issuers had already raised some $8.5bn in the debt markets – with sovereign deals from major countries such as Chile, Mexico, Brazil, Colombia and Venezuela, as well as smaller countries such as Panama and Costa Rica.
“In terms of the region overall, you have had some substantial growth, you have had credit rating improvements, you’ve had stock market valuations going up quite dramatically, you’ve had currency strengthening,” says Mr Cunningham. “And there has been a bevy of activity as we headed into 2004.”
For sovereign issuers that has meant cheaper, longer money – with several countries, all of them sub-investment grade, successfully completing 30-year issues. Investment grade market stalwart Mexico, meanwhile, experimented with a sterling bond, and is rumoured to be mulling over a foray into the Swiss franc market later in the year.
“What they [sovereign and other frequent issuers] have been able to do is lengthen duration and lower their overall cost of capital – and that’s been a function of the current markets,” Mr Cunningham says.
By far the biggest and most unexpected success story has been Brazil – as socialist Luiz Inácio Lula da Silva stunned markets by turning into a fiscal conservative on winning the presidency. As the prodigal son was welcomed back with open arms by the investor community, the country’s stock market doubled, and bond spreads plummeted.
Brazil’s 30-year offering in January, originally a $1bn issue but increased to $1.5bn, sold at 376bp over treasuries. A year ago even shorter tenor Brazilian bonds were trading at more than 1250bp over treasuries. “Obviously there was a lot of uncertainty, prior to the election [of Lula],” says Mr Cunningham, of Brazil. “But the market has been positively surprised in terms of how the country has been managed and how it’s performed,” he says.
Even no-growth Venezuela was able to raise $1bn in 30-year money, raising the eyebrows of more sober observers. “Yes, you read correctly,” wrote Pablo Breard, head of international research at Scotiabank Group in a note to investors. “Greed supersedes reason and risk management at the time of investing in Venezuelan debt securities.”
The fact the issue coincided with an effort by Venezuelan President Hugo Chávez to take over the central bank in a row over farm financing apparently did not have much impact on investor appetite for the lengthy tenor, which sold at 503bp over treasuries.
Region hots up
Next up are likely to be a few more weak credits, with Uruguay keen to do a bond and Ecuador seriously considering its first sovereign issue since its 1999 default. Indeed everything in the region seems to be hot, hot, hot – with the exception of Argentina.
On the subject of defaults, it is worth pointing out that the Collective Action Clauses or CACs that help creditors in case of non-payment – so controversial with issuers such as Mexico when they were first floated – are going into every sovereign issue without a murmur. For now, they are a non-issue – although that may change in a few years.
As Mr Cunningham points out, it is only in a difficult market, with defaults and restructurings going on, that the worth of CACs will be really tested: “We’ve had such buoyant markets to date that I don’t necessarily think the issuers have gotten full credit in terms of the value of CACs,” he argues.
But if sovereigns have been a focus of activity, it is the opening of international markets to more corporate issuers that spells the real sea-change over the past year.
On the debt side, quasi-sovereigns, such as Petrobras, Brazil’s state oil company, are expected to continue coming to market. The company did a $750m 15-year issue in December, but is reportedly also considering a 30-year. CVRD, Brazil’s massive iron ore company, managed a 30-year, $500m bond in January.
From Mexico, frequent issuers such as Mexican oil giant Pemex are expected to continue raising debt internationally. “Pemex will be a major issuer this year,” says Michael Schoen, head of the Latin America debt capital markets group at CSFB. “They’ve got substantial borrowing needs and while they’ve raised some financing in the peso market, they’ll still have plenty to finance.”
Michael Schoen: ‘search for yield still a theme’
Market entrants
But it is the appearance in the market of names not seen before – or at least not seen for a while – that’s really making investment bankers sit up. “What is important and exciting is that you have a situation where the high yield corporate sector, which historically has not had market access, now is able to raise funds at attractive terms,” says Mr Schoen.
He notes: “Over the past year, you’ve really started to see the return of the high yield sector to emerging market corporates.”
Examples of deals done include a bond issue for Axtel, a fairly telecoms new company, in a sector that has proved fairly tough globally. The deal nonetheless got sold.
“We had a chance in Latin America to do a few very good high yield transactions for lower rated credits – such as Axtel and Braskem,” Mr Schoen says. Braskem is a Brazilian petrochemical company for which CSFB last year did a one-year, followed by a five-year, and finally a 10-year bond in January 2004. “That progression allowed Braskem to develop a complete borrowing curve, in spite of being a virtually unknown credit, say, a year ago,” Mr Schoen says.
Whether it is lower rated sovereigns, such as Venezuela, or high-yield corporates, one thing is clear: with US interest rates at historical lows and the higher rated credits trading at tighter and tighter spreads (as one portfolio manager complains – if emerging markets tighten much more they’ll be trading at the same as US Treasuries) investors are having to hunt for decent returns, and that’s what’s driving the current enthusiasm for the likes of Axtel.
According to Mr Schoen: “The whole search for yield continues to be a theme and I think it’s likely to continue to be a theme, unless you see a major correction in the high-grade and high-yield sectors. Because if that happens, you’ll see crossover money not needing to look for incremental yield in emerging markets, which will reduce the demand for those names.”
On the equity side, also, investment bankers see the present environment as a unique window of opportunity for issuers. The appetite for Latin American shares is there at a price owners are willing to sell at – and that has not often been the case in recent years.
Mr Cunningham expects to see at least $5bn of equity issued out of Latin America in 2004 – after years of very little activity. He also believes the offerings will take the form of family-owned companies deciding to go public, and private equity investors deciding to open up – rather than the large-scale state privatisations of the past.
Nicolaas Millward , managing director for equity capital markets at UBS, is also optimistic. He points out that of the equity transactions done last year, it was a $135m deal for Suzano, a Brazilian pulp and paper company, at the end of November, that was the first internationally syndicated deal to see any new money raised.
The $650m Cemex deal, for example, was an unwinding of existing derivative contracts, structured and managed by the banks who had entered into those contracts for Cemex. Offerings by Unibanco, Corpbanca and VCP also saw no new money raised.
“Everybody is expecting this year to be a lot more active,” he says. “In terms of mandates we’ve been awarded and that we know have been awarded it looks as if the first six to nine months are going to see a reasonable amount of activity.”
Out of Brazil, Mr Millward expects to see transactions involving BNDES, the state-owned development bank, which last year sold shares in pulp and paper company VCP for $285m. “I expect them to be active,” he says.
He expects at least 8-10 deals out of the region, in a range of sectors (including some that have never come to market before), both IPOs and follow-ons.
“It’s the first time since 2000 that companies feel comfortable – given valuation levels, and how well the market has done – coming back to market,” Mr Millward says.
In Mexico, the sector to look out for is house-building, one of the country’s few growth sectors. “I’d be surprised if there wasn’t at least one deal in the housing sector,” he says.
But there are no privatisations out of Mexico that he knows of, and if anything, a parallel theme of the year will not be companies going public, but going private. He cites two deals recently announced – including the $4.1bn buy-out of minority shareholders of Mexico’s Bancomer by BBVA. “In the short term these deals are good news, because it pushes up share prices. The bad news is that over the longer-term you’re taking liquidity out of the market.”
Window of opportunity
Still, investment banks are advising clients to take advantage of current demand for Latin American equity to issue shares while they can. According to Mr Millward: “What we tell our clients is, if there’s a window, you’d better take it. Windows never last as long as you think they should, and if you’re not ready you’ll watch it simply pass you by.”
Mr Cunningham agrees. “For a number of clients in Latin America who have thought about issuing equity, they believe we are in a unique phase – and certainly history would prove them right in terms of their ability to access the equity markets.
“They are generally very focused on the concept of the window being open – and when will that window close? Will it close because of US elections? Will it close because of increasing interest rates? Will it close because of some event in Latin America? Will it close because of investors changing back to a technology focus? There are a lot of factors beyond their control, but what they do know is that right now the window is open.”
A hint of the potential fragility of the current Latin American underwriting boom was already apparent after hints from the US Federal Reserve at the end of January that interest rates might not stay at rock bottom quite as long as previously anticipated.
A sell-off followed, with Brazil in particular feeling the pinch. “It is going to affect issuance in the very near-term,” says Gabriel Bochi, managing director for Latin America debt origination at JPMorgan. “And in fact we’ve seen very little issuance in recent weeks.”
After a phenomenal $18bn in debt issued by emerging markets in January, it is also a function of the market taking a breather, and waiting to see “what happens before jumping in and buying more aggressively anything that comes into the market,” Mr Bochi says.
But he argues that unless the Federal Reserve dramatically changes its stance and starts raising interest rates before the market expects it to (that is, before the US election in November), triggering a further sell-off, he does not expect overall 2004 issuance to be affected.
Investors are likely, rather, to continue putting money into emerging markets, including Latin America. “Last year was a phenomenal year for Latin America – in terms of volume, in terms of behaviour of spreads, especially the recovery of Brazil. And one theme that has consistently dominated, that has helped this rally and issuance was basically money coming into the market – some important strategic allocations coming into the emerging market asset class.
“That has obviously continued into the beginning of this year. We have the impression that these things have actually slowed down a little bit recently, these allocations, but we expect them to pick up again very soon,” Mr Bochi predicts.
