Euphoria fades on LatAm high-yield rush
NEW YORK, Feb 1 (IFR) - The euphoria surrounding the high-yield space in Latin America seemed to be fading this week as a sell-off in the secondary market Thursday took the bloom off the rose in a sector that had been having a tremendous run in recent weeks.
A slight uptick on Friday on the back of positive US jobs data may have reversed some losses, but bankers and borrowers were still reassessing pricing expectations and timing as momentum appears to weaken.
Over the past week or so eight high-yield names either announced roadshows or printed new deals, namely meat name JBS (BB/BB), Chilean holdco Corp Group Banking (Ba3/BB), Cementos Chihuahua (B/BB-), Cementos Pacasmayo (BB+/BBB-), Chilean retailer SMU (B2/B), Schahin Oil and Gas (BB+/BB-), oil and gas credit GeoPark (B/B) and Brazilian holdco J&F (B+/B).
The fact that an offering such as beef company JBS's new 10-year non-call five could come up to 50 basis points inside its own curve excited the imaginations of both bankers and borrowers, and proved that a strong technical bid was still working wonders for companies that were out of favour just last year.
"This is obviously a credit bubble in the making. It is all fun and games until the music stops," said a senior syndicate banker.
Inflows and the impressive performance on lower-rated bonds such as Minerva and Gildemeister have left the buyside wanting to come back for more.
"Everyone is in it for the trade and that is how they are generating their alpha," said a New York-based trader.
"The cycle has fed upon itself as accounts looked to add some juice to portfolios in an illiquid market that performs tremendously well on the way up but equally poorly during a sell-off. These food-processing companies in Brazil were hated last year," he said. "But there is demand for yield."
However, Thursday saw another bout of selling as the rate fears that have left high-grade names floundering in the secondary market spread to the high-yield sector as well, though arguably it has been very name specific.
Despite strong inflows, real money accounts were awaiting more data out of the US before deciding whether to buy on dips or become sellers themselves, said a trader.
Either way, borrowers may need to lower overly ambitious pricing expectations as the sell-off gives some CFOs pause before announcing more deals, said bankers earlier this week.
Indeed, tight pricing on JBS has left its new bond hovering around or below reoffer all this week, standing in contrast to the rallies seen in other newly minted deals just a few weeks ago.
"There is not much upside potential," said Klaus Spielkamp, a trader at Bulltick. "If people are looking at the protein market, they are looking for a higher yield than 6.5%."
Still, bankers remain optimistic, arguing that investors need to put strong inflows to work in high-yield credits that provide a greater buffer against any back-up US rates.
"This space will keep being active. The more volatility there is in US Treasuries the more keen people are to be in this asset class," argued a syndicate official.
However, not everyone buys this story.
"People say in high-yield you don't have to care about duration risk," said a US investor. "But high-yield today is not 12%, it is 6%-8%, and at those coupon levels, the impact on prices in response to a movement in the base rate is bigger."
The much expected rotation out of fixed-income into equities should the US economy show more strength could also have a detrimental impact on bond issuance.
"When that happens, I think this market will get smoked," said another syndicate manager.
That, plus growing fears of a spike in US rates, may be reason enough to tap the markets sooner rather than later. Indeed, last week saw several names join the queue.
J&F, a holding company with a stake in JBS, plans to market a US dollar seven-year non-call three.
This week it will be in New York on February 4, in Boston on February 5 and in Los Angeles on February 6. Barclays, BB Securities, Morgan Stanley and Santander have been mandated on the trade. Ratings are B+/B by S&P and Fitch.
The company has direct and indirect equity interest of 20.59% in JBS, 24.57% in dairy products company Vigor Alimentos , 55.21% in pulp mill Eldorado and 99% in home and personal care products entity Flora.
Chilean retailer SMU is also looking to raise US$300m through senior unsecured notes. The company was wrapping up global roadshows on Friday through BTG Pactual and Deutsche Bank and is expected to price this week.
Moody's cites the company's high leverage, acquisitive growth strategy and negative cashflow as reasons for the Single B rating.
Brazil's Schahin Oil & Gas also started roadshows last week as it looks to market a possible 144a/Reg S offering. This week, it meets accounts in London on Monday and in New York on Wednesday. Citigroup has been mandated as global co-ordinator, with Deutsche Bank, HSBC and Mizuho acting as joint bookrunners. Schahin Oil & Gas is an offshore oil and gas services company.
Schahin has made several forays in the international capital markets to take out loans used to finance drillships, most recently last March when it raised US$750m through a 10-year amortiser priced at par to yield 5.875%.
However those deals were structured to achieve an investment grade rating of Baa3/BBB-/BBB-, while on this occasion the holding company is approaching investors as a sub-investment grade credit.
Geopark Latin America Limited Agencia de Chile, another single B name, is also looking to price a US$300m senior secured seven-year non-call four on Monday via Itau, JPMorgan and BTG Pactual are the joint bookrunners.
(This story will appear in the Feb 2 issue of the International Financing Review, a Thomson Reuters publication; for more, see www.ifre.com)
For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol:
U.S. corporate bond price quotations...
U.S. credit default swap column........
U.S. credit default swap news..........
European corporate bond market report..
European corporate bond market report..
Credit default swap guide..............
Fixed income guide......
U.S. swap spreads report...............
U.S. Treasury market report............
U.S. Treasury outlook...
U.S. municipal bond market report......
- U.S. Mega Millions lottery up to $400 million, 2nd-biggest ever
- Cortege departs to take Mandela's body to lie in state |
- Uruguay becomes first country to legalize marijuana trade
- UPDATE 2-U.S. Mega Millions lottery up to $400 million, 2nd-biggest ever
- Thai 'red shirts' prepare rally to back PM against protesters