Positive backdrop for Latam high yield tempered by losses

Fri May 3, 2013 3:43pm EDT

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NEW YORK, May 3 (IFR) - A drop in US Treasury yields and stimulus in Japan and Europe may be creating an ideal backdrop for a revival in the LatAm high-yield space, but losses inflicted on holders of Mexican homebuilders and Brazilian oil and gas name OGX mean that investors are going to be highly discerning going forward.

"Investors are getting more selective," said a senior DCM banker. "Mexican homebuilders and OGX are widely held and the write-offs in terms of mark-to-market have left investors more cautious."

Bonds issued by Mexican homebuilders have in some cases plummeted 50% or more over the last month after Geo and Urbi announced their intention to restructure debt.

OGX has taken a similar hit in the wake of poor production numbers for its offshore oil wells, leaving investors more skeptical than ever about the region's up-and-coming sectors.

"Mexican homebuilders caught people off guard, especially Geo as on paper it looked good," said a New York based investor. "A lot of people are in shock and re-examining their exposure."

The growing ambivalence among the buy-side towards LatAm high-yield credits was underscored this week by the mixed results of junk names attempting to access the market.

What is certain is that sub-investment grade companies, particularly those at the lower end of the credit spectrum, will have to adjust pricing expectations if they wish to succeed.

Low-cost sugar and ethanol producer Aralco (B/B), for instance, was forced to pay a 10.25% yield this week on a US$250m seven-year non-call three, after resuscitating a deal that had originally been offered to investors in mid 9s just a few weeks ago.

It was a similar story for Colombian airline Avianca (B+/B), which was heard first approaching accounts with a 10-year in the mid 8s, only to shorten the tenor to seven years with initial price guidance of low 9s.

From there, however, leads had a downhill ride Friday, tightening to 9% area (plus/minus 0.125%) and then to 8.75% (plus/minus 0.125%) before launching a US$300m seven-year non-call four at 8.625% on the back of a US$1.2bn book.

LIQUIDITY CONCERNS

However, not all deals were successful. Mexican funeral services company Grupo Gayosso (B+/B) was forced to throw in the towel on a seven-year non-call three, even after it had widened talk from 8.50% area to 8.75%.

The bond's relatively small US$150m size and the fact that it was sole led raised concerns about liquidity, while private equity ownership also gave the buyside pause for thought.

"It is a small issue in Mexico and people have had a bad experience with the homebuilders," said an investor. "It hasn't made money yet and it belongs to private equity. Why would I want to by that at 8% when you can buy Nextel, secured, which is trading at 10%?"

Argentine renewable energy company IMPSA (B/B+) also faltered Friday when it too postponed a five-year non-call three after the borrower and investors failed to see eye-to-eye on pricing despite juicy mid to high 11s talk.

IMPSA's postal code was problematic for some accounts, although the company's revenue and backlog are increasingly sourced through Brazil.

Indeed, the issuer is WPE International Cooperatief, which is a direct subsidiary of Wind Power Energy (WPE), the Brazilian operator.

According to Fitch, 45% of revenues and 82% of the company's backlog come from Brazil. This may explain why the borrower was offering talk that is tighter than the 12.5% yield seen earlier last week on IMPSA's outstanding 2020s, though accounts clearly pushed back at those levels.

Nor were they entirely enamored by the sector.

"Wind is still not the cheapest source of energy," said a hedge fund manager.

Meanwhile, an exceedingly active month in the primary markets has only served to dampen demand for junk names.

Investors are suffering from supply fatigue after seeing some US$60bn in new issuance across the EM universe in April, leaving them with little time to do the necessary credit work required on the more complex and lesser known businesses that often populate the high-yield universe.

However once that has been digested, bankers are expecting volumes in the sub-investment grade space to pick up as the hunt for yield continues, though US Treasuries sold off Friday on stronger-than-expected jobs data.

"Although some of the money managers are already concerned with a future interest rate hike and therefore reducing a little bit the duration of their portfolios when investing in bonds and high-grade corporate names, there are lots of them as well that are doing the same but also enhancing yield with emerging markets high-yield alternatives," said a Sao Paulo-based DCM banker.

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