Chile's Coldelco takes rare misstep in international debt market
NEW YORK, Aug 9 (IFR) - Codelco's annual visit to the international debt markets fell flat this week after investors pushed back despite a comparatively generous concession for the cost-sensitive copper producer.
A modest US$1.4bn book on a US$750m 10-year meant that the Chilean blue chip had to sacrifice size for pricing, underscoring the new reality in LatAm DCM, said bankers.
Along with the broader retreat from EM, credit-specific concerns have weighed on the borrower as it balances higher capex needs with lower copper prices in the face of slower Chinese growth.
Rating agencies have taken opposing views on the credit. S&P raised its rating several notches to AA- last Monday, citing the state-controlled entity's closer links with the government. Yet, just the previous week Moody's put the A1 credit on negative watch, saying that falling copper prices were exerting further downside risks.
For a borrower used to negative new-issue concessions, the 20bp afforded to investors on initial thoughts of 187.5bp over Treasuries may have appeared generous.
Yet, the new-issue premiums and a spread of about 87.5bp to the sovereign, failed to excite the buyside's imagination and left leads sticking to that number, first with official guidance of 187.5bp (plus/minus 2.5bp) and then with final pricing of 99.864, a coupon of 4.5% and yield of 4.517%.
Like several other new issues, Codelco's bonds have sunk below reoffer and were trading wider at 193bp-191bp post-sale.
"It is a new market," said one syndicate official.
It is telling that the standard squeeze lower - in this case just 2.5bp - never unfolded and that final pricing marked the blue chip's highest yield in recent years.
"I am surprised with Codelco," said a rival banker. "It gives pause [for thought]."
The deal lured more than 120 accounts, with demand coming largely from the Americas (85%) followed by Europe (10%) and Asia (5%). Fund managers took 60%, insurance and pension funds 20%, financials and private banks 5%, and hedge funds and other investors 10%.
While drawing broad conclusions from any single issue may be a stretch, Codelco is a convenient example of how pricing dynamics have changed for the region's blue chips.
Codelco's high-water mark occurred last year when it managed to lock in its tightest yields to date on a 10/30s issue, despite negative new-issue concessions.
At the time, it generated a US$10bn-plus book before printing a 3% 2022 to yield 3.157%, or 165bp over, and a 4.25% 2042 to yield 4.398%, or 170bp. Those 2022s were trading at anywhere between 165bp and 168bp on a G-spread basis ahead of the new deal.
It is worth noting too that the 30-year was tight to the new 10-year. The Chilean company has not come that wide since 2009 when tumbling equity markets, a downgrade from Moody's and weaker copper prices had the borrower paying an eye-popping yield of 7.759%, or 537.5bp over for the same tenor.
Codelco's experience adds fodder to DCM bankers' arguments that borrowers should tap now and lock in still attractive yields before the inevitable back-up in US rates occurs.
The senior unsecured bonds are rated A1/AA-/A+ (negative/stable/stable) and were sold under a 144A/Reg S format with no reg rights. Bank of America Merrill Lynch, HSBC and Mitsubishi were leads.