Key test of LatAM credit appetite expected next week
NEW YORK, Aug 30 (IFR) - At least eight Latin American issuers are set to test appetite for credits out of the region in comings weeks after a two-week drought in the cross border dollar market.
A lacklustre response to deals that emerged mid month and a broader buy-side retreat from emerging markets has bankers wondering if demand will be able to match supply as investors continue to fret about US Treasury volatility in the face of improving economic data.
Several borrowers are drawing up plans to come as soon as next week ahead of the Rosh Hashanah holiday late Wednesday and key US unemployment data on Friday. The following week, issuers will have to tip toe around the FOMC meeting but will likely try their luck then as well.
"We have several borrowers preparing to come in the first two weeks (of September)," said a syndicate official. "They will get done but with a (higher) concession. This is a market for sovereigns, quasi sovereigns and well-known names, not one for credit stories that are new."
Indeed, market turbulence is unlikely to fade going into the end of the year as events in Syria, rate volatility and concerns over the US debt ceiling come to fore.
The question on most bankers' minds is whether institutional investors will fill the void left over by retreating retail accounts.
The case for investing in EM has certainly becoming less compelling as US rates look set to go higher, despite bargain basement prices among certain LatAm credits. This comes after EM bond funds saw accelerated outflows last week to USD2.013bn, up from USD732m during the prior period, according to ING.
"There is no way around the fact that we have seen decent outflows," said a syndicate official. "Given more supply and arguably less cash, investors can choose to be selective."
This has been reflected in disappointing summer price action. Not only have recently printed deals performed poorly, but LatAm credits have largely weakened with each spike in Treasury yields but failed to recover on rallies.
That said, this was mostly due to investors throwing in the towel in local currency funds, which saw USD1.146bn head for the exits. Hard currency funds, on the other hand, saw USD454m leave the asset class versus USD732m the week before, ING said.
The other caveat to the overarching negativity is that much of last week's retreat can be attributed to movements among retail accounts, which, at the moment, have dominated price action in an illiquid market.
Institutional accounts have largely remained sidelined during the summer holidays, and have to yet show their cards.
Bankers think real-money may have a different view on the market and will start putting money to work in EM come September.
"A lot of weight is being put on retail fund flows, but institutional investors still have cash," said a syndicate manager. "I am cautiously optimistic."
Names in the pipeline include Colombian oil company Ecopetrol, Brazilian aircraft manufacturer Embraer, Mexican oil services name Grupo R, Chilean bottler Embotelladora Andina, Peruvian miner Buenaventura, and state-own financial institution Caixa Economica. Chilean oil company ENAP is also out with an RFP that could result in a bond issue.
Further down the credit spectrum, beef credit Marfrig and Barbados are also contemplating market forays. Sovereign also expected to tap this year include Brazil and Colombia.
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