December 20, 2013 / 4:15 PM / 4 years ago

LatAm cross-border bond activity to slow after record year

NEW YORK, Dec 20 (IFR) - DCM bankers see an inevitable easing of LatAm cross-border debt activity in 2014 after another record year for the region that saw issuance hit US$110bn, a full US$10bn better than in 2012.

The region faces a number of headwinds going into the new year and the backdrop for EM and LatAm is certainly less supportive than it has been in years past, particularly as the US Federal Reserve starts to taper its asset-buying program.

Other obstacles include distractions like the World Cup in Brazil, which has typically produced a good chunk of issuance out of the region, as well as political risks related to upcoming presidential elections in Colombia, Brazil, Panama and Uruguay.

"We will struggle to hit the trifecta in terms of record-breaking years, particularly in a rising rate environment, several presidential elections and the World Cup," said a DCM banker.

Yet while activity out of Brazil (Baa2/BBB/BBB) is expected to decelerate ahead of a possible downgrade next year, Mexican borrowers are likely to take up the slack as meaningful energy reform and a stronger US economy act as strong catalysts for investment flows.

"All the positives occurring in Mexico should drive more issuance there than we had seen historically, maybe at the expense of Brazil," said a banker.

S&P raised Mexico's foreign currency rating to BBB+ from BBB late Thursday, putting it on equal footing with Fitch (BBB+) and Moody's (Baa1) and one notch from a single A rating.

The Mexican congress's approval of a constitutional amendment to open the energy sector after being closed to private investment for the last 75 years is a "watershed moment" for the country, though full passage requires secondary legislation next year, S&P said.

"Tapping into Mexico's vast oil potential should energize investment and growth throughout the economy, but we also believe that we won't see its tangible effects on economic activity for a number of years," the agency said.

Still, the funding needs of Mexican borrowers are expected to increase as soon as next year. Not only is the sovereign augmenting the amount it will raise in the capital markets in 2014, but state-owned oil company Pemex and public utility CFE are likely to compete for attention among bond investors.

At US$37bn, Mexico's cross-border bond volumes already surpassed the US$34.8bn in debt sales out of Brazil this year, according to data compiled by IFR. Next on the list were Chile (US$10.87bn), Colombia (US$7.9bn) and Peru (US$4.05bn).

POSITIVE TECHNICALS

Notwithstanding persistent retail outflows out of EM, technicals remain positive for the asset class - and in LatAm in particular.

Long-term institutional accounts continue to allocate money incrementally to a growing EM bucket and, according to Barclays, Latin American corporations face some US$17bn in pending maturities next year, which is expected to be recycled back into the market.

Against that backdrop, Barclays takes an optimistic view on issuance volumes, predicting the region will match this year's US$110bn volume in 2014. "If the recent run rate is maintained, the proportion of global corporate issuance coming from EM countries could reach over 20% in 2014," it said in a report earlier this year. "LatAm and EEMEA should account for more than half of this."

Not surprisingly, a large chunk of this year's LatAm issuance this year - some US$80bn - came from investment-grade credits. Junk credits, which made up the remaining US$30bn, got a mixed reception from a buyer base that took hits from a series of defaults - homebuilders in Mexico and, most notably, Brazilian tycoon Eike Batista's oil-and-gas company OGX.

With much of the headline risk removed in this space, junk credits may be more favored in 2014 as investors seek some protection against US rate volatility in higher-yielding credits that are more immune to sharp Treasury movements.

Indeed, the strong demand for recently nationalized Argentine oil company YPF's five-year bond, as well as Santander Mexico's subordinated Tier 2 offering, was seen as evidence of the buyside's continued willingness to move down the credit spectrum.

The region may also see the beginnings of a comeback in bank issuance as financial institutions prepare to raise Basel III-compliant capital now that regulators in countries like Brazil and Mexico have created a clear framework for such issuance.

LatAm banks are largely well capitalized, and as such are under no pressure to issue. But they may want to move forward if growth improves in countries like Mexico.

"If all the reforms in Mexico have the desired effect, banks will need to borrow more, though they are starting from a high capital base," said a banker.

Colombian banks may also need to raise more money for lending activity as large infrastructure projects kick in late in 2014.

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