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