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
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
"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.
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
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
For other related fixed-income quotations, stories and
guides to Reuters pages, please double click on the symbol:
U.S. corporate bond price quotations...
U.S. credit default swap column........
U.S. credit default swap news..........
European corporate bond market report..
European corporate bond market report..
Credit default swap guide..............
Fixed income guide......
U.S. swap spreads report...............
U.S. Treasury market report............
U.S. Treasury outlook...
U.S. municipal bond market report......