Jan 18 (IFR) - In a reversal of years past, junk credits and
even a local currency deal have driven Latin American new
issuance volumes in recent weeks, as the search for yield and
fears of a back-up in US rates have investors putting money to
work further down the credit spectrum.
More high-yield issues and exotic fare, including global
local currency bonds and perhaps even hybrids, are likely to be
served up in coming months.
The premature sightings of sub-investment-grade credits is
also being reflected in the US market, where investors are not
only looking for extra yield, but also hoping that junk names
may provide some protection against any spike in US yields - a
move more likely to damage spreads on low-beta names.
"We are seeing the same in the US investment-grade side,"
said one LatAm debt capital markets (DCM) banker.
"Deals are getting done, but books are not that frothy.
People are trying to stretch for yield, and growth prospects for
the region are sound, so high-yield works."
Of the close to US$6bn in new supply seen in the dollar
market so far this year, just over half of that has come from
the region's sub-investment grade credits.
At this time last year, when the US$11bn plus in new issue
volumes represented high-grade names.
The diminished activity underscores record volumes in 2012,
when the region saw borrowers raise more than US$100bn - with
many high-grade names pre-financing heading into this year.
INVESTORS WANT MORE
In Brazil, at least, this trend also goes hand-in-hand with
a general deleveraging among blue chips, which are increasingly
drawn to the lower funding costs in a local market where
investors are shifting portfolio weightings away from Treasuries
and into higher-quality credits.
Even so, inflows into EM bonds remain strong - US$2.05bn in
the week ending January 9, according to EPFR - and investors
need to put money to work at a time when supply out of the
region has been relatively small compared with years past.
"We have had some serious inflows in the past two weeks,"
said one emerging markets investor. "I am just surprised we
haven't seen more high-yield issuance."
The imbalance between supply and demand has been compounded
by an abundance of RegS issues out of Asia this year, forcing US
investors to look at other parts of the EM universe.
All this has resulted in large book sizes for beef names,
for example, that were punished by the buy-side just a few years
Minerva saw its books reach close to US$6.5bn,
and it was a similar story for the 2017s of Marfrig,
which generated some US$4.1bn in demand.
Paraguay's new US$500m 10-year was 10 times oversubscribed,
while debut sugar and ethanol issuer Tonon saw a more modest,
albeit healthy, US$1.4bn book.
Performance has also been impressive, with all these bonds
jumping several points in the secondary - which will likely
encourage investors to come back for more such deals in the
The 8% to 9.5% yields seen on the Marfrig, Minerva and Tonon
deals this week also look attractive when compared to the 4%-6%
yields seen on leveraged junk names such as Cemex, ICA and
And despite expectations that flows will shift out of
fixed-income and into equity if economic growth picks up, some
investors feel that high-yield is a safe halfway house for now.
"It is a safe space for those people that don't want to take
a leap of faith into equities," said a portfolio manager at a
But while investors enjoyed strong returns without having to
overly tax themselves last year, 2013 looks to be tougher.
"Investors are saying I don't know where I am going to get
alpha this year, and I know am going to have to work harder,"
said a senior DCM banker.
That could mean that debut names and higher yielding credits
may have a captive audience for some time.
This includes local currency bonds, which provide more
nominal yield while acting as a hedge against any spike in US
Bankers are also increasingly talking about hybrid bonds,
which are typically deeply subordinated and receive equity
treatment from ratings agencies. Markets for such issues open
and close quickly, but bankers see demand for such instruments
as investors seek yield.
Borderline investment-grade credits may use these
instruments to avoid downgrades, but bankers question whether
Latin American issuers are willing to pay the cost when they
have other alternatives such as liability management and asset
The other reason for issuing such notes would be to receive
equity accounting treatment to buffer companies against FX
fluctuations, though regulators in Brazil have refused to allow
companies to qualify hybrids in this way. Lobbying by borrowers
may change this.
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