NEW YORK, March 3 (IFR) - LatAm DCM bankers are bracing for a rebound in issuance after the region’s slowest February in the dollar market since 2008, which saw just one cross-border issue placed all month.
Lower US Treasury yields and a stronger tone in emerging markets over the last few weeks should bring several high-grade borrowers out of the woodwork despite new risks such as Ukraine.
Issuers were essentially sidelined last month, either because they were sated by January’s surge of issuance or scared off by the subsequent EM sell-off.
But activity is set to spike in March as bankers hurry to take advantage of the much-improved tone in the secondary markets now that several companies have reported fresh numbers.
And there is certainly no lack of companies that have either mandated or already met with investors, including Mexican bank BBVA Bancomer, consumer finance company Credito Real, mobile infrastructure provider Continental Towers, sugar company Ingenio Magdalena, Chilean wood products Masisa, Uruguay oil company Ancap and Colombian pipeline company Ocensa.
The absence of supply has pushed secondary prices higher and improved the technical backdrop, while shrinking Treasury yields due to the Ukraine crisis have improved pricing prospects further up the curve.
Demand for the primary should be healthy as it is often the only place where investors can buy in size, as shrinking inventories and poor liquidity in the secondaries means that only small tickets are available.
“Treasury yields are very favorable for EM borrowers to issue as long as possible,” a senior syndicate official said Friday. “If someone wanted to do a 30-year, now is the time. The 30-year Treasury is now at around 3.60% when a few weeks ago it was near 4%.”
While retail flows persist, bankers say, institutional accounts have amassed cash during the recent drought and are ready to put money to work.
That includes the insurance companies that supported a mini-surge in 30-year bonds earlier this year.
Yet it is likely to be a different story for junk-rated names, as investors take a broad-brush approach to a sector that has been tainted by a number of defaults in recent months.
With no recent benchmarks to go by, though, the first movers may find pricing proves a bit tricky - particularly if investors seek higher new issue premiums to compensate for tighter secondary levels.
“You will still need to start with a new issue premium of 20bp-25bp range [even for well-known high-grade names], and they will end up at 10-15bp,” one senior syndicate official told IFR.
The start of Carnival in Brazil today means that few if any borrowers are likely to emerge from the region’s largest economy for a few days.
But with the country’s spreads finally catching up with low-beta peers, Brazilian corporates and perhaps the sovereign -- which just wrapped up investor meetings in Europe -- may take advantage of the better tone to print before the World Cup and presidential elections potentially complicate execution later in the year.
Indeed, a jumbo trade from Brazil’s Petrobras could boost LatAm volume substantially in March should the oil company decide to make its yearly multi-billion foray this month now that it has released fourth-quarter earnings.
The response to its numbers last week was mixed at best, but given the less pessimistic views about Brazil, Petrobras might not see a better window, said some bankers.
Higher production in pre-salt fields and better Ebitda figures were insufficient to reverse Petrobras’s negative free cash flow data as debt levels continue to climb, said an analyst.
Net debt rose by US$8bn to US$94.5bn during the quarter, bringing net leverage to 3.2x for the year and breaching the company’s 2.5x target.
“Ebitda and sales are slightly better, but the cash burn remains,” said a banker. “Leverage of around 3.5x for an investment-grade company is crazy.”
If Petrobras can come to market, however, bankers are less upbeat about high-yield issuance as headline risks weigh on the asset class.
The restructuring of Brazilian tycoon Eike Batista’s oil and gas company OGX, default concerns in the Brazilian sugar sector and Friday’s seizure by the Mexican government of oil services company Oceanografia will only make the selling of higher yielding credits that much more difficult.
Several sub-investment grade debut issuers are already heard holding off, including Peruvian real estate credits Centenario and Los Portales.
The latter was thought to have already mandated Bank of America Merrill Lynch, BBVA and Santander for the business. Those Peruvian names will no doubt be tainted by last year’s debacle in the Mexican housing market, despite coming from different countries, say bankers.
“If you are a high-grade issue, it is about new issue premiums and not about market access,” said a banker.
“On the high-yield side, it is not that simple. They will look at the credit before anything else and ask: is this a credit I want to bother my time with?” (Reporting by Paul Kilby; Editing by Marc Carnegie)