LatAm Letter: Weird Science (Bond Market)

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Some bankers struggle to make sense of it all. Chile entered the market on Thursday with a $4 billion triple slicer that drew more than $20 billion in orders to the top – a book size that seems like a bygone era in today’s generally modest oversubscribed world. .

The deal certainly did a good job of showing that regardless of the perceived hawkish turn by Jerome Powell on Wednesday, the new issuance markets for Latin America are alive and…we’re not sure “good” is the word. Rather “weird”, according to a union leader.

He struggled to draw conclusions from the Chile deal – behind the outstanding book were new issue concessions of up to 20 basis points on the five-year and 30-year tranches, and about 15 basis points on the 12 year slices.

“If Chile pays 20 basis points, what should Brazil pay?” said the syndicate banker. “I’m trying to figure out what it all means and where it all comes together, but every deal is different and I’m having trouble drawing conclusions.”

As we wrote this week, one takeaway is that Latin American buyers are looking for high-quality assets – and at A1/A/A- Chile is pretty much the best in the region. High-yield issuance is also possible – as Comcel, the Guatemalan telecommunications company owned by Millicom, showed by raising a projected deal from $750 million to $900 million on Thursday based on a request from $2.5 billion.

But Comcel, rated Ba1/BB+, in the words of one credit analyst, is the “Ferrari” of emerging market telecoms. We’re not exactly sure the metaphor works, but point taken: it certainly has Ebitda margins and leverage ratios you’d like to spin. Full story here.

What remains to be seen is the level of appetite for lesser-known and harder-to-understand borrowers. Inversiones La Construcción (ILC), a Chilean holding company for various financial services and private health companies, began investor meetings on Monday but has yet to see the light of day. A BBB+/BBB rating suggests a deal is there to be struck if priced right, but one credit analyst admitted to being baffled as to how to find fair value for such an unusual mix of companies in a market which has suffered very mixed performance from the secondary market so far this year.

Meanwhile, Ingenio Magdalena, Guatemala’s B1/BB-rated sugar producer and biomass power company, is still monitoring markets ahead of what would be a first deal some nine days into its tour.

On Wednesday, Ero Copper added to the weirdness, in the eyes of some Latin American purists. Sneaking past Powell’s speech, the Canada-listed company landed $400m over eight years sold to high-yield buyers out of the bookrunners’ leveraged finance desks – despite operating mines exclusively in Brazil.

Latin American buyers have yet to make peace with unique mining assets (some live with bad memories of Mexico’s Cobre del Mayo), but the issuer’s levfin strategy has done the trick, with yield of 6.5%, well below the levels that the accounts dedicated to emerging markets have said. GlobalCapital they would like to get involved.

Switzerland rolling with the punches

Elsewhere, a date for the newspaper. Credito Real is due to repay a 170 million Swiss franc ($182 million) bond in Swiss francs on Feb. 9, and rating agencies fear its plans to fund that maturity are floundering. S&P cut the company two notches on Monday and Fitch followed with a three notch downgrade on Thursday. Crédito Real is now rated B-/B- and faces “deteriorating business flexibility and a very weak funding and liquidity profile” amid growing refinancing risks, according to Fitch.

Perhaps more concerning, Stifel’s Alexis Panton believes that even if Crédito Real is able to raise funds to repay the Swiss franc bond, “significant challenges remain” – including a “weakening macro environment, higher interest rates and inflation, which could weigh on already thin margins”.

Swiss franc buyers are quite conservative, generally sticking to investment-grade paper, and their rare forays into Latin American high-yield credit haven’t always worked well. Argentina defaulted on some 400 million Swiss francs of Swiss franc bonds as part of its mega restructuring in 2020, for example.

So you might have blinked twice when you read that Itaú (Ba3/BB-/BB) was looking to Switzerland for funding this week. Almost eight years have passed since the last agreement on the Brazilian Swiss franc.

Yet it was not Itaú Unibanco, Brazil’s largest private-sector bank, that was expected to tap the markets, but A3-rated Itaú BBA International, the lender’s UK subsidiary and northern hemisphere platform for its international private banking and corporate and investment banking activities.

Itaú UK raised 150 million Swiss francs of three-year paper, paying 87 basis points on Saron mid-swaps, continuing a strong start to the year for issuers linked to LatAm in Switzerland, after BCI and CAF earlier in January.

Have a great weekend and contact us for a free trial to access all GlobalCapital.

Greetings,

Olly

This is GlobalCapital’s LatAm newsletter written weekly by Latin American journalist Oliver West. If you like it, sign up for free in seconds here and do not hesitate to forward it to your colleagues and contacts.

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