Bonds from debut LatAm issuers have been flying off the shelf despite retail outflows, as institutional accounts put cash to work despite nervousness about US rate volatility. The Fed's accommodative policy stance and fewer headline risks out of Washington have worked wonders for both debut and frequent borrowers seeking funding ahead of any possible tapering of the central bank's asset buying program.
The buyside's willingness to go further down the credit spectrum into sub-investment grade names is simply because they are less exposed to US interest rate volatility, say bankers. Borrowers are now rushing to print before concerns about the Fed's withdrawal of monetary support return to the fore - and investors potentially flee again.
LatAm cross-border issuance spiked in September to USD13.2bn. However, junk credits comprised just USD2.9bn of that, and not one first-time issuer tried its luck. That all changed in October, as several debut issuers ventured forth last month. These included Peruvian bottle manufacturer San Miguel Industries (Ba2/BB), Guatemala cement company Cementos Progreso (BB/BB+) and Banco Nacional de Costa Rica (Baa3/BB+). In the dollar markets, LatAm borrowers printed close to USD9.5bn in new supply in October, with about a third of that coming from sub-investment grade issuers.
"The insatiable demand for these (LatAm) deals, as evidenced by massively oversubscribed books for small deals from first time, high-yield rated issuers, underscores the irrationality of a market fuelled by QE-related technicals," said Robert Abad, emerging markets specialist for fund manager WAMCO. "The tapering delay, perhaps until sometime early next year, was like throwing a birthday candle into a barrel of diesel." The strong bid has even been evident for sub-USD300m deals that do not qualify for inclusion in J.P. Morgan's corporate emerging market bond index (CEMBI) and come with considerable liquidity risks.
Bankers are now readying new deals, including Mexican miners Fresnillo (Baa2/BBB) and Cobre del Mayo (B2/B), as well as Guatemalan bank Banco de los Tabajadores (Ba3/BB-) and Peruvian logistics company Andino Investment Holding (B+/BB-) "Investors have been digesting FOMC and closing for month-end, but it could get busy next week," said a banker. "We are seeing lots of different buyers and they are hungry (for assets)."
A USD200m seven-year from little known San Miguel Industrias perhaps best epitomised the buyside's willingness to throw some caution to the wind. The credit arguably had several factors working in its favour, including a recent sovereign upgrade, Peru's comparatively strong GDP numbers, a strong local bid and a dearth of corporate paper out of the country.
But the USD2.6bn book for such a small deal, though, took some market participants by surprise, as did the pricing - which was ratcheted in by 125bp. "A few years ago, if you had done something like this, you would have angered accounts," said a banker. Higher new issue premiums may be initially required to get investors' attention, but the buyside is willing to tolerate price compression as long as the bonds perform well in the secondary. So far this has been the case.
All recently issued deals were trading at or above reoffer despite the indiscriminate selling Friday on US rate volatility. San Miguel's new 7.75% seven-year pared some gains, but was still trading at 101.75-101.25 after pricing at par this week. It was a similar story for Cementos Progreso's new 7.125% 10-year, which was being quoted at 100.375-100.625 versus a reoffer price of 99.253. Banco Nacional de Costa Rica put in a less stellar performance, with its five and 10-year offering around reoffer at 99.25-99.50.
The technicals appear to be working in LatAm's favour. While EM bonds funds saw another USD593m in net redemptions this week, this was lower than the USD1.592bn seen the week prior, according to ING. Furthermore, bankers say, such figures only reflect retail flows - and that institutional accounts still have plenty of cash.
"Over the last week, benchmark earnings from Cemex, Petrobras, America Movil and Southern Copper have all been weak, but it hasn't mattered," said a trader. "Technicals are winning out over fundamentals and credit work." Treasury rate volatility, which burned investors earlier this year, remains a big threat. 10-year yields spiked again towards the end of the week on better economic data. The question is whether investors want to minimise damage to portfolios by reducing exposure or take a broader strategy to increase returns, said one strategist.
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