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Collapse of China property sector devastates APAC DCM, rockets restructuring appointments – APAC Restructuring Insights Report

While the issuance of USD high-yield bonds has been lethargic globally since early 2022 amid rising rates, the decline in APAC (ex-Japan) has been very much caused locally, and very much by one specific sector: mainland China property. Conversely, that has been a boon for restructuring advisory work.

As shown in the table below – powered by Debtwire’s Restructuring and Primary Issuance databases – new HY USD issuance volume in the region collapsed in late-2021, just as large Chinese developers began missing payments on their offshore bonds. The sector’s impact on volume has been outsized largely because it has long been the main provider of APAC USD HY bonds.


Surveying the damage

The wave of offshore bond defaults, which formed in mid-2021, crested in the middle of 2022 and has yet to recede. So far, 53 Chinese property companies have been subsumed in the surge, and behemoth homebuilder Country Garden Holdings will be the 54th if it doesn’t cure two missed 7 August bond coupons by the end of a 30-day grace period.

This has dried up demand for Chinese property bonds. Debtwire data shows that non-investment grade Chinese property companies currently have 397 offshore public bonds outstanding with aggregate principal value of USD 154.9bn. They have so far lost more than USD 135.5bn of their market value mostly in the past two years. That is based on 25 August prices from IHS Markit, which covers 367 (includes three CNH and five HKD-denominated tranches) of these tranches with USD 152.9bn outstanding, and cumulatively marks them at a total value of only USD 17.3bn – or 11.3% of the principal outstanding.


Dollar bond issuance dries up

The unprecedented distress in the Chinese property sector has eliminated the key pillar of the USD bond market in APAC (see chart above). For the six months ended June 2023, only USD 3.5bn high yield bonds were issued in APAC, of which one tranche was from a China property developer – Seazen Group‘s May issuance of a USD 100m due-2024 bond. Overall, the region’s USD high yield issuance in 2023 is on pace to be even lower than a disastrous 2022, which had the lowest annual issuance volume in a decade.

The issuance of APAC (ex-Japan) USD HY bonds had increased significantly, if bumpily, throughout the 2010s, and peaked in 2019, when more than USD 120bn was priced. The growth from 2017 was powered predominantly by the Chinese property sector; it contributed USD 69bn in 2019 or 55% of the total APAC figure, up from USD 7bn/19% in 2016.


Prelude to the tempest

The sector’s offshore bond issuance spree was part of its debt-raising binge that eventually prompted the central government to force developers to deleverage. It was this policy push – not the underlying property market – that triggered the tsunami of defaults.

Indeed, after a sharp but short slump during the early days of COVID-19, contracted sales among high-yield bond-issuing Chinese property developers staged a furious rally.

Data in Debtwire’s monthly China Property Pre-sales Tracker shows that, in 2020, there was a 10.9% YoY increase in aggregate contracted sales by the 53 high yield bond issuing developers that reported comparative figures for that year. Then the 52 developers with comparative data for 1H21 reported an aggregate 34.6% YoY increase for that half. Contracted sales only began to fall sharply in 2H21 and have continued to plummet since then.


Restructuring advisor opportunities

While the carnage in the Chinese property sector has left homes unfinished, and DCM bankers with little to do, it’s been a boon for restructuring professionals in the region. As the chart below shows, Chinese property companies have accounted for the vast majority of new restructurings in APAC since 3Q21, as measured by debt amount.

While the total number of new mandates for restructurings involving Chinese property companies has come down in the last few quarters, the sector remains a bountiful source of advisory fees – and headaches. As the chart below shows, 22 Chinese property companies that are currently engaged in a workout process appointed advisors more than one year ago, while another eight are beyond the six-month mark.


Completed Restructurings

Since the current property downturn began in July 2021, 31 developers have completed 39 restructuring processes covering 101 offshore-bond tranches with USD 32.2bn principal (see table below).


Biggest Winners

Four financial advisors – Haitong International, Alvarez & Marsal, Admiralty Harbour and Guotai Junan International – have each received more than 10 restructuring advisory mandates by Chinese property companies or their stakeholders since the start of 2021.

Among international law firms, Sidley Austin leads the pack, with 31 appointments, followed by Linklaters, with 21. Both parlayed their dominance in advising on HY issuance in the region.


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News Analysis

Argentina: Milei would struggle to govern with congressional minority; opposition could help somewhat

A potential government led by Argentina libertarian presidential candidate Javier Milei would have difficulty governing with a minority in Congress, according to two credit research analysts, a source close to the IMF, and a bondholder. However, the main opposition party, Juntos por el Cambio, would likely support the passage of several of Milei’s policies, they said.

“If Milei were to repeat Argentina’s primary results in the general elections, his libertarian party would gain 40 seats in Congress and eight seats in the Senate, but without institutional muscle and winning any governors, it would be challenging for him to pass any reforms in his campaign platform,” Pedro Siaba Serrate, head of research and strategy at the Argentine portfolio managing firm PPI, told Debtwire.

However, Milei’s La Libertad Avanza party could form a coalition with Juntos por el Cambio, which would have 107 seats in Congress and 27 seats in the Senate if the primary results were to hold, enough for the coalition to have a majority in Congress, according to a PPI report. Argentina has 257 members of congress and 72 senators.

“Under the most optimistic scenario, Milei could use the Juntos por el Cambio governing structure to implement policies in the Senate, as they would have a majority in both chambers. I think this could eventually happen.” Siabe Serrate said.

Recently, Milei has toned down his campaign platform after winning the primaries with 30% of the votes, with the general elections scheduled for 22 October. In TV interviews since the primaries, he has said that the dollarization of Argentina’s monetary system wouldn’t occur from one day to the next, that dissolving the Central Bank wouldn’t be done immediately, nor would lifting currency controls.

“If we aren’t able to eliminate the Central Bank via political channels, we will put even more pressure on cutting the budget to lower inflation,” Milei said today during a conference for the Council of the Americas in Buenos Aires.

Abolishing the Central Bank, if implemented, would prove deeply unpopular, according to a bondholder involved in Argentina’s previous debt restructuring negotiations.

Milei sometimes simplifies concepts to communicate them to society better, a source close to his campaign explained. When he says he will eliminate the central bank, this is not something he plans to do immediately or in an irresponsible way. The candidate is not even considering lifting FX restrictions from one day to the next and knows there is a hyperinflation risk if he does that. He plans to do these things sequentially and reasonably, the source close to the campaign said.

A representative for the La Libertad Avanza party did not respond to a request for comment.

“The issue is whether Milei will be able to govern or not,” said Andres Borenstein, an economist at the Econviews consultancy in Buenos Aires. “Milei has no governors and would hold only 10-15% of Congress. It will be very difficult to pass laws. If it were difficult for [former president Mauricio] Macri to govern when his party held a third of Congress, Milei would have less than a half of that.”

“The market is going to be very anxious until the general elections, and the upside that the Argentine sovereign debt — which was viewed as very cheap — will now be on hold until the general election results,” Borenstein said.

Argentina’s USD 20.5bn 3.625% bond due 2035 traded at 29.9 on 14 August compared to 26.4 on 15 June, according to MarketAxess. The USD 10.5bn 3.5% bond due 2041 traded at 31.4 on 14 August compared to 28.5 on 15 June.


Rule by Decree

Previous Argentine presidents have issued executive decrees that allow them to dictate laws without needing a majority in Congress. Its use is only prohibited for criminal, electoral, and tax legislation. At least one of the chambers of Congress must approve a decree for it to be valid, according to the legal framework for decrees (Law 26.122).

Former President Cristina Kirchner issued a decree to intervene in the previously privately owned oil firm YPF when initiating its expropriation in 2012. She also issued a decree in 2010 to remove Central Bank president Martin Redrado from his position after he opposed using the bank’s reserves to pay for public debt. Macri issued decrees during his administration, which never had a majority in either chamber, to establish foreign exchange controls, fix fuel prices, and renegotiate public debt.

“I think it could be similar to the situation faced by the previous [Macri] administration, a scenario in which Milei has the support of Juntos por el Cambio with reforms. I think there are a lot of coincidences between the two parties. If there are difficulties, they can advance with decrees. Milei also mentioned doing a referendum,” Martin Castellano, Head of LatAm Research at the Institute of International Finance (IIF), said.

Milei could get support to reform the government’s public finances, maybe including a privatization program. Castellano said. The fiscal issues will be where most of the focus is, but it isn’t easy to implement. “But I think he could work with the main opposition party and get support to implement it. It is important to maintain investor confidence and keep working with the IMF given their role as the country’s main creditor,” Castellano said.

Milei’s economic team had a more collaborative attitude with the IMF during meetings last week, being more in favor of the current government receiving financing from the IMF so there can be a smooth transition, Argentina’s economy minister Sergio Massa said during a press conference 23 August.

Milei would advocate for harsher budget cuts than what the IMF is asking for, he said in an interview with television station TN.

Although the “fund continues to be the fund,” the IMF sees things differently now, a source close to Argentina’s delegation to the IMF told Debtwire. The IMF knows that a sharp adjustment creates a decline in production and a smaller tax base, meaning a continued deficit without being able to pay the debt. It understands if Argentina adjusts too much, the country won’t grow, and its tax base will decline, preventing Argentina from paying its debt service, this source said.

Another issue is the proposed privatizations of YPF and state-owned airline Aerolineas Argentina, which Libertad Avanza’s candidate for mayor of the City of Buenos Aires, Ramiro Marra, assured would be implemented in an interview with TV station C5N on 23 August.

“YPF is also a company that we need to privatize because it has clearly been used for party politics,” Marra said. On the other hand, he said that for Aerolineas Argentina, the party is working on a plan for employees to administer the company.

“It would be challenging for Libertad Avanza to privatize the 51% of YPF that is state-owned,” a source close to the IDB told Argentina. “By law, it would require a two-thirds majority in Congress, and I don’t think that would be easy to do.”

“Some of Milei’s ideas could be very good if implemented, but the market will judge you on the probabilities of execution and whether they will be well-executed,” Siaba Serrate said.

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News Analysis

Argentina’s primary results in three-way race, increasing market uncertainty ahead of October elections

Argentina’s primary presidential election concluded with an unexpected three-thirds scenario led by libertarian candidate Javier Milei, increasing uncertainty regarding who could become the country’s next president, according to political and market analysts consulted by Debtwire.

With fewer campaign resources, Milei “managed to be heard by the population” and secured 30.04% of votes, outperforming the main political coalitions, said a source close to Javier Milei’s La Libertad Avanza campaign team.

Main opposition coalition Juntos por el Cambio obtained 28.27% of votes, and ruling party Union por la Patria, 27.27%, according to the latest results provided by Argentina’s Electoral Direction.

The primaries’ result was deemed an “earthquake” by political analyst Sergio Berenzstein, during a Zoom discussion this morning with Argentine portfolio managing firm PPI. Milei’s results were “amazing” even in provinces where he spent zero resources campaigning. It is similar to what happened in Brazil with [Jair] Bolsonaro and in Mexico with [Andres] Lopez Obrador,” he said.

However, the scenario is still open ahead of the 22 October general elections, according to Berenzstein. It is yet to be seen whether Milei will be able to consolidate his results, considering the slim difference he obtained compared with the main political forces, and the fact that in the general election there will likely be around 5% or 6% more voters than in the primaries, the analyst said.

The Juntos coalition, which was seen by a majority of polls as the leading contender in the primaries, had “its worst election since it was created” in 2015, said Berensztein. They lost a lot of support, but it is true that in the past they have managed to improve their results in general elections versus their results in the primaries, he said. It is yet to be seen if Patricia Bullrich, who was elected as the coalition’s candidate for Juntos over contender Horacio Rodriguez Larreta, can increase her support to around 35% and make it to the runoff, said the analyst.

“It was a victory of antipolitics,” said a source from the Juntos campaign team. “Milei is an expression of Argentines’ disappointment and anger, but we need to find a way to deliver the message that he cannot replace politics and institutions,” the source said.

The ruling coalition Union por la Patria, with candidate Sergio Massa, also emerged weakened in these primaries, said the Juntos source. More than 60% of Argentines voted against them and in favor of right-wing policies and a less interventionist view, the source said.

“Milei’s performance in the primaries is likely going to improve in October,” said an Argentine portfolio manager following the matter. “If he doesn’t make too many mistakes, he will probably grow amid the new enthusiasm and as voters now see him as a competitive candidate,” the source said.

On the contrary, the ruling party will have to navigate two months of financial instability that would probably weaken it, while Bullrich will have to face a tough campaign with one opponent on her right and the other to her left, the portfolio manager said.

Fear of the unknown    

Argentina’s sovereign bonds traded negatively Monday after the primaries results, with global bond prices plummeting 10% on average, according to a second portfolio manager. “While Milei clearly proposes pro-market policies, investors are showing fear of the unknown,” the trader said.

The libertarian candidate’s government plan includes a reform of the tax, labor and pension systems, the privatization of loss-making public companies, the elimination of the Central Bank and a dollarization of the economy, among others.

“Abolishing the Central Bank and dollarizing the economy will be huge endeavors considering Milei’s probably limited support in Congress,” said Hans Humes, the CEO of Greylock Capital Management.

“Dollarization is a legitimate issue to discuss for a country that has had the currency weakness Argentina has. Abolishing the Central Bank and all the Health, Education and Environment ministries, if implemented, would prove deeply unpopular,” he stated.

While Bullrich and Milei (to an extent) speak of economic plans that traditionally appeal to the financial community, the whipsaw of change in political direction could be very disruptive, said Humes. Markets like stability, continuity and predictability, he said.

The market can see that “the next few months will be really difficult for Argentina after the primaries’ results,” said a fixed-income trader. “We will have more inflation, more poverty, before any policies to correct macro imbalances can be applied,” the fixed-income trader said. While very good years can come with a new administration, the transition may be turbulent, the fixed-income trader said.

“Argentinians overwhelmingly favored the most forceful right-leaning opposition factions in the primary,” Martin Castellano, head of LatAm Research at the Institute of International Finance, posted on his X account. “While Milei’s proposals could trigger concerns, the election outcome enables much-needed policy changes. Asset prices should react favorably despite the tough transition ahead,” he stated.

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News Analysis

Primary market shows signs of revival, momentum to continue in 2H23, but at a cost

Activity in the US junk debt market has picked up after the 4th of July and the momentum is expected to continue through 2H23, but at a cost for issuers, said two buysiders and a sellsider.

Driving the action, interest rates and inflation have stabilized and market sentiment regarding an imminent recession in the US has improved, prompting borrowers with upcoming refinancing needs to get off the sidelines, the sources said. Still, the uncertain outlook means issuers will need to make concessions to fuel interest from the buyside, they added.

Among the most noteworthy transactions so far this month, Arconic Corp is in the market looking to raise USD 1.9bn of debt to partially fund Apollo Global Management’s USD 5.2bn buyout of the aerospace parts manufacturer. As part of the debt financing package, the company yesterday kicked off a bond offering for a USD 900m senior secured note due 2030. This follows marketing on a seven-year USD 1bn first lien secured term loan B that launched last week offering SOFR+ 475bps, and an OID guided at 97-97.5. The TLB syndication timeline was accelerated from the initial 1 August commitment deadline and is expected to wrap up later this week, concurrent with the bond offering. The debt package also includes a USD 725m senior unsecured note due 2031 to be offered privately. Apollo and minority investor Irenic Capital Management have also committed to writing a roughly USD 2.3bn equity check.

Procurement support provider OMNIA Partners also closed a seven-year USD 1.65bn term loan partly backing the company’s acquisition of certain non-healthcare assets from healthcare business solutions provider Premier for around USD 800m in cash, according to news reports. The term loan was upsized from USD 1.625bn at launch and the spread was tightened to SOFR+ 425bps OID 99 from an initial margin guidance of 450bps-475bps with a 97.5-98 OID. The credit facility, which will also go toward refinancing existing debt, includes a USD 155m delayed draw term loan and a USD 250m revolver.

Meanwhile, Chatham Asset Management-owned RR Donnelley priced an upsized USD 285m junior lien secured offering via Jefferies last week. Proceeds from the deal – which carried a 95.3 OID and 9.75% coupon for an 11% yield – funded a takeout of existing debt, including a portion of its 10% PIK holdco notes due 2031 held by Chatham, as reported.

Improved sentiment regarding the magnitude of an economic downturn in the US based on the latest macroeconomic data is fueling market expectations that the second half of the year will see a gradual uptick in the volume of new issuances.

“Data is improving and the latest inflation numbers make me think that the US is on the right path. We think that if there is a recession, it will be a mild one and this should be very positive for fixed income,” David Norris, portfolio manager at TwentyFour Asset Management told Debtwire.

US GDP was revised up to 2% annualized advance in the first quarter by the government on 29 June, up from 1.3% from their prior estimation. Household spending rose at 4.2% rate, the strongest pace in nearly two years. At the same time, inflation gauges were revised down by the Fed leading the market consensus to expect the Central Bank’s rate hiking process to be nearing the end.

The US regional banks crisis also did not have profound effects on the broader banking system, further boosting market sentiment. “It seems like we’re not heading for a hard landing, which is bringing the market back to life,” added Norris.

Meanwhile, a rally in the high yield secondary over the last few weeks has also bolstered optimism in the new issuance market, said one buysider. Mirroring the improved performance in high yield secondary trading, SPDR Bloomberg High Yield Bond ETF last traded at USD 92.20, versus USD 91.95 on 30 June.

“If a borrower has debt maturing in 2025 or even in 2026, they better be refinancing it soon, while the window is open,” the buysider noted.

There are USD 98bn of high yield bonds and loans maturing in 2023. The number rises to USD 289bn in 2024 and USD 558bn in 2025, according to data from Dealogic.

Most 2023-2024 maturing debt was refinanced in 2020-2021, while the market was still robust, Chris Blum, head of corporate finance and leveraged finance at BNP Paribas told Debtwire.

“During the pandemic years, transaction volumes were incredibly high as companies valued liquidity and the bond market was never better,” said Kenneth Wallach, co-head of global capital markets practice at Simpson Thacher.

Total issuance for US marketed high yield bonds reached USD 429bn from 595 deals in 2020 and USD 462bn from 636 transactions in 2021, according to data from Dealogic. The number fell to USD 104bn from 134 transactions in 2022.

Cautious optimism 

Though 2023 has been a good year for US junk issuance compared to 2022, the market will remain in a defensive stance until borrowers and investors are able to gauge the full magnitude of the upcoming US economic downturn. There’s been USD 92bn of high yield bond issuance year-to-date through June, according to Dealogic data, 89% of the total volume issued during all of 2022.

The primary market saw challenges in 2022 mainly due to a strong inflationary environment and rising interest rates. “In 2020 and 2021 companies took advantage of positive market conditions to push out debt maturities and get more runway before needing to raise more capital,” said Wallach.

The war in Ukraine also unsettled the economic outlook, particularly for companies with significant exposure to Europe, while the trade tensions and the economic outlook for China also had negative impacts on the primary market, according to Wallach.

The still-uncertain outlook is keeping investors more selective, according to three additional buysiders.

“It could take a while before you see [an influx of broadly marketed] unsecured debt as a part of the capital structure on providing financing for LBOs,” said Grant Moyer, Head of Leveraged Finance at MUFG. Currently, the bridge caps for CCC rated credit are just too expensive and too close to the cost of equity, he noted. Hence, “you’re seeing all senior secured financings supporting these LBOs inherently giving slightly lower leverage at around 4x to low 5x, versus the 6x-7x we were seeing before.”

Terms are also wider than they were compared to 18 months ago, according to Moyer. “We’re still seeing pricing relatively elevated and still fairly conservative flex if you’re an underwriter. Market flex used to be 100bps-125bps. Now, we’re getting 150bps-175bps with a bigger portion to OID than we used to see. We expect that to continue until the market shows real stability.”

The average institutional loan margin for B rated loans has so far remained consistent on year-over-year basis, hovering at 432bps in 2Q23 compared to 433bps in 2Q22, according to Debtwire data. The overall lack of movement is mainly due to an increase in issuance from higher rated firms, which are more able to tap the syndicated markets than riskier credits in the current environment, Debtwire’s June US Leveraged Insights noted.

However, margins seem to be on the rise when looking at individual ratings categories, the report further highlighted. The weighted average margin on BB rated credits has edged up a tad higher to 338bps in 2023 YTD through June compared to five years ago when the average margin was at 277bps and ten years ago when the average margin was at 313bps. Similarly, for B rated loans, the average margin has risen to 441bps for 2023 YTD compared to 389bps five years ago and 402bps 10 years ago, according to the Debtwire report.

The percentage of bonds issued as senior secured instruments over unsecured notes remained at 50% in June – far above historical averages of around 30%-40%, the Debtwire report further highlighted. Along with the safety of bonds that are secured over assets, a greater percentage of higher rated issuers have tapped the bond markets thus far in 2023 with 56% of issuers having a BB rating, up from 43% last year.

BB rated companies currently represent a sweet spot in the market, according to Patrick Ryan, head of global banking and credit practice at Simpson Thacher. “They have higher yields for investors than investment grade with a lower risk profile than most non-IG companies, and also tend to be active users of capital, including for acquisitions,” Ryan said.

While the primary market remains in a defensive stance, the private credit market is expected to gain traction as an alternative source of capital, as seen in Arconic’s USD 725m privately placed unsecured bond tranche.

“We’re still in the early innings of seeing the impact as the large maturity wall is still out there, so we will need to see how it plays out. Fixed rate bonds will likely be more attractive to investors once interest rates stabilize or even start to decline,” Wallach said.

“Borrowers might not have a choice other than going to direct lenders if the broadly syndicated loan market (BSL) [and high yield market] is not open to them,” noted one of the buysiders. “If direct lenders start doing bigger deals, then the question will be if the borrowers want to pay 300bps–400bps higher to direct lenders when the BSL market reopens.”

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News Analysis

Argentina’s main political coalitions creak as deadline to register for presidential elections approaches

Disputes inside Argentina’s (CCC-/C) main political coalitions, Frente de Todos (FdT) and Juntos, have left them at the brink of fracturing, just before the 14 June deadline to register for the 22 October presidential elections, three sources familiar with the matter said.

There is a chance that ruling coalition FdT ceases to exist due to the conflicts between President Alberto Fernandez and the factions led by Vice President Cristina Kirchner and by Minister of the Economy Sergio Massa, the first and second sources said. Massa and Kirchner are said to be negotiating in the last couple of weeks to form a new coalition that will present a single presidential platform for the primaries. President Fernandez is not part of these negotiations, the sources said.

Former governor of the province of Buenos Aires, Daniel Scioli, as well as Cabinet Chief Agustin Rossi, both close to Alberto Fernandez, have expressed their intentions to run in the 13 August presidential primaries and they refuse to withdraw their candidacies to negotiate a consensus presidential platform for FdT, as Kirchner and Massa want, said the first source. The situation has become “impossible, with nobody willing to capitulate,” the source said.

“The truth is that FdT does not have a candidate that is strong enough to gather the entire coalition’s consensus,” said the second source. Other potential candidates in the FdT coalition include Massa, Minister of Domestic Affairs Eduardo de Pedro and social leader Juan Grabois, according to local press reports. All of them have voting intentions of around 15% and fail to capture the 25%-30% core support that Cristina Kirchner is able to gather, the second source said. Kirchner has announced she won’t run for president.

Similarly, the Juntos coalition is divided between a faction supporting Patricia Bullrich and the group that backs Horacio Rodriguez Larreta, said the second and third sources. Rodriguez Larreta is willing to broaden the coalition with the incorporation of other political forces, such as the Federal Peronism of Cordoba’s governor Juan Schiaretti, but Bullrich and former president Mauricio Macri are against this strategy, the second source said. Conflict inside Juntos has escalated rapidly this week due to this issue, the source said.

Nonetheless, “chances of a breakup in Juntos are minimal,” said the third source. Macri and Bullrich are working to avoid that and this week they have accepted Larreta’s suggestion to incorporate Jose Luis Espert, from the libertarian party, to Juntos, in an effort to wind down confrontation levels, the third source stated.

The only one benefitting from these disputes in FdT and Juntos is La Libertad Avanza candidate Javier Milei, said the second source. “Argentines are angry and disappointed with politicians and these conflicts for power only reinforce their willingness to bet for the anti-system alternative,” the source said.

The most recent poll of consultancy firm Aresco shows Juntos with a 29.1% voting intention, followed by La Libertad Avanza with 27.6% and leaving FdT in third place with a 27.4% voting intention. Measured by candidate, for the Juntos coalition Bullrich obtains 14.7%, while Larreta gets 14.4%, according to the Aresco poll. For FdT, Eduardo De Pedro gets 15.8% and Scioli, 11.6%, said the report.

De Pedro is seen as Kirchner’s favorite candidate, even though the vice president has not yet said who she will support, said the second source. Another recent poll, from consultancy firm Analogias, shows FdT with a 27.5% voting intention, followed by Juntos with 26.8% and La Libertad Avanza with 21.2%.

Coalitions will have to register to participate in this year’s presidential elections by 14 June, and they will have to present the candidates that will run in the primaries by 24 June. The primaries will be held on 13 August and the general elections, on 22 October. Presidential debates are scheduled for 1 and 8 October. A runoff, in case it is needed, is expected for 19 November.

Spokespeople for President Fernandez and Sergio Massa did not reply to requests for comment. Spokespeople for Patricia Bullrich and Horacio Rodriguez Larreta declined to comment.

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News Analysis

GCC private credit on the rise as region embraces higher returns

Asset managers and hedge funds have been paying close attention to the emerging private credit market in the Middle East, attracted by the prospect of juicy returns, according to market participants polled by Debtwire.

As the asset class scales new heights, news broke earlier this month that Caisse de Dépôt et Placement du Québec, a pension fund manager, financed its stake in a Dubai port with a USD 900m injection of private credit.

“There is currently unprecedented activity in the Middle East’s private credit market – both from companies needing capital and from allocators,” said Rashid Siddiqi, partner at Ruya Partners, a private credit fund in Abu Dhabi. “It’s certainly a growing market.”

The global explosion in private credit deals started in the US, before filtering over to Europe, where it was led by France and Germany, according to Victoria Mesquita, partner at Addleshaw Goddard. Now, the Middle East is catching up, she said.

The appeal is principally being driven by the pull of lucrative returns, typically ranging from 12% to 15%, said one buysider. The interest in the asset class is further amplified by the scarcity of new high-yield and distressed debt opportunities in the region, added the buysider.

Private credit deals are often structured so that there is an upside component if the issuer performs well, such as with a warrant, which can take total returns up to the high teens if the company performs well, said a second buysider.

In addition, debt issuers themselves are also being drawn to private credit due to the funding gap in the current market, particularly for new issuances falling within the USD 25m to USD 50m range, said one lawyer.

“There’s a funding gap that private debt can address, in particular in respect of leveraged acquisition financings, which are typically not covered by the commercial banks unless the deal is about AED 500m (USD 136m) upwards and it can be referred to the banks’ investment banking teams,” Mesquita of Addleshaw Goddard said. “That leaves many of the SME mergers and acquisitions without debt financing.”

There are several noteworthy examples of how private credit is filling the gap. Moove Africa, an African mobility company, raised a USD 30m five-year private credit loan with a 12% coupon in November, with a strong interest from Middle Eastern investors. Additionally, Pure Harvest, a farming company in the UAE, raised USD 50m through private placement of a 15% three-year sukuk with an 8% coupon in March 2021.

STARZPLAY, a subscription streaming service, also raised USD 25m in February 2021 from Ruya Partners.

“We provided USD 25m in growth capital to [STARZPLAY] at a critical junction, when it did not want to dilute its shareholders through another round of equity funding,” said Siddiqi of Ruya Partners.

As more issuers take advantage of the growing private credit market, regulators have been rushing to keep pace. Earlier this month the Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) issued a regulatory framework for private credit funds, enabling ADGM funds and their fund managers to originate and invest in private credit.

“That kind of infrastructure is only implemented when there is demand for the product,” said Sajid Siddique, chief executive officer of Advice Re Capital. “As the UAE continues to expand its offerings in the capital and equity markets, we will see a much wider platform of credit available through different channels, one of those being private debt.”

As a result of this growing interest in the market, the number of private credit funds investing into the Middle East is certainly growing, said Mesquita.

“[In] the Middle East, 10 years ago we only had a handful of local debt funds active in the region, primarily doing mezzanine-type financing,” she said. “We now see a lot more activity in private credit, not only from locally managed debt funds (old and new), but also with players from London, Hong Kong and the US coming into the region.”

There are now a number of well-known firms involved in private credit located in the GCC, including Ruya Partners, Investbridge Capital, Shuaa Capital and Franklin Templeton.

Sovereign wealth funds (SWFs) have been turning up the dial on their private credit investments too. The Abu Dhabi Investment Authority (ADIA) is reported by local media to be increasing its exposure to private credit, and in 2021 GCC SWFs invested USD 850bn in private credit assets.

Charting their own path

Amidst the successful conclusion of several prominent restructurings, such as NMC Health and Emirates REIT, distressed and high-yield investors in the Middle East are actively exploring fresh avenues to generate returns, said the first buysider.

With this in mind, certain investors are venturing into distressed opportunities within the secondary market. Many have engaged in long-standing single-name situations or acquired entire non-performing loan (NPL) portfolios from banks, strategically aiming for asset recovery through litigation finance.

Private credit offers an attractive alternative for those wanting to generate big returns, without necessarily getting involved in long, messy, and drawn-out bankruptcies in the Middle East, said the second buysider.

There can be a difficulty for asset managers trying to raise money from allocators and investors in the pursuit of private credit in the region though, cautioned the first buysider.

“Funds want to do more private credit, but it is difficult,” he continued. “Raising money from investors to do esoteric private investments in the Middle East is difficult. A lot of these investors are comfortable with private lending in the US and Europe, but it’s difficult convincing them to back you in the Middle East.”

“Once you mention private debt, you need investment committees and consultants – it steps up in the complexity,” the first buysider noted. “You essentially need to carve the deal out yourself, and it becomes more complicated.”

The increasing difficulty in getting investors to allocate capital to private credit funds in the Middle East is in part due to the rising returns in developed markets (DM), said the first buysider.

“Two years ago, you’d get 7-8% IRR in developed markets and 15%+ in emerging markets (EM),” the second buysider agreed. “Now, in developed markets you’re getting 12%. The pick-up in return for EM is not necessarily that high for the increased risk – putting some investors off.”

But comparing such headline returns between two different regions is not necessarily suitable, cautioned Siddiqi of Ruya Partners.

“Returns are not shrinking in EM, however it is indeed more common for private credit investments in DM to be priced with floating rate structures, and therefore the change in base rates, as has been the case more recently, will naturally deliver higher returns,” Siddiqi said.

“Another factor that is common practice, albeit works in the opposite direction when base rates are climbing, is the fact that most private credit funds in DM utilise fund-level leverage to accrete returns to their investors,” he continued.

“While EM-based private credit investments are typically priced at fixed rates and generally don’t benefit from fund-level leverage, they are quite often coupled with upside sharing mechanisms, like warrants, and are able to deliver superior overall returns, particularly in growth situations,” he added.

Despite talk of relative returns between regions and markets, private credit is still attractive and the number of new funds that want to enter the market is significant, said the second buysider.

Real estate

Real estate is one of the sectors that market participants say could be transformed by the development of private credit in the region.

“UAE banks are very strong and they can lend widely,” said Siddique of Advice Re Capital. He added however that the growing call for the implementation of stronger banking regulations in the region, which could impact metrics like risk-weighted assets, could in turn result in tighter lending standards.

“It is likely that in the future we will see banks being more picky with where they lend, which is where private credit can step in,” he said.

Siddique noted that many banks already face various regulations that allow them to only lend up to a certain amount of their deposits to the real estate industry — limits that are fast being approached.

“Banks can sometimes get nervous and start withdrawing some of that liquidity, particularly to developers, which is where private capital, through a regulated fund or vehicle out of ADGM or DIFC, can be of use,” he said.

Whether it is providing flexibility to real estate developers, plugging a funding gap or providing higher returns to asset managers, one thing is for sure: the market for private credit in the Middle East is gathering steam, and many are enthusiastic about its potential.

Whether the region will be truly able to catch up with the US in the size and scale of its private credit market will depend on whether it can convince investors of its value, and if regulators can continue to keep pace.

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News Analysis

LatAm primary shows signs of life as issuers’ focus turns again to inflation data

Activity has returned to the LatAm primary bond market as worries about turmoil in the US banking sector dissipated, creating a window of opportunity for issuers. Borrowers’ concerns will now center around inflation data and what the US Federal Reserve might signal at its May meeting, according to a derivatives trader, an investor, a DCM banker and the head of Latin America Capital markets at a bank.

“Concerns about the US banking sector have dissipated and inflation has become, once again, the most relevant factor for issuers,” the derivatives trader said. “The activity we’ve been seeing in the past two weeks were transactions that had been in the pipeline for a long time. There’s a small window right now for those deals but I doubt we’ll see anything new at least before the May meeting.”

This week saw the return of Brazil to the international capital markets after an almost two-year hiatus. The country raised USD 2.25bn through the sale of a new 2033 bond for repayment of outstanding indebtedness. The deal showed that there is demand for big LatAm issuers, according to the head of LatAm capital markets.

Brazil’s 6.150% yield represented “aggressive tightening” from 6.5%-6.625% IPT, implied a minimal concession of 10bps and was an upsizing from the USD 1.5bn-USD 2bn initially planned, this banker added.

Demand at its peak was more than USD 8bn, with orders mainly from the US, the UK, continental Europe and Brazilian investors, the LatAm capital markets head said.

The new 6.0% 2033 bond traded at 99.24 today, after pricing at 98.849.

Brazil was the fourth new bond to come out over the past 30 days, after Cemex, Panama and Costa Rica also took advantage of the rate stability in the debt markets.

These four deals totaled USD 6.55bn and brought the year-to-date LatAm cross-border total to USD 24.74bn from 21 tranches, according to Debtwire data. This compares to USD 30.81bn from 34 in the corresponding period of 2022.

The positive feedback for Brazil’s new sovereign is a sign that, at least for the time being, there is a window for issuers to take advantage of the relatively stable conditions before May’s Federal Reserve meeting, the investor said.

“The market has been positive for the past two weeks for the following reasons,” the investor said. “First is that there seems to be confirmation that there’s been no systematic impact from the collapse of some regional banks in the US. Second, inflation data has been around what was expected or lower. And third, the recent uptick in oil prices did not put upward pressure on inflation in LatAm and has actually benefited some countries in the region.”

Although there have been few new deals, those who have issued recently have seen good results in the secondary market, which is another sign that conditions are currently relatively stable, the investor added.

“Take the new Cemex bond, for example,” the investor said. “Its price was pressured right after the pricing day but its currently sitting over 101. I think it’s got good market-momentum and should continue on that trend in the coming weeks.”

The Cemex USD 9.125% perpetual bond traded at 99.7 today, according to MarketAxess, reaching as high as 101.25 on 5 April after pricing at par. Costa Rica’s new USD 1.5bn 6.55% 2034 bond traded at 100.7 today, after pricing at par.

Another reason why issuers might want to come out with new deals soon is they have 4Q22 financial statements ready and don’t want to lose them and have to wait until 1Q23 results, according to the DCM banker.

“There’s been a window in the past four days that I think will carry over to next week. We are expecting a couple of new deals next week,” the banker added.

Moving forward, all four sources are hopeful that the primary market will see more activity before the May Fed meeting ends up either confirming the pausing of its restrictive cycle or signals more hawkishness ahead.

“The latest data regarding inflation and employment was benign, perhaps suggesting that the Fed is going to slow down its rate-hiking process,” the head of LatAm capital markets said. “There’s now a case for issuers to be more active as they’ve seen that bonds like Brazil’s were very well received. I’m very hopeful we’ll be seeing more activity.”

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News Analysis

Mid-market lenders push back on EBITDA adjustments to future-proof credits

Mid-market lenders are using a position of relative strength in a risk-off environment to hit back at over-engineered EBITDA adjustments that were the norm in dealmaking barely a year ago.

The global pandemic ushered in widely accepted operational cost – and synergy-adjustments to EBITDA calculations as sponsor-led deals flourished. But now, amid increased interest rates, rising macro-economic uncertainty and a dearth of deals, lenders hope to soften the blow by both curtailing leverage and the EBITDA it is ultimately based on.

With fewer deals and less cherry-picking available to all, financiers are reining in control on EBITDA hard caps, which are expressed as a percentage of EBITDA prior to relevant adjustments. Where previously 25% of EBITDA was acceptable, now lenders are willing to swallow only 10%–20%, market participants have said.

The inclusion of some cost savings and synergies will still be permitted but not all cost control, restructuring and operational improvements will make the cut.

“Vendors are scaling back EBITDA exceptionals. There are clearer caps that we are seeing with banks and funds. Both are coming back to 10%; 20%, at the maximum, is what they will reasonably accept,” one European lender said. “They (vendors) can’t do anything with an adjusted and real EBITDA that are too far apart. They have woken up.”

Sectors that have been hit particularly hard include healthcare, favoured by investors on both sides of the aisle. Large swaths of adjustments related to cost synergies vendors hoped to achieve in some uncertain future based on a buy-and-build strategy, sources noted.

More broadly, buy-and-build cases required lenders to take a leap of faith on reaching the proposed adjusted version of EBITDA in some uncertain future, sources said.

“People have realised that there is a lot of nonsense, particularly in their portfolio, let’s say with credits from around 2021,” a financier at a major European bank said. “I think experience and circumstances are making it clear that it can’t go on like this.”

A case in point is the ongoing sale of German RFID-specialist Elatec, where the vendor broke out adjustments to the EBITDA amounting to less than EUR 200,000, a source familiar with the situation said. Leverage pitches on the business landed at around 4.75x with the jury out on structuring earnings as forward looking FY23 EBITDA was projected to reach EUR 26.9m, a 50% increase on last year’s reported figure, as reported.

An auction for UK’s dentistry chain Clyde Munro was parked in March by sponsor Synova as the financing environment remained challenging, as reported by Debtwire sister publication Mergermarket. Here, too, lenders were structuring off GBP 5m of EBITDA and scaling back adjustments related to synergies from potential acquisitions: a far cry from the GBP 10m it was being marketed off.

The sale of Rad-x hit a snag late last year with aggressive EBITDA adjustments related to a buy-and-build plan that didn’t reflect its actual performance, as reported. Many sponsor buyers backed out of the process to acquire the Gilde Healthcare-backed German radiology business, as it was marketed off EUR 25m to EUR 30m of EBITDA while its real EBITDA lay closer to EUR 13 to EUR 15m.

“The equity people will assume they will achieve everything they say they are going to achieve,” a European debt investor said. “That is their upside, but the debt guys will be more cautious and assume that they won’t achieve all of what they are saying and structure the leverage off a lower EBITDA number.”

Lenders are unlikely to push back on tangible adjustments such as those related to a factory closure, reducing headcount or restructuring-related operational cost reductions, the debt investor noted. It gets trickier when synergy costs related to future benefits get spun out.

“This is often where we start to say ‘hang on, no, not really. Two years is a long time. I don’t know if you will be able to fully realise this,’” the investor noted.

Those same adjustments also won’t be accepted on an unreasonable time scale. “It was common to see that people were allowed to use the adjustment for 18 months – sometimes even 24 months – this is almost certainly now back to 12 months,” another mid-market direct lender noted.

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News Analysis

LatAm primary issuance early-year rally loses momentum as inflation jitters linger for issuers and investors

The early-year rally in the Latin American primary bond market has slowed significantly, as issuers and investors wait for more clarity regarding the duration of the US Fed’s monetary tightening cycle, according to two investors, a DCM banker and two credit rating analysts.

“Things have calmed down because the economic data we’ve been seeing from the US is pointing towards higher rates for longer,” the first investor said. “The Fed’s terminal rate is almost at 5%, there’s still a ton of volatility.”

LatAm borrowers had raised a total of USD 15.95bn from 12 tranches during January and the first week of February, one-third of the total issued during all of 2022. That pace has slowed down, with only Braskem (USD 1bn) and CAF (USD 1.06bn) issuing new bonds recently.

“At the beginning of the year, there was a clear rally in the emerging markets primary markets, especially in the BB-rated spectrum,” the second investor said. “Now we are wondering if the optimism was misplaced. There seems to be a light at the end of the tunnel, but we still need to see what the Fed is going to do next.”

What ends up happening with the Fed and interest rates depends on the macro data that will be coming out in the next few weeks, all five of the sources said. The most important data point to watch for is related to the tightness of the US labor market, according to Madhavi Bokil, senior vice president and emerging markets analyst at Moody’s Investors Service.

“Labor market data is currently very strong and it’s a double-edged sword. It gives hope of a soft landing but it also means that there’s more room to go before we see a decline in aggregate demand. For inflation to durably come down in the US we have to see loosening in the labor market,” Bokil told Debtwire.

“There’s not a consensus on where rates will go or whether there will be a recession. If we don’t see the labor market loosening, the Fed will continue to raise interest rates. Probably not at the same rate but still raise until they hit their target,” said Kelvin Dalrymple, Senior Credit Officer at Moody’s.

Data for the US employment situation during February 2023 is scheduled to be released on 10 March.

During periods of volatility where issuers are taking a wait-and-see approach, investors expect high-rated issuers to keep visiting the market while higher-yield borrowers remain cautious.

“We expect the ones that have been doing well to continue to do well, but there will still be a lot of volatility at the lower end of the rating spectrum,” Dalrymple added.

“The emerging-markets asset class is currently divided,” the first investor said. “The juice is in the double-B credits, but everybody is overweight there. Down the credit range you start looking at credits like Ecuador (B-/Caa3/B-), Argentina (CCC-/Ca/CCC-) or El Salvador (CCC+/Caa3/CC) and it gets a bit iffy.”

Despite the current volatility that is expected to last at least until the new labor data comes out, CAF (AA-/Aa3/AA-) priced a EUR 1bn 2028 bond. The Venezuela-based multilateral lender’s original plan was to issue EUR 750m, but ended up printing more thanks to high demand.

“It’s a good indicator for investors,” the DCM banker said. “The trade was a very smooth execution, it exceeded the target ambitions and it gives issuers some investment diversification which should encourage more issuance in euros.”

“Volumes were very large in January and February, we now have an event-driven window,” the banker added. Inflation and labor data are coming up in the US so we might see relatively decent issuance volumes next week and probably a bit less after because of all the events. It will be like this until there’s more clarity.”

Looking ahead, issuers including Costa Rica (B/B2/B+) and Guatemala (BB-/Ba1/BB) could visit the markets relatively soon. Costa Rica recently selected legal advisors for a deal, while Guatemala’s Finance Minister Edwin Martinez recently mentioned a trip to New York to visit investors ahead of a potential new USD 500m bond this year, according to a report from Santander.

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