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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