LatAm primary shows signs of life as issuers’ focus turns again to inflation data
6th April 2023
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.
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.”