Market talk
Despite initial concerns about a slowdown in the second-half, capital markets participants now express some optimism for the third quarter. Activity in Mexico seen as a key factor in the loan market
Latin America’s bond issuers turned out in greater force than expected in the middle of the year, upending predictions of a slowdown as issuance in June and July stood at $29.95 billion, according to data provider Dealogic. Total issuance from June through the first week of September was $68.55 billion, the firm said.
Adding local market deals into the mix and the low interest rate environment, globally, have helped boost overall issuance, says Cristina Schulman, Santander’s head of Latin America Debt Capital Markets.
“The robust pipeline we see for the third quarter in the international capital markets is a by-product of both the continued low rate environment and residual funding needs of issuers who have tapped the local capital markets earlier in the year, which is the case especially in Brazil,†she says.
In the first half of the year issuers tapped local more than international markets, Schulman said, adding she doesn’t see them in direct competition.
“If you have a credit that has efficient funding in the local markets, it’s going to be a better credit overall when it accesses the international markets, reaching an equilibrium. Issuers are going to have access to two markets: sometimes they’re going to go to one and sometimes they’re going to go to another — it’s a win-win situation for everyone,†Schulman says.
Notable Brazilian corporate deals with benchmark size issuance were Marfrig, Cosan, JBS and Usiminas. On the sovereign side, Mexico issued a two-part $3.56 billion deal and $1.5 billion in yen.
Schulman notes that “because most of the continent isn’t growing at a considerable pace,†corporate activity largely consists of refinancing 2020 and 2021 maturities for liability management purposes.
Passage in July of Brazilian pension reform in the lower house didn’t spur a flood of initial public offerings. Instead, the flow of funds in August was “interestingly†negative, says Juan Carlos George, the head of equity capital markets at Citi.
“This outflow should stabilize, however, depending on external factors like interest rate cuts by the US Federal Reserve, but also internal measures including the simplification of Brazilian tax law, the stabilization of the real, and the government’s divestment plans of state-owned assets,†he says.
After a quiet first half of the year, July saw Brazilian reinsurer, IRB Brasil Resseguros, raise R$8.5 billion in a follow-on offering, while the fuel distributor, BR Distribuidora, collected R$9.6 billion ($2.5 billion) in a share sale the following week.
Secondary equity offerings remain the dominant theme, says George. “Neither sponsors nor banks have felt comfortable enough to launch a new wave of IPOs.†This could change before year-end.
“Utilities and retailers are coming to market. Home builders are interested in raising equity capital but this is limited to larger companies and not SMEs. How these transactions evolve should determine the extent to which the IPO opens up in the medium-term,†George says.
Chile continues to prove self-sufficient. In June, shopping center chain Cencosud raised $1.1 billion in an IPO, while Enel’s rights offering brought $3 billion.
Peru’s follow-on market looks healthy with smaller companies looking to IPO, while in Colombia expectations for issuance to increase in the medium term will occur despite fiscal concerns over tax imbalances.
“All things being equal, I expect a surge of deals across Latin America this quarter,†George says
Loan volumes in Latin America fell by 15% in the first half of the year, due in part to fewer infrastructure projects and the growing competition from the local loan markets. Mexico, however, has proved a surprising source of strength, serving as a linchpin in the loan market even amid its political volatility, according to Diego Vogelbaum, the head of loan syndications at Itaú BBA.
“Mexico has historically represented between a quarter and a third of the regional loan volume. This year, that total has been 47%,†Vogelbaum says. Big ticket transactions from borrowers like Pemex, Cemex and América Móvil, totaling nearly $15 billion, have helped lessen regional losses in loan volumes year to date.
Despite the decreased loan volume, the market remains “extremely liquid,†which has pushed regional and international banks to find ways to differentiate themselves from local lenders. These institutions nevertheless “still have work to do†to adapt by offering longer tenors and more customized solutions to each company’s needs, Vogelbaum says.
Some of these new financing solutions include adding various tranches to pre-fund capex and future acquisitions. “Companies, therefore, fund part of a deal upfront to refinance debt for whatever purpose and then implement a different tranche, which is committed for six months or a year or longer and that tranche gets a delayed draw, which can get committed for the use of future growth plans,†Vogelbaum says.
According to Vogelbaum, mergers and acquisitions may provide a boost to the loan market through the end of the year. “There are a bunch of M&A deals in the power sector. But the market is open to every sector. We’re seeing deals in mining, cement and real estate.â€
There might be the will to get deals done in the Latin America M&A market, but bankers are not necessarily finding the way, and the decline in transaction volumes compared to last year is the evidence, says Martin Sanchez, the head of Latin America M&A at Bank of America Merrill Lynch.
“Despite regional volatility, numerous strategic dialogues have been taking place in mergers and acquisitions. The problem has been executing these dialogues into transactions,†Sanchez says.
“Deals are taking longer to materialize because uncertainty plays into valuations and risk perceptions from sellers about when is the right time to sell, but also this uncertainty affects buyers about when is the right time to invest,†he says.
This dynamic may change next year in Brazil, which could see an uptick in M&A activity in 2020.
“Decreased M&A volume this year has been in part due to unmet expectations on the macro side and the delays of pension reform legislation,†Sanchez says.
“We only had one sizeable M&A deal this year in Brazil with the TAG Pipeline. As multi-billion dollar deals have always been the catalyst in the Brazilian M&A market, overall volume has been hampered,†Sanchez says.
There will, however, be more M&A activity on the state-owned asset side because of Petrobras’ divestment schedule.“Infrastructure, oil & gas, technology, media and entertainment and retail are going to lead the way moving forward,†Sanchez says.
The Andes could prove to be a M&A hotbed.
“The challenges are not on the demand-side but rather on the supply-side on viable targets to invest in those geographies because of their size,†Sanchez says.
