Market talk
Capital market participants say the final quarter of 2019 is witnessing significant activity, a hopeful sign for the first quarter of 2020. Local currency markets are especially strong
The growing trend in Latin America of issuing local currency bonds is expected to increase in the coming quarters, with Mexico and Brazil leading the charge.
Should Mexico’s central bank maintain its interest rate cutting trajectory, this should promote a wave of local issuance in the months ahead, says Arthur Rubin, the head of Latin American DCM at SMBC in New York.
“Mexican issuers are increasingly funding domestically rather than tapping the cross-border market, especially for those seeking peso-denominated financing. Others are issuing in pesos and then swapping back to dollars,†according to Rubin.
In Brazil, Rubin doesn’t expect the local capital markets to cool in the near-term but has questions about market capacity. “Issuing in dollars and swapping back to local currency was prohibitively expensive for issuers. But the point at which they max-out what is available from the local banks remains to be seen, which could force them to look for other sources of funding,†Rubin says.
To increase returns, investors are either taking more credit risk or pushing out their durations, which is behind the surge of seven- or 10-year-plus local issuance, he says.
With this market alignment, clients may start looking at international BRL-linked instruments again. “We have not seen real indexed bonds being sold offshore, as we have in Colombia or Peru, but this may happen as the local market is stretched to capacity,†Rubin says.
In the infrastructure sector, institutional investors are increasing their appetite for project bonds in the 144A market, including newcomers like US insurers. “Most of these credits are investment grade, and yet they usually offer some premium to vanilla corporate bonds,†according to Rubin.
With Brazil’s Congress having passed landmark pension reform legislation, investment bankers are highlighting first-mover advantage to corporate clients for tapping equity capital markets now that the new law is in place.
“We have been pitching to clients that traffic will be there and that they can benefit from being one of the first companies to issue. Consumer and retail have been active thus far, but real estate is the sector that really stands out over the last few months,†says Fabio Nazari, the head of equity capital markets at BTG Pactual.
Through the book building process, the local investor community has become more robust.
“The local investor base has been strong because interest rates have hovered around 5%, which has propelled a significant migration from fixed income securities to equities this year in Brazil,†Nazari says.
However, according to Nazari, foreign investors are still not fully committed to Brazilian stocks.
“Traditional AAA foreign investors are still not playing in Brazil or Latin America, though the ones we are seeing are more frequently hedge funds. A few big liquid transactions are being populated by long-only accounts, but it is not the backbone of market share,†Nazari says.
While the dearth of IPOs has been “surprising,†this could change next quarter, he says.
“The IPO market should heat up in the first quarter. Chile could be a good surprise. In Colombia, we could see some one-offs including government divestitures. And, in Mexico, we are seeing activity in deregulated sectors. But I think from a pent-up demand perspective in Brazil, we are going to see a lot of activity over the next twelve to eighteen months,†Nazari says.
There are mixed feelings within the loan market for how deal flow will play out at the start of 2020. The theme through the rest of 2019, however, will remain consistent with few, but large ticket transactions, says Felipe Pinto, a director of loan syndications at Mizuho.
“This year we had six deals over $1 billion. As of last quarter, there was $41 billion in volume closed. That is a massive chunk of total business, and a large contributor to this record year,†says Pinto.
“Brazil will be the cornerstone of the US dollar loan market next year, not just with refinancings, which have dominated the majority of deal types in 2019, but also with new money being issued through acquisitions and capex needs,†Pinto says.
“Mexico and Chile may see a decrease in volumes because of the political uncertainty. In Chile, especially, companies are being more cautious. CFE’s (Federal Electricity Commission) awarding of new concessions in Mexico, however, may boost the numbers there,†Pinto says.
While local markets are appealing for issuers as liquidity remains high, Pinto assures demand for dollars will continue. “The 4G (toll road) program in Colombia demonstrates the capacity of the local currency market in meeting issuers financing needs; there will always be a need for dollars,†Pinto says.
In the project finance space, more temporary loans, also referred to as mini-perm structures in the seven- to nine-year range, are expected. “As banks prepare for Basel IV, some lenders are constrained to participate in long tenor deals, therefore mini perms are becoming more common. Nonetheless, we continue to see some sponsors able to obtain 20 years or so in countries like Chile and Mexico,†Pinto says.
Merger & acquisition (M&A) deal volumes for the Latin American region are down nearly 8% through October, compared to the same period a year ago, according to data provider Dealogic. But that statistic isn’t considered to be a harbinger for a slow ending to 2019 nor a weak opening for the new year.
“Our pipeline is full compared to this time last year with a notable increase in Brazil and Colombia, but less in Mexico,†says Walter Ringwald, Head of Advisory for Latin America at BNP Paribas in New York. “The market in Colombia opened up once there was clarity on policy from the new government.â€
While M&A hasn’t been as active in Mexico compared to other capital markets, this trend could change in the months ahead in the cross-border market.
“Mexican corporates are trying to see what they can do internationally to diversify currency and country risk business. Corporates may have frozen their plans six months ago, but today they are reconsidering,†Ringwald says.
“To be consistently more present around key corporates and financial institutions, BNP Paribas is investing in Mexico in operations, balance sheet, and client coverage relationships using all our suite of products,†Ringwald says.
More generally, Ringwald doesn’t see many new trends in the M&A market, but rather “a reaffirmation of what has already been happening.†He expects “power, gas, infrastructure and financial institutions continuing to be the most active sectors.â€
He noted one change, however, that could lead to shorter negotiations. “In general, the buy- and sell-side are reaching an agreement more easily than two years ago. Sellers have had more realistic expectations given recent local currency depreciations,†Ringwald says.
