Economic headwinds have caused temporary slowdown of corporate issues in Latin America but demand for local debt continues growing.
To understand how the Latin America debt market is dealing with declining commodity prices, depreciating local currencies and a potential rise in US interest rates, Global Finance spoke to Gabriel Bochi, managing director and head of Latin America debt capital markets for BBVA.
GFMag: What is the outlook for capital markets in the Latin American region for 2015?
Gabriel Bochi: Last year was the strongest year ever, in terms of volume, for the Latin America international bond market. The single most important variable in the second half of the year was oil, which traded above $100 a barrel in the middle of the year. Now it is around $50 but got very close to $40 recently. There was a lot of volatility in spreads in Latin America in the fourth quarter of 2014 and in January this year, especially in economies whose performance is tightly correlated to oil prices, like Mexico, Colombia, Venezuela and Brazil, and in economies that are dependent on commodity prices, like Peru and Chile. This year started a bit slower, though things picked up in February. The biggest difference I see versus 2014 is that the supply is now dominated by big sovereign or quasi-sovereign issuances, including most recently Costa Rica, twice already in Mexico, Colombia, the Dominican Republican, Chile in December, even a couple of transactions from Argentina. Very few corporates have come to the market at this point, and almost no high yields; they have all been investment grade, like the ones we did for Pemex and América Móvil.
GFMag: Why do you think that is?
GB: We have seen a lot of activity from corporates, including many first-time issuers, in the past two or three years. They were all taking advantage of the appetite for Latin America and for high yield. These companies offered higher coupons than their peers in US. This year things have been slower for a couple of reasons: because of the volatility we are seeing, investors’ preferences have been for sovereigns and quasi-sovereigns. Secondly, many companies in Latin America, smaller companies in particular, have already tapped the market, and there isn’t necessarily an infinite supply of them. Additionally, some companies might have got hurt by the depreciation of local currencies and might have seen their liabilities increase if they weren’t hedged. Some of them might be reluctant to borrow in US dollars now.
GFMag: What is local demand for local debt like today?
GB: There is a captive audience, strong and rising. There are growing pension systems across the region, which put their money first and foremost in local government debt, and savings have been increasing everywhere. Interest also comes from insurance companies, mutual funds and banks. Furthermore, local investors are less price-sensitive, and when foreigners get nervous, demand still comes from the locals. The America Móvil issuance attracted about 50% foreign subscribers and 50% local. The Pemex local currency Euroclearable bond was also a great success, with strong appetite, including from international investors.
GFMag: What countries in the region are better equipped to handle the current environment?
GB: We haven’t seen any activity from Brazil so far this year, so chances are Mexico might emerge as the dominant country in terms of volume. Though I’m sure Brazil will come to market at some point. For the rest, things are pretty evenly divided among the other countries. We have seen new types of issuers, for example the city of Buenos Aires and state-owned energy company YPF in Argentina. If interest rates stay where they are, markets remain stable like today and yields on Argentine bonds continue to decline, we might see more supply, though I doubt too many Argentine issuers will do it for fears of currency devaluation.