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DEALS OF THE YEAR: Up in the world

Jan 1, 2013

Global volatility did little to disturb the upward momentum of Latin capital markets in 2012. As our Deals of the Year Awards show, their importance and appeal have never been so great

Despite the continued uncertainty looming over the global economy, Latin American issuers have much to celebrate in 2012 - and much to be optimistic about in 2013.

The winners of this year's LatinFinance Deals of the Year exemplify the increasing importance and appeal of Latin American assets and the growing size and innovation of transactions. Although this is a theme that has been emerging for many years, it is only in the last two that the region has truly come to be seen by investors as more than just a diversification play.

Large and sophisticated debt capital markets transactions were the highlights of this year's awards. Indeed, several deals that were considered ordinary in this year's awards period - from October 1, 2011 to September 30, 2012 - would have been regarded as groundbreaking just a few years ago. High-grade issues have come at lower than ever spreads attracting a wide range of investors. High-yield debutants have popped up from unexpected corners. Cemex pushed a wall of debt back three years, with overwhelming acceptance from the market. Bolivia - with its first international offering since the 1920s - in October issued a bond with a yield of under 5%.

Appetite from the buy side has been immense. "There has been a lot of inflow from institutional investors this year," says Blaise Antin, head of TCW's sovereign research team. "We don't think that's going to change in 2013."

The volume of straightforward bond issuance shouldn't distract from the innovations that are still appearing: Banco do Brasil has led the emerging markets in preparing its borrowing for Basel III regulations; an issuer that is not even the biggest bank in Panama raised the first covered bond in the emerging markets outside of Korea; and a $7 billion four-tranche bond sale is not easy, even for Petrobras.

"As we become a more mainstream asset class we see a lot of crossover investors embracing emerging markets, and they want things in a nice standardized package, recognized, and liquid," says Chris Gilfond, co-head of LatAm DCM at Citi. "There has been a huge surge in volume and while that defines the bulk of the business, within that there is still a bit of innovation taking place."

"Emerging market debt is eventually going to look a lot like the US fixed income market," Antin says. "There will be a lot of hard currency debt, corporate debt and local currency debt, and you'll have a number of different strategies that segment the asset class."

The local markets have been fertile grounds for testing new models also.

Pemex and Peru both inaugurated global depositary notes for all-in-one global-local currency and domestic market sales. América Móvil later went one better with such a seamless sale within a single security. In Brazil, lower rates drove record local bond issuance, Volkswagen's Driver One broke new ABS ground and the infrastructure debenture class may have finally gotten off the ground towards the end of 2012.

Sovereigns didn't struggle, with sub-investment-grade names getting rock-bottom rates and the highest rated names engaging in sophisticated liability management transactions that would be the envy of many developed-world nations. Mexico even entered the Japanese market without a guarantee.

Bankers, however, point out that with increased success come increased investor and issuer expectations. A deal may get 17 times book one day -as did Mexichem's - but find the next day the window has closed.

Though today's costs in the bond market are hard to beat, LatAm projects and companies again have the loan market as an option. Several deals coming out in the final months of 2012 suggest a more robust crop in the future. To the extent they are able, European, US and Asian lenders want to lend to solid LatAm credits, such as Ternium. Regional banks are picking up the slack when these foreigners' balance sheets don't allow them to lend.

LatAm assets offer an alternative to the slow growth and financial ill-health in Europe, the US and Japan. Companies from across the world are eager to buy into LatAm peers with healthy balance sheets and sky-high growth potential. They face more competition than ever from a greater number of growing LatAm powers. CorpBanca, Cencosud and Grupo Sura are just a few examples of companies transforming themselves into major regional players.

"The pipeline is building every day," says Javier Vargas, co-head of investment banking for Latin America at Credit Suisse. "Companies are much more open to take advantage of getting capital and putting it to work and using it to grow."

Others, such as Mexico's América Móvil and Mexichem, have moved to pick up European operations at rock bottom prices. Moreover, there is still consolidation ahead in big markets like Brazil and Mexico.

There is even hope for the equity capital markets, a class severely underperforming its historical levels. Transactions from Santander México, Cencosud, Cementos Pacasmayo and Fibra Uno have shown the potential of issuance from Mexico and the Andean nations. Provided they are ready to come to market, investors are taking a serious look at companies from these geographies.

BTG Pactual and Taesa have shown that investors still want quality names from Brazil. Falling valuations should mean greater investor interest in the year ahead.

2013 should be a strong year. More high-yield debt issuance, which was only about 20% of the bond volume in 2012, could be in the works. A few pulled transactions in late 2012 had people wondering about a bubble.

"You eventually run up against risk of issuance by issuers who aren't very strong, but we haven't seen too much of that this year," says Antin. LatAm high-yield corporates are generally in better shape than high-yield borrowers elsewhere.

A rerun of the economic conditions in 2012 would not prove disastrous for Latin American debt issuance. Europe's problems may appear set to continue but last year they had negligible impact on LatAm activity. An economic hard landing for China now seems less likely than before, though there is no certainty about this. While near term fears over the US fiscal cliff have receded, a bitterly divided Congress will continue to bedevil economic policymaking in the world's largest economy - a fact that could weigh on issuers hoping for a clear market this year.

But barring a major financial shock, similar levels of activity are likely in M&A, and more business is expected in the syndicated loan and equity capital markets - and perhaps even another record year in DCM.

For now, however, we toast the standouts of 2012. LF

The winners of this year's LatinFinance Deals of the Year exemplify the increasing importance and appeal of Latin American assets and the growing size and innovation of transactions. Although this is a theme that has been emerging for many years, it is only in the last two that the region has truly come to be seen by investors as more than just a diversification play.

Large and sophisticated debt capital markets transactions were the highlights of this year's awards. Indeed, several deals that were considered ordinary in this year's awards period - from October 1, 2011 to September 30, 2012 - would have been regarded as groundbreaking just a few years ago. High-grade issues have come at lower than ever spreads attracting a wide range of investors. High-yield debutants have popped up from unexpected corners. Cemex pushed a wall of debt back three years, with overwhelming acceptance from the market. Bolivia - with its first international offering since the 1920s - in October issued a bond with a yield of under 5%.

Appetite from the buy side has been immense. "There has been a lot of inflow from institutional investors this year," says Blaise Antin, head of TCW's sovereign research team. "We don't think that's going to change in 2013."

The volume of straightforward bond issuance shouldn't distract from the innovations that are still appearing: Banco do Brasil has led the emerging markets in preparing its borrowing for Basel III regulations; an issuer that is not even the biggest bank in Panama raised the first covered bond in the emerging markets outside of Korea; and a $7 billion four-tranche bond sale is not easy, even for Petrobras.

"As we become a more mainstream asset class we see a lot of crossover investors embracing emerging markets, and they want things in a nice standardized package, recognized, and liquid," says Chris Gilfond, co-head of LatAm DCM at Citi. "There has been a huge surge in volume and while that defines the bulk of the business, within that there is still a bit of innovation taking place."

"Emerging market debt is eventually going to look a lot like the US fixed income market," Antin says. "There will be a lot of hard currency debt, corporate debt and local currency debt, and you'll have a number of different strategies that segment the asset class."

The local markets have been fertile grounds for testing new models also.

Pemex and Peru both inaugurated global depositary notes for all-in-one global-local currency and domestic market sales. América Móvil later went one better with such a seamless sale within a single security. In Brazil, lower rates drove record local bond issuance, Volkswagen's Driver One broke new ABS ground and the infrastructure debenture class may have finally gotten off the ground towards the end of 2012.

Sovereigns didn't struggle, with sub-investment-grade names getting rock-bottom rates and the highest rated names engaging in sophisticated liability management transactions that would be the envy of many developed-world nations. Mexico even entered the Japanese market without a guarantee.

Bankers, however, point out that with increased success come increased investor and issuer expectations. A deal may get 17 times book one day -as did Mexichem's - but find the next day the window has closed.

Though today's costs in the bond market are hard to beat, LatAm projects and companies again have the loan market as an option. Several deals coming out in the final months of 2012 suggest a more robust crop in the future. To the extent they are able, European, US and Asian lenders want to lend to solid LatAm credits, such as Ternium. Regional banks are picking up the slack when these foreigners' balance sheets don't allow them to lend.

LatAm assets offer an alternative to the slow growth and financial ill-health in Europe, the US and Japan. Companies from across the world are eager to buy into LatAm peers with healthy balance sheets and sky-high growth potential. They face more competition than ever from a greater number of growing LatAm powers. CorpBanca, Cencosud and Grupo Sura are just a few examples of companies transforming themselves into major regional players.

"The pipeline is building every day," says Javier Vargas, co-head of investment banking for Latin America at Credit Suisse. "Companies are much more open to take advantage of getting capital and putting it to work and using it to grow."

Others, such as Mexico's América Móvil and Mexichem, have moved to pick up European operations at rock bottom prices. Moreover, there is still consolidation ahead in big markets like Brazil and Mexico.

There is even hope for the equity capital markets, a class severely underperforming its historical levels. Transactions from Santander México, Cencosud, Cementos Pacasmayo and Fibra Uno have shown the potential of issuance from Mexico and the Andean nations. Provided they are ready to come to market, investors are taking a serious look at companies from these geographies.

BTG Pactual and Taesa have shown that investors still want quality names from Brazil. Falling valuations should mean greater investor interest in the year ahead.

2013 should be a strong year. More high-yield debt issuance, which was only about 20% of the bond volume in 2012, could be in the works. A few pulled transactions in late 2012 had people wondering about a bubble.

"You eventually run up against risk of issuance by issuers who aren't very strong, but we haven't seen too much of that this year," says Antin. LatAm high-yield corporates are generally in better shape than high-yield borrowers elsewhere.

A rerun of the economic conditions in 2012 would not prove disastrous for Latin American debt issuance. Europe's problems may appear set to continue but last year they had negligible impact on LatAm activity. An economic hard landing for China now seems less likely than before, though there is no certainty about this. While near term fears over the US fiscal cliff have receded, a bitterly divided Congress will continue to bedevil economic policymaking in the world's largest economy - a fact that could weigh on issuers hoping for a clear market this year.

But barring a major financial shock, similar levels of activity are likely in M&A, and more business is expected in the syndicated loan and equity capital markets - and perhaps even another record year in DCM.

For now, however, we toast the standouts of 2012. LF



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“The crisis has been a setback for reserve diversification."

Jan Dehn, Ashmore Investment Management