In 1988, there was no Latin corporate bond market to speak of.
Instead, companies took opportunistic shots at the market,
while sovereign borrowers struggled to pull themselves out of,
yet often fell back into, crisis.
A quarter century later, Latin America’s debt
capital markets – now the most advanced of any
emerging region – offer a sophistication few could
have imagined back then. And today, corporate debt markets
represent an asset class that is not only a central funding
vehicle for increasingly many companies, but also an attractive
investment for institutional accounts.
Chile was roundly applauded when it nabbed Latin
America’s first investment grade rating in 1992.
Now, around three-quarters of the region’s
sovereigns have escaped junk terrain. As the sovereign ratings
have risen, so have the credit ceilings for corporate
borrowers, allowing Latin companies the opportunity to fund
through the bond market
The figures prove the point. In the year to July 16, LatAm
high-yield and investment grade corporates borrowed $43.9
billion from 66 cross-border deals, according to Dealogic. In
1995, corporate borrowers sold just $1.7 billion from 16
Cemex was an early pioneer, finding demand for a $100
million 12 non-put three year convertible bond in 1990, the
year after Mexico signed its Brady bond restructuring
agreement. Petrobras was the first Brazilian company to issue
after the 1980s meltdown, selling a $250 million two non-call
one year bond yielding 13.5% in 1991 – even before the
sovereign rescheduled its debt.
Today, some predict the LatAm corporate bond market will
continue growing as sovereigns increasingly borrow in local
markets and cross-over investors allocate more to emerging
markets to capture the spread on offer.
"Overall the credit markets have developed dramatically and
there is no doubt that we’ve experienced a
paradigm shift," says Alexei Remizov, head of capital markets
Brazil at HSBC. Investors, he says, can now see the
macroeconomic outlook more clearly and have a better
understanding of, as well as more certainty and confidence in,
the regulatory frameworks for Latin borrowers.
Yet debt from first-time issuers makes up more than a
quarter of EM bonds. That offers chances to invest tactically
and selectively – but also difficulties, says Robert
Abad, emerging markets portfolio manager, at Western Asset
"While the asset class itself may have earned an
investment-grade rating years ago – which has served
as a magnet for more diverse and sizable inflows in the asset
class – under the hood lies a veritable soup of
economic and political risk that should not be underestimated
given the propensity for it to boil over at any moment," he
Part of that soup includes a growing LatAm high-yield bond
market, which brings with it a higher likelihood of default.
Already OGX, Grupo Rede, Lupatech and the Mexican homebuilders
are notable examples of borrowers missing their obligations.
The proliferation of high yield issuance could mean more
secured deals, or more aggressive structures, are used.
Many now expect market volatility to rise, after an extended
period of abundant liquidity, which encouraged a greater number
of low-rated issuers to tap the markets, Abad says.
LatAm blue chips
While the riskier names are growing, so too is the pool of
top-quality Latin issuers. The JPMorgan Corporate Emerging
Market Bond Index (CEMBI) shows issuance from Latin corporates
grew from $11.5 billion in December 2001 to $235 billion in
June 2013 (see chart, p12). It has also overtaken the Latin
sovereign component of the JPMorgan EMBI Global index, which
was $228 billion in mid-2013.
The development of corporate EM bonds has been one of the
most important market innovations of the past 25 years, says
Cynthia Powell, managing director of fixed-income syndicate at
BTG Pactual. "As investors started to identify EM corporates as
a distinct subset of the larger asset class, with its own
benchmarks and investors started managing distinct, separate EM
corporate bond funds, then the market opened up more broadly
for a wider range of issuers," she says.
External issuance by Latin American corporate borrowers has
accelerated and is expected grow in 2016, when debt maturities
pick up, JPMorgan says. Latin American companies are in
acquisitive phases, expanding and investing more than ever
Mexican blue-chip América Móvil is a good
example. The company increased its stake in Netherlands-based
Royal KPN over the years, before announcing in August 2013 a
bid for full control. In the debt markets, América
Móvil has tapped a variety of funding sources,
developing yield curves in dollars, sterling, and euros
– in addition to the global-local security that offers
the same ease of execution afforded to the Mexican
"For the first time, many Latin American companies are
beginning to expand internationally and obviously a source of
funding for this expansion has been the international debt
capital markets," says Carlos García Moreno, chief
financial officer at América Móvil. Local
currency markets will grow in importance as demand from
institutional investors increases, he says.
But local market development is not comprehensive:
high-yield borrowers – especially in Mexico –
still turn to the international bond market for funding. "The
relative importance of the local markets is growing, but at the
same time, we will see more integration with international
markets," BTG Pactual’s Powell says.
The size of institutional investors has increased
significantly over the past 10 to 15 years with the growth in
particular of the region’s pension funds, says
García Moreno. "The growth of institutional investors
has outgrown probably the supply of new securities in their
local markets and many local players are increasingly pushed to
invest in names abroad."
Factors hindering international debt issuance include:
competition from the local markets; domestic bank lending;
commodity price moves; exchange rate volatility; political
risks discouraging M&A or large investments; and the lack
of clear frameworks encourage long-term issuance.
With US interest rates set to rise, and with the economic
situation in a number of Latin American countries
deteriorating, prices could suffer and yields rise,
particularly in local debt markets.
Yet equally, LatAm issuers may face less headwinds than in
previous cycles; moreover, international investors are more
comfortable than ever with regional credit – a fact
that speaks in favor of continued local currency funding.
"Some 15 to 20 years ago issuers had to run a mismatch of
currencies to get tenor and size," says Roberto
D’Avola, head of LatAm DCM at JPMorgan. "The
development of the local markets has helped reduce mismatches
and has been an important force in moments of volatility."