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Liquidity boom for LatAm as borrowers dive in

Jun 11, 2014

Bond investors are rushing for increasingly lower-rated deals from Latin America

A surge of demand from fixed-income investors is drawing increasing numbers of Latin American companies and sovereigns to the bond market.

High grade borrowers including América Móvil and the Republic of Uruguay, and sub-investment grade issuers like Marfrig, have rushed to market amid conducive conditions.

A further liquidity push by the European Central Bank announced last week, as well as a bid by issuers to secure funding before a summer slow-down, are said to be among the drivers.

Spreads on emerging market credits tightened last week after the ECB announced a new liquidity program and US employment data was reported stable, Siobhan Morden, head of Latin America strategy at Jefferies, said in a research note on Monday. She also pointed to record inflows into EM bond funds.

"The strong inflows and only moderate debt issuance dominates over tight valuations," wrote Morden. "The country specific risk

     
     
  Markets shine on emerging market
borrowers like Uruguay.
Source: Pablo Viojo
 
factors have been less influential against global liquidity and appetite for high yield and high beta."

The Republic of Uruguay caught attention on Tuesday when it tapped the long end of the curve, selling a $2bn bond that matures in 2050. The sovereign borrower matched the new issue with a tender offer, switching some short dated paper into longer-dated debt.

But investors' craving for yield means they are keen on bond sales rated lower than the triple-B sovereign.

Marfrig (B2/B/B) took advantage of the conditions to sell an $850m bond on Tuesday. Investors scrambled for the debt, placing orders of around $5bn.

Mexico's América Móvil grabbed its chance last week to return to its global-peso program. The instruments are rated single-A but create currency risk for investors with hard-currency portfolios. The borrower had been forced to abandon the global-peso program last year amid market troubles.

A recent study from the ECM suggested that emerging market borrowers would have issued about half as much as they have, if developed markets had not embarked on a quantitative easing drive, noted analysts at Barclays. The proportion of new issuance to the asset class has also been much higher in emerging markets than developed markets, the analysts said.

Yet there is little chance that a debt bubble is forming, Barclays concluded.

"We find little evidence that QE and near-zero policy rates in developed markets have created an EM credit bubble," analysts said on Friday.

"Although select pressure points may emerge - for example, in Africa or some corporates in the extractive sector - we do not think that issuers have taken on too much debt at too low spreads, which would necessarily result in a large correction and rising defaults when the policy outlook changes." LF





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