Panama bond sale may pave way for others

Panama bond sale may pave way for others

Asset Management Bonds Capital Markets Debt Corporate & Sovereign Strategy Debenture Economy & Policy Fixed Income Funds El Salvador Panama Latin America Coronavirus

Panama's ability to sell $2.5 billion worth of sovereign bonds on the international capital markets in an effort to shore up its resources against the global economic shock of the novel coronavirus, COVID-19, marked the first sale by a government in over two months and could pave the way for more issuance.

It’s great that they came to market, because this will open the doors to other issuers, said one banker in New York.  

Many countries are likely to come to market because they need to finance their recovery plans from the damage caused by the COVID-19 shock, the New York banker said, adding that he expects to see “some activity” in April. 

“Everybody is looking at the market. Many countries want to issue,” said the New York banker, adding that Guatemala and Honduras would be approving issuances soon, and that Chile and Colombia would probably also seek to issue. Peru and Costa Rica are unlikely to issue, he said.

January’s issuance of $14.7 billion worth of sovereign bonds, an amount surpassed only by the $18.7 billion historic record in January 2018, according to Dealogic, stands in stark contrast to the full stop that followed in the sovereign space. In late February, Mexico did not issue after a planned roadshow, as the markets became more volatile. And the Dominican Republic, who issued $2.5 billion on January 23, was the latest sovereign to come to market before Panama’s sale on Thursday.

There have been several corporate issuers that issued in February in smaller sized deals and just a single deal at the start of March by Mexico's Comision Federal de Electricidad.    

“Panama’s issuance is a sign of strength as one of the highest rated credits in LatAm that still has access to capital markets under the current stress,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York. 

On Thursday, El Salvador announced that its legislature had approved a $2 billion issuance.  

“For El Salvador, I think it would be more difficult for them to come as a single B credit,” Morden said. 

Countries need resources to help navigate the virus but the difficult conditions are likely going to limit their ability raise capital and certainly could put them on the hook to pay out higher coupons to investors hunting for yield while developed market benchmark bonds are yielding historically low rates.

The 36-year notes issued by Panama on Thursday priced at par with a coupon of 4.5%. But in the risk-off environment brought on by COVID-19, the transaction was expensive. 

The issue premium was very high. They started 1% above the curve and finished 0.65% above the curve,” said the New York banker. But, given the circumstances, the market was happy with the results. Today, Panama was up 6 points in the secondary market.” 

El Salvador plans to use the $2 billion issuance for the COVID-19 emergency. A total of 70% of proceeds will be used in a direct transfer program to vulnerable families, to cover budget deficits caused by COVID-19, and add resources to the budget. The other 30% will be used by municipal government to tend to the emergency. 

“El Salvador will take some time to issue. They still have to select banks,” the New York banker said.