Latin American Q1 2020 deal activity underpinned by banner January

Latin American Q1 2020 deal activity underpinned by banner January

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If not for January’s surge in financing demand by Latin American and Caribbean (LAC) sovereign and corporate borrowers, first quarter issuance levels would have been abysmal, and the deepening pandemic caused by the novel coronavirus, COVID-19, does not bode well for the second quarter as economies have ground to a halt with stay-at-home orders.

Sovereign and corporate bond issuance for the region hit $32 billion in January, just shy of the record set in January of 2018, when $34 billion was issued, according to data provider Dealogic. The data, going back to 1995, showed activity in January 2020 was a 144% spike year-on-year. 

In the first quarter of 2020, sovereign bond issuance rose more than 37% versus the same period a year ago, with $17.54 billion in new debt. The vast majority coming in January, with no issuance in February and just  $2.7 billion in March.

The top five largest sovereign offerings all took place in January, except for Panama, which came to the market in late March with a $2.5 billion deal that garnered a 4.5% coupon maturing in 2056. At the time it was thought the deal might restart the sovereign market for Latin American issuers. However, since then the pandemic has gripped the region event tighter while weak oil prices have undermined government budgets in places like Ecuador, which now faces imminent default.

On Sunday, the OPEC oil cartel and nations that align with it, including Russia, agreed to record oil production cuts of 9.7 million barrels per day (bpd) for May and June in an effort to lift prices. Mexico had been a holdout, refusing to cut by 400,000 barrels. It agreed instead to cuts of 100,000 bpd, with the United States agreeing to make up the difference.

The largest deal in the first quarter was its first, completed by Mexico on January 6, with the sale of $3.9 billion in debt. Panama’s deal was second, followed by $2.47 billion by the Dominican Republic, $2.2 billion by Chile and then an additional $2 billion by Mexico.

The January surge in issuance from LAC borrowers was driven by a combination of ample liquidity, low and negative interest rates elsewhere in the world and a risk-on sentiment that pumped up stocks, globally.

The MSCI Latin American stock index gained 14% last year versus a 29% rise for the US benchmark S&P 500. Latin American stocks  managed to recoup losses in the last quarter of 2019 and held steady in 2020 before the COVID-19 health crisis began to take a real toll outside of China, where it originated, in the second half of February. There were no cross-border sovereign deals recorded in the whole month of February as both issuer and borrower sentiment turned sour. 

On the way down in 2020, Latin American stocks have severely underperformed, falling 42% versus 13.6% for the S&P 500. Both indexes rallied from their late March lows, but the region has suffered from a flight to quality with assets fleeing the region and currencies losing their value against the US dollar. The pandemic has yet to peak in Latin America. 

On the corporate issuance side, the picture is somewhat similar, with first quarter deal volumes up 30.2%. The January deal volume compensated for an evaporation of deals in February and March.

The top corporate or quasi-sovereign issuers in the first quarter were all completed in January. The biggest was the $5 billion worth of bonds sold by Mexico’s state-owned oil company Pemex. Moody’s Investors Service issued a report on April 8th saying it expects Pemex will need to tap all of its existing credit facilities, totaling $8.9 billion this year because of the plunge in oil prices.

The next biggest corporate debt offer was the double-tranche $2 billion issue by Chilean state-owned mining company CODELCO, followed by a $1.47 billion deal by Mexican multinational beverage and retail group Femsa. Brazil’s Electrobras, considered a corporate high-yield offering, sold $1.25 billion in bonds and then another FEMSA deal for $1.23 billion.

The loan market told a slightly different story with volumes subdued throughout the first quarter of the year. Loan volume totaled just under $4.3 billion, a 65% drop over the first quarter of 2019, the Dealogic data shows.

The top five deals were: $850 million for Brazilian pulp and paper company Suzano; $788 million for Granada’s St. George’s University; $616 million by Mexican pharmaceutical maker Invekra SAPI de CV; $500 million for Chilean copper and nickel miner Minera Centinela; and $470 million for Mexican autoparts maker SANLUIS Rassini.

Mergers & acquisitions activity has also fallen off, with four out of the five top deals still pending. The largest deal announced was in Brazil’s energy sector where Eneva proposed to purchase AES Tiete Energia in a deal valued at $2.35 billion, according to Dealogic data.

The second largest deal, valued at $835 million was by Brazil’s Hypera to purchase 100% of the non-core Latin American products of Japan’s Takeda Pharmaceuticals.  In third is the $640 million deal by Brazil’s e-commerce information services provider Bom Negocio Atividades de Internet to buy real estate holding company ZAP Imoveis.

Mexico’s Grupo Carso SAB de CV, Carlos Slim’s conglomerate, completed on February 20 a $553 million purchase, including debt, of Ideal Panama, an energy company, for the fourth spot. Rounding out the top five is the $516 million deal by Japan’s Daio Paper Corp for Brazilian paper company Santher Fabrica de Papel Santa Therezinha.

First quarter league tables have JPMorgan retaking the lead from Citi, which was the top bookrunner in the fourth quarter of last year, in both the sovereign and corporate issuance sectors.

The following is a breakdown of the first quarter bank league tables for initial public offerings (IPO), loans, and M&A versus the fourth quarter of last year.