LatinFinance hosts 2018 Capital Markets Roundtable

LatinFinance hosts 2018 Capital Markets Roundtable

Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Fixed Income Funds Interviews Mexico Colombia Brazil

Cross-border bond sales from Latin American issuers hit record volumes in the first two months of 2018. Borrowers continued to take advantage of historically low interest rates as they positioned their bonds ahead of a potential shift in investor sentiment later this year when three of the region’s biggest economies hold presidential elections.

The increased capital markets activity carried over from 2017 as Latin America’s economic backdrop showed signs of improving and investors aggressively hunted for yield. Last year, debt capital markets volume hit the highest levels in three years, according to Dealogic.

The region’s economic fundamentals are expected to remain strong, according to participants in the Latin America Capital Markets Roundtable that LatinFinance convened in mid-January. But the panelists, who represented some of 2017’s most impressive issuers, also warned that political uncertainty will increase market volatility as voters go to the polls in Brazil, Mexico and Colombia.

Another wildcard will be expectations of higher interest rates in the United States that could bump up the cost of borrowing. 

Anticipation in Mexico
In Mexico, uncertainty over the country’s presidential election led a number of companies to prefund their financing needs in the second half of 2017 and early 2018. Polls favor leftist and populist Andrés Manuel López Obrador as the frontrunner.

“We prefunded for both 2018 and 2019 because we do anticipate volatility,” says Javier García, corporate funding director for cement maker Cemex. “Having said that, we are always looking at the markets for opportunities for liability management, which is our second main objective after reducing our expenses.”

García says Cemex, which issued a €650 million ($772 million) bond in November, will keep monitoring markets for windows of opportunity. The company could explore the dollar and return to the euro markets.

Although he acknowledges that going local is more difficult, García does not rule out tapping Mexican investors for debt. “We were a very active issuer in the domestic market,” he says. “But with our current ratings [BB by Standard & Poor’s and BB- by Fitch], it’s still complicated for us.”

Mexican energy company IEnova made its debut in the international bond markets in December. The subsidiary of Sempra Energy also was wrapping up its financing needs ahead of the election and political noise swirling around the NAFTA renegotiations.

“This year’s election could imply a potential slowdown in business in Mexico,” says IEnova CFO Nelly Molina. “But it could offer opportunities, particularly in M&A, which could represent good growth for us.”

For investors, navigating the months of noise over NAFTA negotiations and Mexico’s election will be a challenge, says Darin Batchman, an emerging market corporate debt portfolio manager at Stone Harbor Investment Partners.

But “exposure to a worst-case scenario for most of the companies that have issued dollar debt in international markets is probably not near as scary as the NAFTA headlines,” he says. “The headline risk will whip prices around, but, fundamentally, many of these companies are much stronger than they were two or three years ago, regardless of what happens on the political front.”

The first Mexican corporate to tap the international bond market this year was Nemak, which sold $500 million in 2025 non-call bonds in January. “Sixty percent of our business is outside of Mexico, so we’re really a global company,” says Daniel Odriozola, corporate treasurer Nemak’s parent company, Grupo Alfa, one of Mexico’s biggest conglomerates. “We believe that our NAFTA risk is limited,” he says.

Alfa does not appear to be finished. Odriozola says the company is looking to “opportunistically refinance” a callable bond with a new issue at one of its subsidiaries. “That’s our target this year,” he says.

Despite the election and NAFTA uncertainty, “as the year has progressed we’ve seen issuers going to market in amounts that we were not expecting,” says Joy Gallup, a partner in the Latin America and corporate practices at Paul Hastings, an international law firm.

A new Brazilian cycle
Issuers are also keeping an eye on Brazil’s electoral calendar. With presidential elections scheduled for October and polls showing a wide open race, “many Brazilian companies, in anticipation of the volatility, are coming to the market at the beginning of the year,” says Bianca Nasser, corporate finance manager at Petrobras.

Some issuers are tapping Brazil’s local market as interest rates in the country have fallen. “Even with the political uncertainty, I would say that, from a funding perspective, Brazilian companies are in a good position,” she says.

Brazil’s improving economic fundamentals have encouraged executives. “We are preparing ourselves for a new cycle,” says Eduardo de Toledo, the former CFO of the paper and pulp firm Klabin. “For the first time in years, Brazil has lower interest rates and lower inflation,” he says. “This is something new for us. But you do have to anticipate volatility because of the election and do your homework. I think we will see a good year in Brazil.”

The embrace of business
In Colombia, where voters will cast their ballots in May to choose a successor to President Juan Manuel Santos, Grupo Argos CFO Alejandro Piedrahíta sees less uncertainty.

“Most of the candidates are market oriented,” he says. “This is good news for corporations like ours.”

Group Argos may look to roll over some of its debt in either the international or local capital markets this year, he says.

For some sovereign issuers, 2018 offers a chance to build on debt issuance strategies.

Uruguay, which last year funded itself entirely in pesos, expects to continue to develop its nominal peso curve this year, says Herman Kamil, the country’s head of public debt.

“Given where the 10-year is now, we’d like to push it to 15 years if we see the demand and we’re able to get a yield below double digits, which for Uruguay would be an accomplishment,” he says.

But, after focusing on local currency issues in 2017, Uruguay also plans to return to the dollar market in the coming months. “We want to cater to those investors who are the most reliable, who have the deepest pockets, who have been with Uruguay for many years,” Kamil says. “We don’t think it’s a good idea to be out of the dollar market for more than a year or a year and a half.” LF

LatinFinance Roundtables are underwritten by sponsors. The 2018 Latin America Capital Markets Roundtable was sponsored by the law firm Paul Hastings. LatinFinance retains editorial control to ensure objectivity and independence.