Latin America’s non-bank lenders, which are mostly unregulated, had become — before Covid-19 hit — a solid source of bond supply. A growing number of Mexican issuers, in particular, had tapped the markets in recent years.
Yet in the wake of the pandemic, with consumer credit quality taking a hit and the lack of fiscal stimulus particularly notable in Mexico, bonds in the sector suffered badly. Even BB/BB+ rated Crédito Real — considered by several analysts to be the strongest credit in the sector — saw its bonds hit distressed levels.
Crédito Real’s senior unsecured 9.5% 2026s went as low as the mid 70s in late March and — despite a higher coupon than the rest of the curve — only returned above par in the second half of 2020.
When the EM bond market enjoyed a strong rally towards the end of the year, however, Crédito Real was an exceptional performer: the 2026s, which are callable from February 2023, started November at around 97 cents on the dollar and went as high as 111.70 on December 7, according to MarketAxess.
Though appetite has softened since then, the 2026s remain at around 108.50 — or a yield of 7.06% — and the company began investor meetings last week. The reception was strong enough for Crédito Real to become the first Lat Am NBFI to tap international markets since the pandemic began. Chilean factoring and auto financing company Tanner had held a virtual roadshow in July, but decided not to issue.
Bookrunners BNP Paribas, Goldman Sachs, Santander and SMBC on Monday set initial price thoughts at low to mid 8% area for Crédito Real’s seven year non-call four trade, and attracted over $1.1bn of demand, GlobalCapital understands.
This allowed the company to offer guidance at 8.125% plus or minus 0.125%. With the book remaining firm at over two times subscribed, Crédito Real launched a $500m deal at 8%.
“None of these names that target the lower income segment of the population are easy credits right now, but the bonds have been on a rip and this landed pretty much in line with what we were expecting,” said one head of Lat Am DCM.
The 8% coupon 2028 bonds were reoffered at par.
A banker on the deal said he believed fair value was in the “high 7%” area, arguing that the new issue concession was 10bp-12.5bp.
“That’s not at all excessive given it’s not the easiest credit,” said the banker.
Proceeds from the new bonds will be used to finance a tender offer for up to $215m of the company’s $427m of 7.25% 2023s, to repay short-term loans of around $50m, and for general corporate purposes.
Crédito Real is also seeking to use the tender offer to align the covenant packages of all its bonds.
The new bond has standard high yield covenants — just like Crédito Real’s dollar 2026s and euro 2027s. However, the 2023s, the oldest outstanding bond on the borrower’s curve, have a more onerous covenant package. Therefore, alongside the tender offer, Crédito Real is asking holders of the 2023s to agree to bring the covenants in line with its other bonds.
This includes granting the company more flexibility to raise additional debt, increasing the cross-default threshold, and reducing minimum notice periods for when the issuer wants to make an optional redemption.
Bondholders who participate in the tender by the early-bird deadline of 5pm New York time on January 20 will receive 103.875 cents on the dollar. After that date, and until the expiry date of 11.59pm on February 3, the tender price will be set at 100.875.
Any bondholders who participate in the tender will be deemed to have granted their consent to amend the covenants. Those who only consent to the amendments will receive a payment of 2.5 cents on the dollar.
Some 54% of Crédito Real’s portfolio is in the payroll lending segment, which has an average interest rate of 54%. SMEs represent 22% of the portfolio.