New issue concessions are high, everyone knows that. This is natural: investors are worried about inflation, Treasuries, monetary policy, and what it all means for EM bonds.
In the words of Jennifer Gorgoll, who looks after EM corps at Neuberger Berman, investors are “in a funk”.
Perhaps they’re being funky chickens (not Gorgoll’s words this time, we must emphasise), and fear is not letting bond buyers grasp the opportunities in front of them?
“My take, to quote a great line from a great movie, is to ‘get busy living or get busy dying’,” Gorgoll told GlobalCapital. “Very few see the value that is being created [with high new issue concessions] for fear of what is going to happen, but I think many will kick themselves for not taking advantage of what is potentially in front of them.”
There appeared to be plenty of juice in LatAm primary this week. Mexico offered 25bp of new issue premium on its euro trade on Monday. State utility CFE followed with up to 50bp of concession on its $1.75bn dual-tranche deal in dollars.
Were these deals screamingly good value? Mexico widened by 15bp on Tuesday, rather concerningly. However, CFE did find a follow-on bid, with its new seven year around half a point higher on Wednesday, and the shiny 30 year up a point and a half. But then came US CPI, the highest inflation print in 40 years, and gains were lost on Thursday.
Ray Zucaro, CIO at RVX in Miami, called it a “problematic” inflation print, noting that the particularly high numbers were everyday items like energy and food. This upped a fear factor that means several major investors are barely looking at new issues — no matter how juicy the concessions appear.
Omotunde Lawal, head of EM corporate debt at Barings, said it was “not clear” what might lead new issues to perform well, and highlighted there was “plenty of good paper” in the secondary market trading well below par — which “might make more sense”.
“The new issue market has been tough, even when deals offer apparently attractive pricing,” said Lawal, who said she’d been “mostly absent” from the primary market.
Another large US-based EM buyer admitted he was also largely ignoring new issues, saying his priority was positioning his holdings for a potential “pressure point” in fixed income. He feels that new issue concessions will offer him little protection in a broader sell-off.
Perhaps it’s good timing for earnings blackouts to begin, allowing time to recalibrate ahead of the March Fed meeting that some hope will give the market the clarity it needs on the rates outlook. But putting so much faith in the March meeting may be wishful thinking. Nobody actually knows what will calm the markets.
“At some point, Treasuries will level, but it is difficult to determine what and when that will be,” said Rodrigo Gonzalez at BNP Paribas.
Some good news: one reason volumes will be lower is that borrowers last year sought to get ahead of both the Fed and domestic political noise. Therefore, “many Latin American borrowers are prepared to ride out the markets,” said Gonzalez.
Still, higher rates plus higher spreads plus higher concessions equate to a less hospitable LatAm bond market. And LatAm new issue volumes (35% down versus 2021 year-to-date, according to Dealogic) will almost certain fall sharply. Click here for our full commentary of market sentiment.
But does it matter if issuers must pay higher concessions or print smaller deals? GlobalCapital argued in this week’s leader column that the latest deals — though they look like hard work — should not be judged on short-term performance. Only in a year or so will we know whether they were right to push through difficult markets.
“The EM corporates who DCM bankers say have abandoned issuance plans for now may have saved face, but have they saved money?” we asked.
Hope is a good thing, maybe the best of things…
Suriname is a stunning but tricky to reach country (Bogota-Curaçao-Trinidad-Paramaribo was the route for your correspondent’s last visit in 2019) that is unknown to most of the world. But the sovereign’s debt restructuring has all the ingredients to be a fascinating case study.
GlobalCapital sat down with finance minister Armand Achaibersing and Albert Ramdin (r) to discuss their plans as they get ready to negotiate with bondholders, just before they released their latest creditor update.
President Chandrikapersad Santokhi’s government inherited a desperate economic situation when they took office in July 2020. But, with an IMF facility sealed and economic growth expected to return this year, hope springs eternal, particularly because the country has recently had some potentially transformative offshore oil discoveries.
Yet for now, this hope is just that: hope. There is still no final investment decision from oil companies Apache and Total, meaning oil revenues are not included in the IMF’s macroeconomic projections or debt sustainability analysis — a sticking point in restructuring negotiations.
This was one of several important topics covered in our rather extensive interview with the ministers. Highlights included:
Suriname will “invite” creditors to design the value recovery mechanism to be offered in the restructuring (likely a bond linked to oil revenues).
“Today we negotiate with bondholders, but tomorrow we might need them” — Minister Achaibersing.
Minister Ramdin sees a “lack of multilateral support” for non-IDA small economies. And eligibility requirements for the G20 Common Framework for debt treatment “need to be looked at”.
After Suriname had to wait eight months for Executive Board approval of its IMF programme, the authorities expect their experience to “facilitate some policy changes within the IMF”.
Suriname is one of an elite group of three carbon-negative countries in the world. Ministers would love to integrate sustainability-linked factors into their new debt, and see this restructuring as a “unique opportunity” for commercial and official lenders to show off ESG credentials.
Also this week, hopes for Crédito Real’s liquidity-raising strategies were finally extinguished: the Mexican payroll lender defaulted on its Swiss franc bond on Wednesday and a restructuring looms. The Dominican Republic is lining up a new bond to fund a liability management exercise, and Brazilian sugar and ethanol producer Coruripe finally clinched a debut international bond — though had to pay 10% for the privilege.
Have a great weekend, and do get in touch for a free trial to access all of GlobalCapital.
Saludos,
Olly
The best of this week’s LatAm bond coverage: