LatAm bond bankers ponder new normal despite volume optimism

When GlobalCapital last surveyed Latin America’s DCM heads 12 months ago, there was broad consensus that primary market activity would pick up in 2023. After what had been an utterly dismal 2022, things could hardly have got worse. Thankfully, the consensus was correct.

Dealogic data shows that by late November international bond issuance from LatAm and Caribbean borrowers had reached almost $80bn for the year — up from below $60bn in full-year 2022, and in line with the 25%-50% increase that three-quarters of last year’s respondents had predicted.

This time there is again consensus: every single participant in GlobalCapital’s survey believes that issuance volumes will pick up in 2024, and almost one in three believes they will increase by more than 20%.

“I am feeling bullish about next year,” says Rodrigo Gonzalez, director in LatAm DCM at BNP Paribas. “There is a pipeline of deals from financial institutions. Obviously the typical SSAs including all the sovereigns will come, and there are some maturities on the corporate front that need to be met.”

Some of the market’s expectation is simply a natural consequence of a still-modest level of activity in 2023, and the likelihood that the US Federal Reserve’s interest rate increases are near their end.

Indeed, GlobalCapital carried out the survey in mid-November, after a strong rally in US Treasuries that had begun in late October. More than one of those predicting a greater than 20% increase admitted that they would have not been so optimistic if they had been asked a month earlier.

“My biggest hope for next year is that US inflation converges to 2%, which would allow the Federal Reserve to ease monetary policy,” says Lisandro Miguens, head of LatAm DCM at JP Morgan.

As ever, LatAm bond markets are at the mercy of US interest rates. Yet hope does not equal expectation. Though all but two bankers expect issuance conditions to improve for LatAm borrowers, only two respondents called the end of rising rates a “turning point”. Instead, the vast majority said the improvement would be “gradual”.

Moreover, despite an array of other obstacles — ranging from the US election to LatAm domestic politics and economies, there is agreement that the biggest risk to the outlook is the possibility that a Fed pivot is not as close as many think.

Yet, beyond the cautious optimism on both volumes and primary market conditions, LatAm DCM bankers are struggling to agree on what will drive volumes. This suggests a market that is only just finding its feet after two difficult years.

“I would say that if 2022 was a year that caught everyone off guard, 2023 showed that it was not just a one-off,” says the head of EM syndicate at one large bank in New York. “We are now wondering if the last two years have marked a regime shift. 2024 will be important because, if we find ourselves in a less volatile version of the last two years, it will be an important barometer of what LatAm bond activity will look in the post-QE new normal.”

Corporate issuance, for example, has been particularly low, with the $30.1bn priced in the first 11 months of 2023 paling in comparison to the $79bn done in 2021. Sovereign issuance — at $42.9bn year-to-date — has recovered well versus the $57.7bn priced in 2021.

This explains why all but one respondent was forecasting higher corporate issuance in 2024, while five do not expect sovereign issuance to increase.

Those who say that sovereign issuance does not have much further to grow point to the fact that there was already a lot in 2023 from Chile, that all other regular issuers were active, and even a rare issuer like Costa Rica raised $3bn through its first two deals since 2019.

Mexico will be the determining factor in whether sovereign issuance increases even further. The government’s 2024 budget points to a hefty increase in the fiscal deficit, from 3.3% of GDP to 4.9%, and with it an increase in debt issuance.

Mexico is the second largest economy in Latin America, so how much of that issuance is funded in external bond markets could have a big impact on volumes.

For all the expectation of improved conditions and higher volumes, there is no expectation that dollar funding costs, which have ballooned in the past two years, will also improve for issuers.

For a start, there was a broad disparity among respondents over the direction of spreads. Rather, it is rates stability that will lead to lower execution risk and longer issuance windows that will help fertilise higher volumes.

“I don’t expect [dollar bond market] funding costs to lower very much until later in the year,” Gonzalez says. “But the companies and banks that have used other alternatives — such as local markets, banks and multilaterals — at some point will have to take the rates that are on offer.

“I think it will take a while for LatAm credit spreads to tighten significantly but eventually they will. Once Treasury volatility subsides, and investors have a better view on long-term rates, they will start to take more views on credits.”

If corporate issuers are to return in numbers in 2024, at least some will do so out of necessity. Three bankers listed “pressing” corporate refinancing needs as one of the most important drivers for an uptick in volumes, while four put it as their second choice.

Faced by a sharp jump in funding costs in dollars, many LatAm companies and banks have instead been leaned on banking relationships or domestic bond markets for finance. At least six bankers in the survey, meanwhile, thought that issuers would have no choice but to return to international bond markets, listing this as their first or second most important driver of higher volumes.

Other respondents, however, insisted that there was no issue with the availability of funding in bank lending or domestic bond markets.

Calculating precise local market volumes is tricky, given the scarcity of reliable data, but Moody’s estimated that international corporate and FIG issuance between 2015 and 2021 was 17% higher than domestic.

“On local markets, it depends where you look,” Miguens says. “In Brazil and Mexico the domestic markets are alive and dynamic, but in Chile, Peru and Colombia activity has been anaemic and only a fraction of what it used to be.”

The ability of domestic investor bases to pick up the slack as international markets have struggled has impressed many. Even after Brazil’s credit markets seized up following the shock bankruptcy of retail giant Lojas Americanas in January 2023, it did not take long for the market to begin firing again.

“The last couple of years have been good for Latin American local markets because they tested them,” Gonzalez says. “We saw with the Lojas episode that Brazil was able to digest the troubles and recover.”

With most respondents believing that the previous decade of low interest rates in developed markets was an anomaly, it has led to some existential questioning. If local bond markets can grow to the point at which they can compete on price and in the currency that domestic companies and banks need, what is the use of international markets?

Asked whether local markets’ share of corporate financing would be a permanent trend, most survey respondents think international markets will recover, but will account for a smaller share of the whole.

“The future depends on where you look,” Gonzalez says. “Mexico has an amazing local market, as does Brazil and Chile, but Colombia and Peru remain pretty small. Overall, I do expect the percentage of international issuance to increase next year as issuers will have needs for bigger and longer-dated deals.”

Others admitted that they were almost praying this was not a permanent change and that international markets offer deal size and duration that domestic markets struggle to match.