Busy living or busy dying
New emission concessions are high, everyone knows that. It’s natural: investors are worried about inflation, Treasuries, monetary policy and what all this means for emerging market bonds.
In the words of Jennifer Gorgoll, head of the EM body at Neuberger Berman, investors are “into the funk.”
Maybe they’re funky chickens (not Gorgoll’s words this time, it should be underlined), and isn’t the fear of letting bond buyers seize the opportunities presented to them?
“My view, to quote a great line from a great movie, is ‘busy to live or busy to die,'” Gorgoll said. GlobalCapital. “Very few see the value that is created [with high new issue concessions] for fear of what is to come, but I think many will kick themselves for not taking advantage of what is potentially in front of them.
There seemed to be a lot of juice in the LatAm primary this week. Mexico on Monday offered a 25bp new issue premium on its euro trades. Utility CFE followed with up to 50 basis points concession on its two-tranche, $1.75 billion deal.
Were these offers excellent value for money? Mexico widened 15bp on Tuesday, which is rather worrying. However, CFE found a follow-up offer, with its new seven-year about half a point higher on Wednesday, and the bright 30-year up a point and a half. But then came the US CPI, the highest inflation in 40 years, and the 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 for everyday items like energy and food. This has increased a fear factor that means several large investors are barely considering new issues – no matter how juicy the concessions seem.
Omotunde Lawal, head of emerging corporate debt at Barings, said it was “unclear” what could drive new issues to perform well, and stressed there was “a lot of good paper” in the secondary market which is trading well below par – which “could make more sense”.
“The new issue market has been tough, even when deals are offering seemingly attractive prices,” said Lawal, who said she had been “essentially absent” from the primary market.
Another big US-based emerging markets buyer admitted he was also largely unaware of the new issues, saying his priority was to position his holdings for a potential “pressure point” in fixed income. He feels that the new issuance concessions will offer him little protection in a broader surrender.
Now may be a good time for the profit bans to begin, allowing time to recalibrate ahead of the Fed’s March meeting which will hopefully give the market the clarity it needs on the outlook. rates. But putting so much faith in the March meeting may be wishful thinking. Nobody really knows what will calm the markets.
“At some point, Treasuries will stabilize, but it’s hard to know what and when that will happen,” said Rodrigo Gonzalez of BNP Paribas.
Some good news: one of the reasons volumes will be lower is that borrowers last year sought to outpace both the Fed and domestic political noise. Therefore, “many Latin American borrowers are ready to exit the markets,” Gonzalez said.
Yet higher rates, higher spreads and higher concessions equal a less hospitable LatAm bond market. And LatAm new issue volumes (35% down from 2021 year-to-date, according to Dealogic) will almost certainly drop sharply. Click here for our full commentary on market sentiment.
But does it matter if issuers have to pay higher concessions or print smaller transactions? GlobalCapital argued in this week’s Leader’s Column that the latest trades — while looking like hard work — shouldn’t be judged on short-term performance. It won’t be until about a year from now that we’ll know if they were right to go through tough markets.
“Emerging market companies that DCM bankers say have scrapped their issuance plans for now may have saved face, but did they save money?” we asked.
Hope is a good thing, maybe the best thing…
Suriname is a beautiful but hard-to-reach country (Bogota-Curaçao-Trinidad-Paramaribo was the itinerary of your correspondent’s last visit in 2019) that is unknown to most countries. But the restructuring of sovereign debt has all the ingredients to be a fascinating textbook case.
GlobalCapital sat down with Finance Minister Armand Achaibersing and Albert Ramdin (r) to discuss their plans as they prepare to negotiate with bondholders, just before issuing their latest update on creditors.
The government of President Chandrikapersad Santokhi inherited a dire economic situation when he took office in July 2020. But, with an IMF facility sealed and economic growth set to return this year, hope is eternal, in particularly because the country has recently made potentially transformative offshore oil discoveries. .
Yet, for now, that 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 the restructuring negotiations.
This was one of the many important topics discussed in our rather in-depth interview with ministers. Highlights included:
Suriname will “invite” creditors to design the value recovery mechanism that will be offered as part of the restructuring (likely an oil revenue bond).
“Today we negotiate with bondholders, but tomorrow we may need it” — Minister Achaibersing.
Minister Ramdin sees a “lack of multilateral support” for small non-IDA economies. And the conditions of eligibility for the G20 common framework for the treatment of debt “must be examined”.
After Suriname had to wait eight months for Executive Board approval of its IMF program, the authorities expect their experience to “facilitate some policy changes within the IMF”.
Suriname is among an elite group of three carbon negative countries in the world. The ministers would like to integrate sustainability factors into their new debt and see this restructuring as a “unique opportunity” for commercial and official lenders to show their ESG credentials.
Also this week, hopes for Crédito Real’s cash-raising strategies finally died down: the Mexican payday lender defaulted on its Swiss franc bond on Wednesday and a restructuring is looming. The Dominican Republic is preparing a new bond to fund a liability management exercise, and Brazilian sugar and ethanol producer Coruripe finally landed a first international bond – despite having to pay 10% for the privilege.
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The best of this week’s LatAm bond coverage: