The Big Idea
A moving target in LatAm corporates
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Latin American corporate debt has felt the impact of higher rates in the US with the long end of the curve down an average of 10 points in investment grade. And returns this year have gone into the red with EMBI+ off 2.7%. Higher rates have come with wider spreads generally although some names have been stable or tighter. March issuance in LatAm corporate debt suggests the market may have lost some momentum.
Total issuance in Latin America year-to-date has been US$41 billion, of which US$22 billion was in sovereign debt and US$19 billion in corporate. The consensus target for corporate issuance in LatAm this year is US$75 billion of which 25% has already been achieved, after a very strong January, and a slower February. Some corporates are taking advantage of very tight yields to refinance callable bonds in the 5-year to 7-year part of the curve. These calls are leading to new issues with coupons lower on average by 150 bp to 200 bp and longer maturities with books oversubscribed 2.0x-6.0x. Still, March has been a difficult month for new issues with only two deals.
Brazil recently has been turbocharged with volatility after President Bolsonaro replaced the CEO of Petrobras with an army general with no oil experience. At stake it is the policy of charging gasoline prices linked to the international price of oil, eliminating a long time government subsidy since 2016, helping Petrobras’s finances while reducing net leverage from 5.0x to 2.0x, resulting in yield compression on 10-year debt from 12% to 3.5% over the last six years. Adding wood to the fire, Brazil’s Supreme Court has annulled former leftist President Lula da Silva’s corruption charges, paving the way for potential reelection by the end of 2022. This is at a time when Brazilian assets have been re-pricing due to economic and now political challenges. The macro situation may make many investors reconsidered their overweight positions in Brazil and its corporates, which has been a profitable trade in many portfolios over the last years.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.