The Big Idea

A moving target in LatAm corporates

| March 12, 2021

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.

Jose Kliksberg
jkliksberg@apsec.com
jkliksberg

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