NEW YORK, Oct 17 (IFR) - Latin American borrowers are eyeing a broad set of alternative funding options in non-dollar markets that are becoming increasingly receptive to the region’s credits.
Yen, Aussie dollars and sukuk trades are all in the works, say bankers pitching issuers seeking to diversify away from a core US dollar market that has become increasingly volatile and could turn comparatively costly once the Fed hikes rates.
Japanese institutional investors, for example, are becoming more amenable to the idea of buying Latin American corporate and sovereign bonds after a decade-long rejection of anything but top-quality names.
“Japanese investors had been happy to buy Brazilian, Argentine and Mexican government bonds because they enjoyed the high coupon, but after the (first) Argentina default they stayed away from Latin American credits for more than a decade,” said Takaomi Tahara, head of international debt syndicate at Nomura.
Rock-bottom yields on Japanese government bonds as well as on bonds issued by European banks in yen are forcing the country’s buyside to rethink its views on the region and are likely to push it into the arms of issuers further down the credit spectrum.
“They have been investing in these European banks over the past couple of years, but some are now achieving yen offer swaps plus zero and some investors are not happy with Double A bank paper any more,” said Tahara. “So they are looking at more attractive alternatives such as Latin American credits.”
A greater acceptance of Triple B names opens the doors to a region that is still dominated by sub-Single A credits.
This is a relatively new phenomenon in a market that is famously conservative and slow to change investment strategies. Persistence has paid off for Mexico, which is the only LatAm sovereign to tap this market in recent years without support from the Japan Bank for International Cooperation.
In July, it stretched all the way out to 20 years as part of a ¥60bn three-tranche offering on the back of a ¥100bn order book. The five-year issue came at swaps plus 50bp, considerably tighter than the 110bp it paid on the same tenor in 2012.
Still, it took Mexico years to reach this point, first starting with short tenors and arguably paying over its own US dollar curve. Other Latin American governments that could follow suit include Brazil, which earlier this year said it was eyeing a Samurai issue.
“We are still looking [at the Samurai market],” Paulo Valle, the country’s Treasury undersecretary, told IFR. “The problem with the Samurai market is the duration.”
Brazil may find it doesn’t have to leap through quite as many hoops as Mexico did, given the buyer base’s new-found willingness to take on greater risk in return for extra yield.
As sovereigns, Mexico and Brazil are likely to be comfortable keeping their yen exposure, but corporates can ill-afford to take on such risks and will be looking at the swap back to US dollars or local currency.
While far from ideal, the trend has been working in borrowers’ favour, with the five-year yen/dollar basis swap contracting from minus 80bp in June 2013 to minus 40bp today, according to Nomura.
A minus 80bp basis swap meant that even if borrowers raised funds at yen Libor flat, their dollar costs would still be as high as dollar Libor plus 80bp.
While minus 40bp is a vast improvement, it is really the tighter credit spreads that local investors are willing to accept on Triple B credits that are likely to be the draw for Latin American corporates.
“The question becomes, is there a differential in credit spreads that Japanese investors are willing to accept relative to dollars?” said Arthur Rubin, head of Latin America debt capital markets at Nomura. “You have seen a trend over the last two years, where credit spreads for Samurai and yen issues have compressed a lot, so it is less a story about monetary arbitrage and more a story about credit arbitrage.”
Other markets that have been largely ignored by Latin American borrowers are also being targeted, with the region soon expected to see its first-ever sukuk offering.
“The UK, Hong Kong, South Africa and others have all done sukuk this year and there is more to come,” said Henrik Raber, global head of capital markets at Standard Chartered, noting that global sukuk issuance is up 50% this year. “I would expect something like this in Latin America.”
While it remains unclear which LatAm borrower will step forward first, several have expressed an interest in issuing sukuk or tapping the deep pool of investors in the Middle East.
“We understand that some of the issuers in the sukuk market have had very successful transactions and that the pool of resources could be significant,” said Alejandro Diaz de Leon, Mexico’s head of public credit. “But that is something we are still evaluating.”
It is a similar story with the Australian dollar market, whose depth and diversified investors have proved appealing to the region’s higher-rated development banks.
Central American development bank Cabei is eyeing this market as it seeks to mop up its remaining funding needs this year.
“Australia is becoming an important market,” said Ricardo Rico, the bank’s head of DCM. “Savings in Australia have grown very fast as a result of the economic success it has enjoyed. Many investors, banks and sovereign wealth funds since the crisis have been diversifying away from US dollars and one of the currencies they like is the Australian dollar.”
A version of this article appears in the October 18 issue of IFR Magazine
Reporting By Paul Kilby, Davide Scigliuzzo; Editing by Matthew Davies