The chill that pulled Latin American debt issuers out of international bond markets in 2022 is setting, as the US assumes the outlook for higher interest rates for longer.
Governments and companies in the region have issued about US$44 billion in dollar-denominated bonds this year as the Fed raised borrowing costs, the lowest for the period since the 2008 global financial crisis, according to Bloomberg data.
This could push the typical early-year issuance until at least mid-2023, analysts say. While investment-grade borrowers can probably get along without foreign bondholders, junk-grade borrowers have fewer options, as do governments in risk of falling into difficulties or default.
“The possibility of rates staying at current levels or rising is likely to discourage issuers from going to the market,” said Teresa Alves, an analyst at Goldman Sachs Group Inc (GS). “That’s likely to continue to be a problem until we get to a hawkish peak.”
In Latin America, where high-yield borrowers predominate, bond issuance fell 63% as of Nov 28 year-on-year, according to data compiled by Bloomberg. By comparison, hard currency debt sales are down about 41% in Eastern Europe and 48% in emerging Asia over the same period.
It’s a grim position for Latin American officials, who have seen Wall Street’s appetite for risky bonds evaporate this year amid fears of accelerating inflation and a possible recession.
Governments resorting to higher taxes run the risk of increasing pressure on citizens, who are already suffering from inflation. At the same time, country-to-country and multilateral lending often come with concessions, while local debt markets are harder to tap after recent hikes by national central banks.
“If the world continues like this for another 18 months of high stress and high yields, we may see bankruptcies among companies unable to refinance their debt,” said Phil Torres, global co-head of emerging markets debt at Aegon Asset Management in Chicago.
BONUS BREAKDOWN
This has left Wall Street with less appetite for risky bonds. Investors this year have been the least interested in junk-rated Latin American borrowers, blocking new issuance from countries like El Salvador.
Things are also tricky for high-yield issuers that can still access the market at higher rates. Colombia, which was downgraded to “junk” by two credit rating agencies last year, sold new 10-year bonds on Monday, even though it will cost the country more than twice as much interest as its previous offering of 10-year bonds. similar duration. Colombia also offered to buy back debt maturing in 2023 and 2024.
Investment-grade issuers have fared better, with a total of US$8 billion in bonds making Mexico the region’s biggest seller of debt by 2022, with Chile following close behind with US$6 billion, shows the data compiled by Bloomberg. Panama, for its part, this month sold another US$1.5 billion in debt with a coupon of 6.4% and announced a repurchase of more than US$800 million in bonds.
For its part, Paraguay is likely to postpone the sale of up to US$548 million in bonds that it had anticipated in early 2023 until it has more visibility on the direction of rates.
Other typically active issuers have been unwilling to sell debt at current rates, said Andre Silva, head of Latin America debt capital markets for BNP Paribas in New York.
“The hope is that we start to see more issuance activity next year, first from sovereigns and quasi-sovereigns, and then from corporates,” Silva said. “Once the market tests a few names, investors might be more confident in trying BB+ and BB credits.”
Such a broad return to debt markets likely won’t happen until the second half of 2023, according to Citigroup Inc.(C) debt strategist Eric Ollom. A stronger end to the year would mark a break with tradition and would likely be dominated by investment grade issuance across all emerging markets, according to Citi.
With help from Ezra Fiezer
With information from Bloomberg Línea