When the coronavirus pandemic reached Latin America, the region’s capital markets slammed shut. Corporates of all sizes rushed for liquidity, pulling down revolving facilities and seeking fresh short-term debt from banks, acting on a history that suggests risk appetite would be slow to return. However, in early May, Brazil saw an IPO come to market.
, Head of Latin American economics at Goldman Sachs, stated,
“A deeper and prolonged contraction of activity increases the risk of scarring effects… which could delay and undermine the recovery once the viral outbreaks are brought under control.”
Elsewhere in Latin America, capital markets have reopened in a slightly more orthodox manner. As reported by Euro Money
, sovereigns reopened the international bond market to Latin American credits and the stronger corporates followed.
The “quasi-sovereigns” and high-grade corporates have navigated the conditions with ease as well. Deals from Colombia’s Grupo Energía Bogotá
and Chile’s government-owned copper miner, Coldelco
, were able to tighten the pricing on their April deals. Mexico’s Santander
and América Móvil
also attracted plenty of investor demand.
According to Euro Money
, the local debt transactions also aren’t quite as good as they look.
“Many local banks structure bank loans as debentures and ‘store’ them in their asset management businesses to ensure better capital treatment for the credit. There’s little transparency about whether these deals are fully or partially distributed in the local market, but sources suggest the early deals were not sold widely.”
, Head of Global Banking in Brazil for UBS, says international investors are taking a differentiated view of issuers’ business sectors.
“TMT [technology, media and telecom] are doing well,” he says. “I wouldn’t say they are growing at the same pace as in the past, but they are performing very well in the crisis- along with others such as healthcare and banks. We are more optimistic about transactions coming for companies in those sectors in the short term.”
Bassan noted that his conversations with sector-dedicated investors are good, but Latin American companies will face strong competition from other companies in regions that are not being as badly affected by coronavirus.
“We have been encouraging clients to look ahead – our general view is that we are going through a relatively benign window of opportunity in which to issue to extend maturities and eventually to raise equity,” said Eduardo Miras
, Head of Investment Banking Brazil at Citi.
There is no certainty that waiting will lead to improved conditions, however. Latin America was the last region to be hit by the COVID-19 pandemic, but it could end up suffering the most. Banks, including Goldman Sachs in a recent report, have revised their predictions about the length and severity of the downturn.
Weak health systems and political confusion mean that the lockdowns and social distancing, in place in many regions since the second half of March, will be extended for a couple of months. This could lead to a 7.6% contraction across the seven biggest regional economies in 2020, with the largest expected to be hit particularly hard: Argentina (-8.5%), Brazil (-7.4%) and Mexico (-8.5%) (Euro Money
“This extension will generate a deeper and longer-lasting effect on real activity. Furthermore, a deeper and prolonged contraction of activity increases the risk of scarring effects… which could delay and undermine the recovery once the viral outbreaks are brought under control,” says Goldman Sachs’ Alberto Ramos.
The deteriorating outlook is particularly true for Brazil – and so far there has been deafening silence from Brazilian issuers of any kind in the international market.
On May 18, Alessandro Zema
, Brazil country head and head of investment banking in Brazil at Morgan Stanley, stated,
“The vast majority of the frequent issuers – the blue-chip names – came into this crisis having already conducted liability management exercises, and their capital structures were in good shape. In a sense they have the luxury to wait for what they think is the optimal timing, and I think most will be opportunistic. But I do think we will see the first international debt capital markets transaction coming from Brazil in the next few weeks.”
If Brazil’s sovereign team is even a little sensitive to its pricing levels – which it is – then recent developments are not going to help investors pile into a new issuance in the same way as other large Latin American countries.
Brazil is becoming the new global epicenter for the disease, and the government’s response has gone from ineffectual to counter-productive.
“President Jair Bolsonaro has seen his rejection of the consensus on science and public health policy lead to the resignation of two health ministers within a month. The pandemic is in danger of spiralling out of control and the economic ramifications are going to be a heavy weight. With the rate of daily deaths still growing in late May, the prospect for reopening the economy seems far away.”
On May 15, Bank of America revised down its 2020 GDP growth forecast for Brazil to -7.7% and the region to -6.8%. In a client note Capital Economics estimates that the markets are charging an additional 50bp of political premium in the spreads of Brazilian sovereign dollar bonds, complicating the decision to issue new debt.