Billions have flowed into bonds issued by emerging markets in 2017, with investors hungry for the higher yields on offer. Enthusiasm for emerging markets has been supported by low interest rates across de globe and sustained weakness in the U.S. dollar.
Flows into emerging markets have been driven by a search for yields, as investors look for higher returns than have been offered by developed bond markets, but have also been encouraged by an improvement in emerging market fundamentals.
With appetite for emerging market assets rising and economic conditions improving, the total amount of debt issued by LAC borrowers in the first half of 2017 reached US$ 74.3 billion, the third highest half-yearly amount ever issued in the region.1
Sovereign and corporate borrowers seized their chance to issue new bonds in the second quarter. In June, state-owned oil company Petroperu made its debut in international bond markets with a US$ 2 billion two-tranche bond sale with 15 and 30-year maturities. In late June, Mexican lender Banorte came to international bond markets with an innovative tier one hybrid instrument in line with Basel III rules – an AT1 callable perpetual bond in two tranches – that offers higher yields as well as higher risk. In the sovereign side, Chile, Ecuador, Guatemala, Panama and Uruguay tapped international bond markets with benchmark-sized returns in the second quarter, but it was Argentina that attracted the most attention by becoming the first Latin American non-investment grade sovereign to issue a 100- year bond.2
The strong cross-border market performance was supported by a tightening in bond spreads. LAC bond spreads tightened 38 basis points in the first half of 2017, although most of the tightening took place in the first quarter. In the second quarter LAC bond spreads tightened just 1 basis point.
However, despite a tightening in spreads, the credit quality in the region continued to deteriorate: there were sixteen sovereign downgrades from January to July, and six upgrades.
The following are the main takeaways from activity in LAC international bond markets in the first half of 2017:
Oil quasi-sovereign companies and sovereigns have led in size: almost 20% of the total LAC issuance in the first-half came from Brazil’s Petrobras, Mexico’s Pemex and Peru’s Petroperu, with all issuances being above US$ 1 billion. On the sovereign side, fourteen sovereigns have come to the cross-border bond markets in the first half of the year, issuing 40% of the region’s total issuance in the period. Bonds of US$ 1 billion or more accounted for 67% of the total sovereign deals.
Twelve cross-border debut issuances took place from January to July: there were five debut issuances in the first quarter, four in the second quarter, including Peru’s Petroperu, and three more in July. They accounted for 7% of the total issuance in the period and 63% of the debut issuances in the period took place in the energy sector. Except for Petroperu, all were high-yield issuances.
In the first quarter there were four bond issuances with a green focus, but only one in the second: there were four issuances in the first quarter whose proceeds are going towards renewable energy projects, although only one was labeled a green bond. In May, Brazil’s National Development Bank (BNDES) issued the only green bond of the second quarter: a US$ 1 billion 4.75% 2024 green-labeled bond, with proceeds to be used to finance wind and solar projects in Brazil.
The three top issuers accounted for 64% of the first-half 2017 total: Argentina (26%), Brazil (22%) and Mexico (16%) were LAC top issuers (sovereign and corporate issuance combined).
Activity has been dominated by high-yield issuers: high-yield issuers, including sovereign and corporate, accounted for 64% of the total issuance in the first half of 2017. High-yield corporate issuers accounted for 32% of the total.
Currency diversity has continued: although dollar-denominated issuance accounted for almost 78% of the total, there were issuances in many currencies, including the Euro, Swiss Franc, Australian Dollar, Japanese Yen, Hong Kong Dollar, Norwegian Krone, and local currencies. Local currencies, which included the Chilean Peso, the Peruvian Sol, the Brazilian Real, and the Uruguayan Peso, accounted for 12% of the total amount issued in the period.