The start of the year has been slower than usual for the LatAm capital market. Lower demand coupled with higher interest rates contributed to fewer deals coming to market. The slowdown is mainly driven by rampant inflation, an unstable environment, and higher bond coupons and loan interest rates on the back of rising US Treasury yields. These market conditions have conspired to push participants to prioritise shorter durations, smaller volumes and to look locally for new funding.
Window of opportunity for borrowers
Average bond volumes have been declining since end-2020, reaching the bottom at the end of 2022. A lower-than-expected US rate hike in January prompted issuers to use this window of opportunity to refinance some of the deals as interest rates drew breath. In February, the market cooled significantly, as market participants waited for more clarity on long-term US monetary policy. The collapse of several US banks in March could have been a scare point for lenders, but as soon as it became apparent that these instances were not turning into a full banking crisis, market activity resumed with USD 9bn of debt secured versus USD 4.7bn closed in February. The deals sealed in March were also larger in average volume than the few tentative ones in February. The only four bonds issued in April have all been large in size, ranging from USD 750m placed by Banco do Brasil to USD 2.9bn placed by Mexico, with maturities also jumping to an average of 14.4 years, propelled by the Mexico bond and its 30-year tenor.
Mexico and Brazil are heavy lifters
Since the start of the year, Brazil and Mexico have shared 61% of all primary activity in Latin America, with Mexico holding 37%, a significant step up from 26% in 2022. Chile accounted for 15% of deal volumes in both 2021 and 2022, but there has been only USD 1.4bn placed in the region so far this year, or 3% of all deal flow.
Brazil: domestic market on the rise
Domestic markets have been improving for bond issuances, especially in Brazil, where domestic deals started prevailing from 4Q21 to the point when all primary activity at the end of 2022 was focused on local deals. Following a long period of instability and high debt pricing on international markets, issuers took advantage of a window of opportunity that opened at the beginning of the year, as US Treasury yields marked a downward trend. During the first four months of 2023, despite a still highly-localised market, several international placements came through: two USD 1bn senior unsecured bonds by Braskem and Pilgrim’s Pride, one USD 336m Abra bond and a USD 2.25bn Brazil sovereign placement. The latest issuer to come to market with a Eurobond was Banco do Brasil with a USD 750m sustainable bond.
Meanwhile, the loan market has seen a higher concentration of foreign-currency-denominated deals in the past six months. In 1Q23, only two borrowers tapped the loan market in Brazil, with multi-tranche USD-denominated facilities: a Latin American data centre, Ascenty, for USD 825m and a utility company, Thalassius, for USD 830m.
In light of the current market conditions, typically volatile and unfavourable, we do not expect any further increase in value or maturity among international deals. On the contrary, we anticipate borrowers continuing to rely more on domestic markets, as tighter relationships with local banks provide more reliable conditions for funding opportunities.
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