Capital inflows into EM-dedicated flows have investors seeking places to put that cash to work, but recently it seems like the LatAm market is losing its sense of relative value and not focusing on fundamentals (or other elements) that traditionally play an important role in investment decisions. Recent issues from Brazil's Rede D'Or Finance and Mexico's Pemex are cases in point.
On 14 January, Rede D'Or Finance SARL (RDEDOR) issued a US$850.0mn senior unsecured bond, due 2030 and rated BB-/BB-, at par, with a coupon of 4.50%. We wonder why investors would choose to allocate their excess cash into this bond when Braskem's (BRASKM) US$1.50bn, 4.50% senior unsecured bonds, rated BBB-/BBB- (two notches above), were trading with the same yield at the time of the RDEDOR issuance. Today, we see RDEDOR trading at cUS$100.65 (ALLQ) to yield c4.42% (g-spread: 265bps; z-spread: 270bps), whereas BRASKM is seen trading at cUS$100.859 (ALLQ) to yield c4.36% (g-spread: 258bps; z-spread: 264bps).
Then we have Pemex's two-tranche bonds issued yesterday, which exceeded expectations in terms of the size of the deal (US$2.5bn per tranche) and priced well below guidance, on the back of one of the most robust order books we have seen in a long time – order books were estimated to be more than US$25.0bn.
As a result, Pemex was able to price Tranche A, comprising US$2.5bn, 5.95% senior unsecured bonds due 2031, issued at par, when the initial price guidance was "in the 6.25% to 6.375% area" – we believed the bonds would price between 6.00% and 6.10%. Tranche B, comprising US$2.5bn in 6.95% senior unsecured bonds due 2060, also exceeded expectations not only in size, but in terms of beating the initial price guidance that was set at the 7.375% area – we expected it to price between 7.0% and 7.10%.
Note that these bonds are issued by a company: (i) whose production continues to decline; (ii) is one of the most indebted oil and gas companies in the world; (iii) has been withholding payments to its suppliers lately; (iv) lost its investment-grade rating from Fitch; and (v) is almost completely dependent on the Mexican government's support for its financial health and viability.
Compare these Pemex bonds to Petrobras's (PETBRA) US$2.25bn, 6.90% senior unsecured bonds due 2049 (rated Ba2/BB-/BB-) currently seen trading at cUS$121.518 (ALLQ) to yield c5.42% (g-spread: 320bps; z-spread: 354bps). Given the business outlook and the current operational and financial state of the two companies, it seems clear to us that PETBRA has a much higher likelihood of continuing to improve, and perhaps even be upgraded by rating agencies this year, than Pemex.
Going down the rating scale, Telefonica Celular del Paraguay S.A.E. (TCDPSA), rated Ba1/NR/BB+, issued US$250.0mn (tapping its existing US$300.0mn to bring the total to US$550.0mn), 5.875% senior unsecured bonds due 2027, pricing the tap at US$106.375. At the time of the tap issuance, TCDPSA's US$300.0mn outstanding bonds were seen trading at cUS$108.013 (ALLQ). Based on this, we had estimated that the final pricing for the tap would be in the US$105.75 area. Although our estimate proved to be overly optimistic, we see the current trading levels of US$107.261 that yields c3.72% (g-spread: 219bps; z-spread: 212bps) as fair.
Now compare TCDPSA to Mexico's Axtel SAB de CV (AXTEL) US$500.0mn, 6.375% senior unsecured bonds (Ba3/BB/BB-) that are currently trading at cUS$106.613 (ALLQ) to yield 3.85% (g-spread: 231bps; z-spread: 212bps), and you can see the slight spread differential where AXTEL appears tight, particularly considering TCDPSA's higher rating.
Meanwhile, in the corporate pipeline today, we see Brazil's Banco Bradesco (BRADES) coming to the market with a two-tranche issue as follows:
- Tranche A: "Benchmark size" (which we believe could be US$1.0bn) in 3-year bonds due 15 January 2023, with Initial price guidance in the 3.15% area;
- Tranche B: "Benchmark size" (perhaps another US$1.0bn) in 5-year bonds due 15 January 2025, with initial price guidance in the 3.50% area.
The bonds are expected to be senior unsecured (Ba2/BB-). Looking at the bank's US$1.10bn, 5.75% subordinated bonds due 2022 (Ba3/NR/B+) that are currently seen trading at cUS$105.884 (ALLQ) to yield c2.85% (g-spread: 131bps; z-spread: 124bps) and its subordinate status, we believe that the initial price guidance for the new senior unsecured bonds is way too generous. The final pricing, in our view, could be in the 2.75% area for the 2023, and in the 3.0% area for the 2025.
It remains to be seen how optimistic the markets feel today.