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LatAm: New issues galore!

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    2 October 2019
    Published by

    There are numerous new fixed income deals in the pipeline in Latin American countries (including Brazil, Chile, Mexico and Paraguay), in different sectors and with a wide array of structures, maturities, ratings and potential returns to pretty much satisfy the appetite of any type of investor. These expected new credits come in the context of what has been an intense couple of weeks of new Latin American bonds issuance.

    We are seeing a bit more diversification in terms of the quality of credits, in terms of geography and also in terms of structures. The recent examples of new issues (mainly from Mexico) had been, for the most part, very high-quality names, with few options for investors to pick and choose according to their risk appetite and returns objectives.

    On 19 September, Brazil's BRF S.A. (BRFSBZ) came to the market with US$750mn 4.875% senior unsecured 10-year bonds (Ba2/NR/BB) that priced at US$99.007 to yield 5.0%. Since launch, the price has barely moved – the bonds trade at cUS$99.17 (ALLQ) to yield c4.98% (g-spread 337bps; z-spread 348bps) – which seems to suggest they are tightly held. The bonds have traded in a range of US$98.725 (their low, on 25 September) to US$99.11 (their high, on 2 October). 

    The company announced today (2 October) that it had refinanced BRL1.6bn in credit lines with Bradesco, that it intends to redeem all of its 2020 7.25% bonds totalling US$86.1mn and that it has prepaid part of the farm loans it holds with Banco Santander (which are due  2020). These liability-management actions certainly strengthen the company's financial position by reducing its cost of debt, extending its maturities and confirming its good access to financing. However, we reiterate our Hold recommendation on the BRFSBZ family of bonds on the basis of valuation – they remain the most expensive in the Brazilian protein credits universe.

    Also on 19 September, Minera Mexico S.A. (SCCOMX), the Mexican operating company of the parent Southern Peru Copper, issued US$1bn 4.50% senior unsecured bonds due 2050 (Baa2/BBB+/BBB+) at US$98.733 to yield T + 2.875%. These bonds trade at cUS$98.366 (ALLQ) to yield c4.6% (g-spread 253bps; z-spread 295bps) and have widened slightly, due mainly, in our opinion, to the current market volatility. The bonds have traded since issuance in a range of US$97.94 (their low, on 25 September) to US$98.925 (their high, on 30 September). We do not have a recommendation on Minera Mexico's bonds.

    On 26 September, Mexico's non-bank financial institution Credito Real (CREAL) issued euro-denominated bonds in the amount of EUR350mn, with a 5.0% coupon and a reoffer price of EUR99.251 to yield 5.125%. The bonds are senior unsecured, rated BB+/BB+ and trade at cEUR102.572 (ALLQ) to yield c4.47% (g-spread 524bps; z-spread 483bps). They have traded in a range of EUR100.869 (their low, on 30 September) to EUR102.574 (their high, on 2 October). The proceeds are expected to be used mainly to partially tender its outstanding US$625mn 7.25% bonds due 2023. We rate CREAL's family of bonds a Hold on the basis of valuation since we are of the opinion that the financial institution's credit curve is fairly priced at current levels.

    Also on 26 September, Brazil's Unigel Participacoes, S.A., through its special-purpose vehicle (SPV) Unigel Luxembourg S.A. (UNIGEL), issued US$420mn 8.75% senior unsecured bonds due 2026 (B+/B+), priced at par. The proceeds from are expected to be used to tender the company's US$23.925mn (out of an originally issued amount of US$200mn) secured bonds due 2024, to prepay other debt and for general corporate purposes. 

    The new bonds trade at cUS$100.346 (ALLQ) to yield c8.67% (g-spread 719bps; z-spread 724bps) and have traded within a range of US$100.178 (their low, on 2 October) to US$100.384 (their high, on 1 October). Although we do not have a rating on Unigel bonds, we believe the price was tight, particularly given the new bonds are senior unsecured and part of the proceeds were used to redeem a secured bond, leaving investors in the latest issue effectively subordinated to what they held before if they were investors in the 2024s.

    Regarding the issues currently in the pipeline (and that could price as soon as the market shows signs of stabilisation), we highlight the following:

    1) Mexico's Fomento Economico Mexicano, S.A.B. de C.V. (FEMSA) – one of the leading micro retailers in the region through small-format convenience stores (Oxxo in Mexico and other Latin American countries), a chain of drug stores, and retail service stations, as well as having a controlling stake in Coca-Cola FEMSA S.A.B. de C.V., the largest franchise and bottler of Coca-Cola products in the world, plus the second- largest owner of Heineken N.V. – is expected to come to the market with medium-to-long-term benchmark senior unsecured bonds, expected to be rated A-/A. 

    The company currently has two U.S. dollar-denominated bonds and one euro-denominated bond. Its US$300mn 2.875% senior unsecured bonds due 2023 (A-/A) trade at cUS$101.881 (ALLQ) to yield c2.32% (g-spread 89bps; z-spread 90bps), while its US$700mn 4.375% senior unsecured bonds due 2043 (A-/A) trade at cUS$115.235 (ALLQ) to yield c3.43% (g-spread 151bps; z-spread 180bps). Its EUR1bn 1.75% senior unsecured bonds due 2023 (A-/A) trade at cEUR105.909 (ALLQ) to yield c0.04% (g-spread 86bps; z-spread 49bps). 

    We would expect the new FEMSA deal will price to reflect the fact that the company is one of the region's most solid credits (perhaps even in global terms), given its business diversification, the high quality of its goods and services and its extremely strong global brand awareness, among other attributes. In this respect, we believe that FEMSA is one of a handful of Latin American companies whose comparable credits are its global competitors, such as the Coca-Cola Company itself, Pepsico Inc., AmBev and the like. We do not have a rating on FEMSA, but expect very tight pricing on the new issue.

    2) In Colombia, Promigas S.A. E.S.P. and Gases del Pacifico S.A.C. are expected to co-issue (under the name Promigas – PROMIG) senior unsecured bonds with intermediate maturity, expected to be rated Baa3/NR/BBB-. The company only has bonds outstanding in Colombian peso (COP) so it is difficult to estimate the size and tenor of the intended issue. 

    Within the Latin American integrated energy services universe, we believe Promigas should be valued relative to peers such as Pampa Energia (adjusting for the inherent Argentina risk of this company and its subsequent ratings differential), Petrobras (adjusting for size, scope, ratings and the company's well-developed credit curve), Transportadora de Gas del Sur (also adjusting for Argentina risk, ratings differential and limited business activities) and, perhaps most closely, to Ecopetrol (adjusting here also for scale and scope, but at a spread (discount) to ECOPET (Baa3/BBB-/BBB-) that we believe should range between 250bps and 350bps, depending on the size of the issue and its final maturity). No price guidance has been as yet given on this deal, but we will look closely at it to determine if there might be an opportunity for investors to realise an adequate return.

    3) In Paraguay, Rutas del Este (which is being marketed as Rutas 2 y 7 Finance Limited), a highway concessionaire building the Ruta 2 and Ruta 7 highways, is expected to come to the market with senior secured zero coupon bonds, with a weighted average life of 9.7 years and rated Ba1/BB/BB+. They will securitise contractual payment rights that constitute direct, irrevocable and unconditional payment obligations of the Republic of Paraguay. These payments will vest upon completion of pre-determined milestones related to the completion of construction benchmarks. Construction is being conducted by Sacyr Concesiones and Ocho A. 

    Comparing these to the Republic of Paraguay's US$1bn 6.10% senior unsecured bonds due 2044 (Ba1/BB/BB+) – which trade at cUS$121.755 (ALLQ) to yield c4.62% (g-spread 267bps; z-spread 299bps) and have 14.09 years' duration – and the Republic's US$500mn 4.70% senior unsecured bonds due 2027 (Ba1/BB/BB+) – which trade at cUS$108.725 (ALLQ) to yield c3.37% (g-spread 184bps; z-spread 19bps) and have 6.441 years' duration, we believe the Rutas zero coupon bonds should be priced c150-200bps wide to the sovereign (assuming the 9.7 years' average life) to yield c5.25-5.50%. There has as yet been no initial price talk.

    4) Finally, in Chile, AES Gener, one of the country's main utilities, is expected to come to the market with US$450mn 60-year (non-call 5.5 years) junior subordinated green bonds, expected to be rated Ba2/BB/BB. Initial price guidance is in the mid-6%s, which clearly reflects the bonds' subordination, extremely long maturity and "green" features. AES Gener, S.A. has a US$550mn 7.125% junior subordinated green bonds outstanding due 2079 (Ba2/BB/BB) trade at cUS$104.8 (ALLQ) to yield c5.94% (g-spread 451bps; i-spread 453bps) and four years' workout duration. Thus, we see minimal concession for the new bonds (if any, since the final price could be tighter than the current guidance). However, we believe that, given the tenor and characteristics of the bonds, they will generate strong demand, mainly from local pension funds. However, because of this and the fact that these funds tend to buy and hold, we believe the new issue will be quite illiquid after the initial issuance.