Fixed Income Analysis /
Global

LatAm sovereign issues: Can't seem to price low enough

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

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    Tellimer Research
    23 January 2020
    Published byTellimer Research

    Latin American sovereign issuers have come out of the gates with gusto at the start of the year, greeted by extremely constructive markets – funds are replete with cash and looking for places to put it to work. 

    Mexico, Chile, Colombia and even the Dominican Republic are taking full advantage of this apparently unlimited demand, and we have seen new issues come out in both U.S. dollars and euros, and across the ratings spectrum. 

    Although we believe that the risk of market saturation is increasing, we do not see that happening just yet, demonstrated by most issuers printing below their initial price guidance. This can be seen in the following forthcoming and recent transactions.

    Dominican Republic

    The Dominican Republic (DOMREP), rated Ba3/BB-/BB-, is planning to launch a two-tranche bond as follows:

    • Tranche A: A "benchmark-size" (which we expect to be US$1bn) 10y senior unsecured bond with initial price guidance in the "high 4% area". Looking at DOMREP's outstanding US$1.3bn 6% senior unsecured bond due 2028, we see it trading at cUS$111.474 (ALLQ) to yield c4.37% (g-spread 266bps; z-spread 272bps). The bond has a duration of 6.865 years. Thus, we believe final pricing for the new 10y tranche will likely be closer to 4%.
    • Tranche B: A "benchmark-size" (also US$1bn in our view) 40y bond with initial price guidance of 6.25-6.375%. The sovereign's longest outstanding U.S. dollar-denominated bond is its US$1.5bn 6.4% bond due 2049, which we see trading at cUS$109.217 (ALLQ) to yield c5.75% (g-spread 357bps; z-spread 390bps) and 14.1 years' duration. Based on this reference point, we believe final pricing for the new 2060s could be close to the lower end of the guidance, perhaps even 6% flat.

    Chile

    Regarding recent issues, the Republic of Chile (CHILE) yesterday priced its two-tranche U.S. dollar-denominated bonds as follows:

    • Tranche A: US$750mn 2.55% bond due 2032, at a re-offer price of US$99.78 to yield 2.571% or T + 80bps.
    • Tranche B: US$900mn 3.50% bond due 2050, issued at a re-offer price of US$104.277 to yield 3.275% or T + 105bps.

    We had estimated that Tranche A would be between US$1bn and US$1.5bn (our estimate fell short of the actual issued amount in the end), and that final pricing would be lower than the initial price guidance, which at the time of the announcement was in the "T + 95 bps area". We stated that, in our view, this tranche could be between T + 90bps and the guidance, particularly since the recent euro-denominated bond priced squarely within the guidance. However, strong demand allowed Chile to print 10bps below initial indications.

    Regarding Tranche B – which was, as we stated yesterday, a tap of the sovereign's outstanding 3.5% senior unsecured bond due 2050 and had initial price guidance of T + 120bps – we also said that guidance would hold; however, in this case, too, Chile was able to print below initial indications.

    Colombia

    Finally, regarding the Republic of Colombia (COLOM), it was announced that the sovereign would issue two tranches: 

    • Tranche A: Initially announced as consisting of a US$500mn (that sources said would not grow) 10y senior unsecured bond with initial price guidance of T + 155bps, this tranche ended up being a whopping US$1.35bn senior unsecured issue, due 2030 with a 3% coupon, a re-offer price of US$98.908 and a final spread of T + 135bps.
    • Tranche B: A US$300mn increase of its 5.2% senior unsecured bond due 2049 (taking the total outstanding amount to US$1.8bn), issued at a re-offer price of US$121.025 for a spread of T + 173bps. We had expected final pricing to be between T + 195bps and T + 200bps based on initial price guidance of T + 200bps.