Flash Fixed Income Report /

Recent new issues from LatAm banks: An array of options

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    12 December 2019
    Published byTellimer Research

    The new issues market has been particularly active in these last few weeks of 2019. We have seen strong appetite for new paper, resulting in levels that we regard as mostly fair, with some exceptions where we see attractive value.

    On 10 December, Bancolombia S.A. (BCOLO), Colombia's largest financial institution and one of the most solid banks in the region, issued US$550mn in 4.625% junior subordinated Tier 2 bonds due 2029, issued at par to yield a spread of 294.40bps over Treasuries. Since its issue, which we believe was attractive given that it came in within the original price guidance of the high 4%s and 5%, the bonds have traded slightly up and are currently at cUS$100.948 (ALLQ) to yield 4.41% (g-spread 277bps; z-spread 280bps).

    On 6 December, Brazil's Banco Daycoval S.A. (DAYCOV) issued US$350mn in 4.25% senior unsecured bonds due 2024, rated BB- by Fitch, and issued at US$99.444 to yield a spread of 274.2bps over mid-swaps. Banco Daycoval is, in our view, one of the better-managed financial institutions in Brazil, with a very orthodox management that focuses on the traditional and conventional banking practices of receiving deposits and lending to high-quality corporations and private consumers with a strong credit profile. The bank also engages in FX products, pension plans, insurance products, and private investment services. 

    However, given its medium size and its limited scope within Brazil, we believe the issue levels were fair to tight. The bonds have traded up slightly and are currently at cUS$100.05 (ALLQ) to yield c4.24% (g-spread 259bps; z-spread 262bps). With all caveats considered, such as the difference in size and scope between Daycoval and Brazil's two largest private banks, Itau and Bradesco, as well as the subordination of the comparable bonds, we see the premium that Daycoval pays over its larger peers as fair to tight. 

    Compared with Brazil's two largest private banks, we see that Itau Unibanco's US$1.87bn 5.125% subordinated bonds due 2023 (Ba3/NR/B+) trade at cUS$105.596 (ALLQ) to yield c3.37% (g-spread 173bps; z-spread 175bps), while Banco Bradesco's US$1.1bn subordinated 5.75% bonds due 2022 (Ba3/NR/B+) trade at cUS$105.9 (ALLQ) to yield 2.97% (g-spread 133bps; z-spread 133bps). Thus, we believe that the premium that Daycoval's bond offers relative to its country's peers is fair at best, particularly when compared with the bond we discuss next, from Banco BTG Pactual/Cayman.

    On 3 December, Banco BTG Pactual/Cayman (BTGPBZ) issued US$500mn in 4.5% senior unsecured bonds due 2025 (Ba2/BB-/NR), priced at US$99.435 to yield c4.625%. The bonds trade at cUS$101.114 (ALLQ) to yield c4.25% (g-spread 257bps; z-spread 260bps). As stated, we prefer BTGPBZ to DAYCOV given that, although BTG Pactual is mainly an investment bank, its business prospects are likely to improve more than that of its commercial banking peers. 

    We believe that, given the continuing decline in interest rates in Brazil and the dynamic equity market, BTG Pactual will continue to benefit (and profit) from meaningful primary activity in 2020. Thus, we believe that BTG Pactual's recent issue is attractive.

    In sum, we believe that the new issues provide investors with an array of options in the regional financial sector, with our preference for the Bancolombia and the BTG Pactual issues as the ones that provide investors with better value.