Flash Fixed Income Report /

LatAm primary market still hot with three new issues

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    18 July 2019
    Published byTellimer Research

    The LatAm primary market continues to show strong dynamism with three new issues in the pipeline.

    First, in Peru, Lima Metro Line 2 Finance II Ltd. (LIMAMT) is expected to come to market with a US$539.3mn, 10.3 years average life amortising bond due 2036. The company is rated Baa1/BBB/BBB and the issue will consist of senior secured bonds that will have a quarterly coupon and amortisation payments commencing in July 2021. The company has a US$-denominated bond outstanding – a US$1.154bn, 5.875% senior secured (1st lien) bond due 2034, currently trading at cUS$107.703 (ALLQ) to yield c4.77% (g-spread 277bps; z-spread 276bps) and a duration of 6.702 years.

    Initial price talk (IPT) for the new issue is in the high 4.0%, which we believe is very tight given that the currently outstanding bond is larger in size, has a shorter duration and trades in the high 4.0%. Therefore, we don't see an incentive to invest in this bond at this initial price guidance other than for those investors that would like to add a high-quality credit to their portfolios. But even then, why not just buy the current outstanding bond instead? It will certainly be interesting to see how strong the demand is for the new issue at these levels and where the bond actually prints.

    Second, Cosan Ltd. (CZZ), one of Brazil’s largest conglomerates (engaged in activities ranging from sugar, ethanol production to energy, agribusiness and logistics among others) is planning to issue a “benchmark size” senior unsecured bond, which we believe could be in the cUS$500mn-750mn range, with an “intermediate maturity” between 7-10 years and should be rated BB-/BB. In our view, the company is one of the strongest and better diversified corporations in Brazil.

    The proceeds of the new issue will be tendered for Cosan’s bond outstanding, a 5.95% coupon with US$500mn in principal and matures in 2024. This bond is currently trading at cUS$106.24 (ALLQ) to yield c4.57% to maturity (g-spread of 275bps and a z-spread of 27bps). The bond has a duration of 4.459 years.

    If the new issue is a seven-year bond, it should price in the low 5.0% and if it is a 10-year, it should price in the mid-5.0%. There is no IPT yet as the roadshow (and pricing) is expected to start on 22 July.

    Third, and finally, Argentina’s YPF Energia Electrica, S.A., also known as YPF Luz (YPFEAR), is expected to come to market with a senior unsecured bond, with a seven-year (non-call four) maturity, and “benchmark size” rated B2/B, which we believe could range between US$200mn-300mn based on the company’s currently outstanding US$100mn, 10.24% bonds due 2021 (not rated). These bonds are currently trading at cUS$108.241 (ALLQ) to yield c6.58% (g-spread 474bps; z-spread 465bps).

    We believe this is an expensive level, so much so that the IPT for the new issue is in the mid 10.0%. This makes sense, particularly given where the parent company YPF, S.A. printed its most recent bond on 24 June, with a US$500mn principal amount, an 8.50% coupon due on 2029, and an issue price of US$98.356. These bonds are currently trading at cUS$98.568 (ALLQ) to yield c8.72% (g-spread 665bps; z-spread 676bps). Therefore, we believe the IPT for YPF Luz’s new issue is attractive, pending the actual final size.

    The issues so far…

    With companies in the region already starting to report Q2 19 results, we expected a slowdown in new issuances, but recent activity suggests that the LatAm primary market is still on fire. This is a  very positive sign, particularly given that Argentinian companies are finding their way back to the market, and that companies in other LatAm countries are finding attractive conditions that have resulted in what has mostly been an overbought market, as demonstrated by the low yields of most of the recent prints.

    In general, spreads for most of the recent issues have tended to be on the tight side, with the exception of Mexico’s Docuformas. The Mexican non-banking financial institution (NBFI) printed a US$300mn, five-year bond yesterday, with the highest coupon we’ve seen in the past few months (10.5%). This was above even the ‘yieldy’ Argentina credits that have come to market over the past few weeks. We understand that Docuformas’ new issue was barely oversubscribed (cUS$440.0mn in orders) despite such a high coupon. We also note that it is very unusual that the NBFI had to print at such high levels.