Borrowing costs jumped in the wake of Donald Trump’s unexpected U.S. presidential election victory in November. Now that volatility has started to cool
Call it the Trump premium.
Borrowing costs jumped in the wake of Donald Trump’s unexpected U.S. presidential election victory in November, inducing Latin American governments and companies to postpone at least $10 billion in international-bond deals. Now that volatility has started to cool, as most of these issuers eye a return to market in the first quarter of 2017, the worry is that so many deals competing against one another will further drive up yields.
"Now that Treasuries seem to have stabilized in new levels, I believe we are going to have a very active January," said Baruc Saez, co-head for international fixed income at Banco Itau BBA, the corporate and investment-banking unit for Itau Unibanco Holding SA. “In this new environment, investors’ and issuers’ mindset and financing strategies are adjusting to reflect asset re-pricing."
U.S. 10-year Treasury yields, the benchmark for everything from U.S. mortgages to dollar bonds in developing nations, surged from around 1.80 percent to 2.60 percent after the U.S. election on expectations increased government spending would spur economic growth. With the U.S. central bank signaling accelerated policy tightening next year to counter inflationary pressures, yields have dipped but are still trading near two-year highs.
Latin American credit spreads also rose after Trump’s election. Brazil’s five-year credit-default-swap spreads rose 22 percent to 321.76 basis points on Nov. 14, Argentina’s CDS spread added 23 percent to 464.11 basis points on Dec. 1, while Mexico’s jumped 33 percent to 193.01 basis points in Nov. 18.
Latin American governments and corporations issued a total of $133.6 billion in international bonds in 2016, a 65.2 percent increase over 2015, according to data compiled by Bloomberg. In 2017, the region will face $75 billion in bonds maturities, the data show. Baruc estimates about $80 billion in issuance this year from the region.
One of the first companies to put bond sales on hold was Barranquilla, Colombia-based Tecnoglass Inc., which provided windows for the Trump Towers resort in Florida and Panama City’s Trump Tower. Its expected sale of as much as $225 million in November was suspended. Aeropuertos Argentina 2000, Argentina’s largest airport operator, also postponed a bond sale, as did the Argentine provinces of Entre Rios, Tierra del Fuego and La Rioja.
The government of Argentina had also considered rolling over in 2016 a $7 billion bond maturing in April, but delayed the transaction to probably the beginning of this year, said four people familiar with the matter.
"In addition to the rollover, Argentina may need to sell another $28 billion" in 2017, including sovereign and provincial debt, said Federico Perez, portfolio manager at Axis, the brokerage founded by the nation’s current Finance Minister Luis Caputo. "It would be good to receive some guidance on timing from the government, to keep the market ready to digest these sales."
Argentina is analyzing tapping the international bond markets in January, Caputo said Dec. 31.
"The country is in talks with eight banks and plans to sell during the second or third week of January an undisclosed amount in different tranches," he said.
Argentina corporates will sell about $7 billion in bonds on the international markets in 2017, said Diego Jordan, chief operating officer at BACS Banco de Credito y Securitizacion SA.
Among those that may price in the beginning of 2017 are Central Puerto SA and Genneia SA, which has taken a $102 million syndicated loan in case a "bottleneck" in bonds drives up yields before it can sell its postponed $400 million of bonds, a company official said, asking not to be named as the plan is private.
Argentina’s Pampa Energia has hired Deutsche Bank AG and Citigroup Inc. to market as much as $1 billion of bonds next week, while YPF SA has board permission to sell as much as $1 billion.
In the Argentine electricity energy sector alone, some $2 billion of financing is needed, Alvaro Anzola, an executive in charge of General Electric’s GE Power unit sales in Latin America, said in a telephone interview from Miami. The company is in talks with suppliers and banks to explore ways to mitigate the effects of the yield jump, he said, citing the idea of government warranties for thermal generation projects.
Some Latin American issuers already came to the market in December as Treasury yields started to stabilize. Pemex SA, the state oil producer from Mexico, issued $5.5 billion, while the government of Ecuador sold $750 million.
For Brazilian companies, 2017 should be also a very active year in part due to the anticipation of debt rollover given the presidential elections in 2018, which usually add instability to markets, said Pedro Frade Rodrigues, head of Itau BBA’s international debt capital markets for the nation.
“I would be very surprised if those that have maturities coming due in upcoming years, and are able to gather investor demand, would not come out," he said. There should be more bond issuance in 2017 than in 2016, “if Brazil is able to successfully approve its fiscal reforms and establish an overall better economic scenario."
So while the Trump era represents a step into the unknown, many signs point to a strong year for debt financing.
“We expect interest rates to be volatile but, generally, the story for Latin America in 2017 should be more positive than the last two years," said Sandy Severino, head of international markets for Grupo BTG Pactual. "That should be true not just for Brazil, but for the whole region. However, given the uncertainty about the impact of the Trump administration on Mexico, we expect greater volatility there."