Banco do Brasil’s $500 million transaction this month shows that the senior unsecured bond market for Latin American FIG remains open, despite the raft of European issuers struggling to access the markets.
The bank’s successful transaction, the first FIG deal in the region since June, is significant as it shows that regional banks will be able to raise funds and might even benefit from a desire from FIG investors to diversify their portfolios with Latin American banking credits.
Banco do Brasil priced its five-year 3.875 notes at 99.413 to yield 4% or Treasuries, plus 312 basis points. Demand came largely from the US, Europe and Latin America, and bankers reported that retail demand was particularly strong. Despite the general atmosphere of risk aversion, the pricing achieved was attractive.
“Given the general risk aversion in the market, it was important to spot the right window to deliver this transaction, especially as there hadn’t been any other Latin America FIG deals since June,” says Roberto D’Avola, head of Latin America debt capital markets for JPMorgan, which led the deal with Banco do Brasil, Bradesco, Citi and HSBC. “Although there has been a lot of volatility lately in FIG globally, we felt strongly about the issuer. In addition to that, the fundamentals for financial institutions in our region are different from what we have seen in the rest of the world. We felt good about the window and it worked well. We achieved a very low yield – it is the lowest yield and coupon for five-year paper from a Brazilian financial institution.”
While European banks face difficulties in raising unsecured debt needed to rebuild regulatory capital – and look to covered bonds and private placement transactions – Latin American financial institutions offer FIG investors a growth story. Banks in the region are seeking to access the markets due to credit growth in their domestic markets exceeding growth in the deposits.
The larger countries in the region are growing particularly quickly and as these markets continue to grow, so do their banks’ balance sheets. With the ultimate users of credit demanding more loans, the banks will continue having an interest in funding themselves.
Latin American banks retain flexibility in financing options, with D’Avola saying he believes the bank could have completed a transaction with a longer tenor but the issuer’s strategy was to establish a strong, senior-unsecured five-year benchmark deal.
“Financial institutions in Latin America offer a great opportunity to investors," he says. "In other transactions, such as those we did for Bancolombia, we have seen that there is a lot of demand from global FIG investors. The financial systems in Latin America are robust. This generates an opportunity for some investors to diversify away from some of the markets they typically invest in. Having said that, no one is immune from the high volatility prevailing in the market, no matter how good an issuer. If it is not the right day, your deal might not be done.”
Bankers report a potential strong pipeline for the first six months of next year, not just in FIG, which is expected to be largely opportunistic in nature. New issue premiums are, generally, volatile, with some issuers paying up to 30 to 35bp, while the new issue premium on another deal is as low as 10bp.
“As volatility comes down, new issue premiums stabilize when the issuer is a quality credit that investors don’t have too many opportunities to get exposure to, and then NI premia get compressed,” says D’Avola.
For the full story, check out the December issue of Euromoney magazine.
