A return to risk-off investment in mid-April ended inflows to high-yield and emerging market funds. However, bankers and investors report that strong underlying fundamentals will continue to drive offshore issuance from high-yield Latin American credits.
Inflows to high-yield funds had been positive for 18 weeks before the middle of April and emerging market funds had seen 12 consecutive weeks of inflows, according to fixed-income data provider EPFN.
So far in 2012, high-yield issuance makes up 18% of issuance, compared with 24% of total deals in 2011, but this is largely a function of greater volumes from high-grade issuers.
"At the start of this year we thought there would be plenty of high-yield issuance, and I would argue that there still will be," says Michael Schoen, head of Latin America debt capital markets at Credit Suisse in New York. "The market has been waiting for some of the huge investment-grade deals that had been swamping the market to clear, and concerns about Europe have added a little volatility, but the market is still open – although the timing of deals is probably a little more important than earlier in the year." Schoen reports a strong pipeline from high-yield credits, including many first-time issuers.
Karina Saade, co-head of BlackRock’s Brazil business, says that far from investors withdrawing from the market, cross-over orders from US high-yield accounts are making high-grade paper expensive. "While we think that right now LatAm high grade still offers an attractive pick-up versus the high-yield index, [BlackRock is] more heavily weighted to investment grade within the LatAm index," says Saade. "We are a little concerned about certain segments of LatAm high yield – specifically Brazilian food processors and airlines, where bonds have recovered more than is justified by the fundamentals."
Brazilian high-grade issuers are increasingly accessing the domestic market as the currency-swap component of the offshore issuance isn’t as favourable as in previous years.
Despite the new money coming into the region from previously US-dedicated funds, Saade believes the new investors are conducting sufficient due diligence. "Increasingly we have been seeing correlations among credit declines that show the market is being discerning," says Saade.
