Latin Finance - July/August 2011 - 16

debt fund manager survey

2007 Again?

Ever since LatAm’s double and single B issuers returned to the bond markets in the second half of 2009, a chorus of voices have increasingly commented on the buyside’s short-term memory and whether the market may see a repeat of 2007 when a string of weaker credits hit the market. The 2008-2009 global credit crisis wreaked havoc on all asset classes, but the proliferation of poor credits bought with little consideration just before Lehman Brothers exacerbated the problem. For now, however, many investors think the underlying credit story is much stronger than in the past. “It’s a mixture of high-quality companies and lesser quality companies coming to the market. You just have to do your credit work, and avoid the ones you don’t like,” TCW’s Robbins says. “There is enough quality out there, so there are ample securities to invest in. You do get a couple that slip through, but for the most part we find there are still decent quality issues.” Robbins explains that spreads are still attractive, and the diversity that comes with increasing volumes is a plus. Some of the cheaper EM issuance is coming out of China, where corporate governance is more a concern, making a lot of Latin issuers stand out for their relative strength against other emerging markets. “Spreads are probably in the middle of the range, and with the market so strong until recently, we’re more circumspect of the flood of higher-yielding issuances that have come out,” says Booth. He says he doesn’t feel this is the right environment to be stretching too far for yield, though he continues to add opportunistically. Milne points out that use of proceeds is generally more responsible in 20102011. LatAm also compares favorably to new issuance this year from Eastern Europe and Asia, particularly China. The emergence of possible irregularities at Sino Forest in June highlight concerns investors have with first time borrowers with little history. “Looking at global EM corporates, there is concern about quality and structure this year. However, the majority of my concerns are restricted to Asia, and less to Latin America,” says Polina

Kurdyavko, Senior Portfolio Manager at BlueBay Asset Management. As the credit crisis fades farther into the rear-view mirror, structures are becoming more ambitious. For instance, Chilean bus company Inversiones Alsacia was trading around 95 in early June after

The Other Side of 4%

Adding Opportunistically: MainStay’s Booth widening yield to get a structured deal done in March. Yet OGX’s decision to tighten covenants shows it may still be a buyers’ market and that investors remain self-disciplined. “So far we’re not seeing real slippage in the covenants or the structure of these bonds,” says Oliver. Though there are more high-yield deals this year, Panait says she does not see many that are risky, and LatAm in particular has offered a healthy mix of investment-grade and high-yield transactions. “We continue to see favorable environment for high-yield issuance, and for LatAm issues in particular,” says Alberto Ardura, head of LatAm DCM at Deutsche Bank. Exogenous shocks would pose a bigger threat to the current new issue window for high-yield corporates, he says. Ardura says his bank continues to see crossover interest for LatAm corporate issues, and also notes a greater participation from private banks, family offices, and institutional investors based in LatAm, that are also helping to keep demand strong.

The remaining question is whether funds will flow the other way once US Treasuries rise, or when growth in the US and other developed markets picks up. Inflation in the region has certainly made headlines this year, but the main risk for bond investors seems to be a rapid shift in the interest rate conditions that have prevailed since the credit crisis. As commodity prices dip slightly and level off, Mainstay’s Booth says inflation in emerging market countries is probably peaking. An increase in US rates could come once developed market central banks move to contain any potential price rises or when growth resumes. However, with a US recovery struggling, the number of observers expecting the US Fed to begin hiking this year has shrunk. Deutsche’s Ardura says that US interest rates aren’t expected to rise for the next three to four quarters. “There is some concern that the run we’ve had in risk assets has been due to low US interest rates, and now this environment is starting to change,” Osses says. “In six months to a year we’ll find out which risk assets were worth it and which were not.” Regardless of the timing, the speed of such a hike would be the most important component in terms of sustaining LatAm corporate issuance. “If there is a gradual move with interest rates, that gives the market time to be comfortable with it,” says Panait, whose base-case scenario is a slow rise. Yet while there are concerns about US rate rises and volatility, high-yield corporates have a negative correlation with US Treasuries and hence act somewhat as a buffer, Kurdyavko says. “I don’t think raising US interest rates is going to have a huge negative impact on corporate issuance in emerging markets,” says Chris Wilder, who helps manage Stone Harbor’s EM portfolio. While rate hikes have a greater impact on investment-grade names, high-yield is not necessarily immune if a sharp climb in US yields provokes a wider spike in risk aversion. “I don’t think we’re at a point yet where we should expect to see a major impact on new issuance,” he adds. LF

16 LatinFinance

July/August 2011

Latin Finance - July/August 2011

Table of Contents for the Digital Edition of Latin Finance - July/August 2011