Currency

EM local currency corp bonds — unfashionable but important


Not everyone is as enthusiastic about Mexican peso corporate bonds sold to international investors as América Móvil CFO Carlos García Moreno.

After a five year issue priced last Friday, the telecoms company is now three deals into its Ps17bn ($1bn) so-called global local currency programme. Deals are registered with both US and Mexican regulators and therefore sold seamlessly to onshore and offshore investors.

García Moreno has big ambitions. He told GlobalCapital when he launched the programme last year that he wanted the bonds to be the “prime non-governmental asset” in Mexico, and he wants América Móvil to lead what he sees as huge growth potential for the Mexican corporate bond market.

Yet it can be hard to track down bond investors with the same excitement.

As is to be expected of one of the best rated and most sophisticated issuers in Latin America, the deals are going just fine. But with América Móvil offering investors just 90bp over the Mexican government’s local curve, the pick-up is hardly juicy. Most EM corporate bond buyers do not want to take currency risk on top of credit and sector risk. Equally, funds dedicated to EM rates and FX plays are not interested in layering credit risk over country risk.

Inevitably, these deals fall into cracks somewhere in between the two, and often attract little more than a shrug when GlobalCapital quizzes bankers and portfolio managers about them. Some bankers even appear to enjoy scorning global local currency corporate bonds. They point to the minority participation of offshore buyers and suggest these are fruitless endeavours.

Such was the case when private sector lender Banco de Crédito del Perú included an internationally offered nuevo sol tranche in its senior bond issue at the start of the year. Demand was understood to be mostly local.

With América Móvil’s peso bond, around a quarter went to international buyers — a far lower percentage than Latin American sovereigns usually achieve when they internationally syndicate bonds in their own currencies.

Nevertheless, for América Móvil, consistently bringing foreign buyers to pesos is an achievement that should not be underestimated, even if they remain a minority in order books. Moreover, the cause this issuer is dedicated to is an important one for emerging markets bonds.

And it is true dedication. América Móvil started a similar programme more than a decade ago, breaking ground with the dual registration structure. But the scheme ran aground as América Móvil embarked on a multi-year deleveraging strategy that meant it stopped issuing and left the securities painfully illiquid.

This time, the issuer has promised consistent issuance, and thus wants to overcome one of the most significant barriers to attracting international investors to local currency corporate bonds: the lack of secondary market liquidity. With three deals in nine months, it is so far delivering.

All this matters for EM corporate finance. Plenty of companies in emerging markets would prefer to have funding in their own currencies, yet have been squeezed into dollar markets because they offer the size and tenor their domestic markets cannot.

At the same time, there is a competing force. Some countries — particularly Brazil — are experiencing a rapid expansion of corporate bond markets. This is taking potential LatAm issuers away from New York syndicate desks, as funding conditions have become more attractive locally.

With more EM corporate dollar bonds being repaid and repurchased than issued, the asset class risks losing some of the diversity that makes it attractive.

It therefore makes perfect sense to marry these two worlds. There should be no reason an investment manager that invests in the Brazilian rates market and lends to Brazilian retailers could not join those capabilities and buy Brazilian retailers’ bonds in reais. And there is only so far the development of domestic markets can go without bringing in international capital.

Couple this with a fast-growing pensions sector, as is emerging in Mexico, and the funding panorama could be transformed.

It may not be easy, but EM issuers should not give up on this frontier. When there is so little global local corporate issuance from EM, anything is better than nothing. Deals like América Móvil’s could be building blocks for a more sustainable and efficient financing environment for the companies that often drive EM economic growth.

Sure, quarterly issues from a single-A rated company at a double digit spread may not be the most thrilling spectacle in the comparatively racy EM bond market. But DCM bankers should be on the look-out for other companies ready to dial up similar programmes.



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