NEW YORK, Aug 4 (IFR) - LatAm credit markets put in a mixed performance on Tuesday as investors continued to turn their backs on Brazil in the face of a possible downgrade to junk next year.
While some on the buyside think rating agencies could show forbearance, large sellside shops such as JP Morgan are already forecasting the sovereign’s demotion to junk by 2016.
Either way, Brazilian asset prices are being pressured lower by uncertainty over the credit standing, as well as the ongoing corruption investigation at Petrobras.
That inquiry resulted this week in the arrest of former president Luiz Inacio Lula da Silva’s ex-chief of staff.
Spreads on Brazil’s five-year CDS were back near 305bp on Tuesday, while the sovereign’s 2025 continues heading south after an initial bounce last week following S&P’s decision to place the country’s BBB- credit rating on a negative outlook.
It is a similar story for Brazilian corporate credits, which were ending the day another 8bp-10bp weaker.
“We keep imploding,” said one New York-based trader. “There are just no buyers in Brazil.”
A weakening Real - which hit 3.46 against the dollar on Tuesday - and the country’s deteriorating economic scenario have the market particularly nervous about credits that generate local revenues but hold dollar debt.
General Shopping, for instance, has watched its senior and subordinated perpetual bonds go into freefall since late July.
The shopping center operator’s subordinated 12% perps are being offered at 35 cents on the dollar, while the senior 10% perps are being quoted at 48.50-50.50, according to one trader.
“The problem is that their assets are in Reais and their debt is in dollars - and coupon payments are becoming more expensive (as the currency depreciates),” said another trader.
Some investors are now making a clear distinction between the senior and subordinated debt as concerns about the company grow.
Overall the sell-off in Brazil is benefiting bond prices elsewhere, as investors seek safer alternatives.
The 6.875% 2022s recently issued by Sable International - the Cable & Wireless telco provider in the Caribbean and LatAm - have seen a nice bounce to around 101.00 since pricing last week at 98.644.
“There is some rarity value from the telco,” said the second trader. “I guess some people like the risk.”
Regional insurance company Sagicor priced a US$320m seven-year non-call four on Tuesday at 98.727 with a 8.875% coupon to yield 9.125%, the tight end of guidance of 9.25% (+/-12.5bp) and in line with initial price thoughts of low 9%. (Reporting By Paul Kilby)