By Paul Kilby
NEW YORK, July 13 (IFR) - Uruguay led the charge on Wednesday in what has become a busy week for Latin American primary bond markets, launching a US$1.147bn dual-tranche tap.
The sovereign joins a string of issuers rushing to market this week on the back of a robust rally in EM over the last few weeks.
Uruguay saw order books swell to around US$5.4bn before launching a US$400m tap of its 4.375% 2027s at T+205bp and a US$747m reopening of its 5.1% 2050s at T+275bp.
Strong demand allowed leads to narrow pricing a good 15bp from start to finish, while still offering investors a 5bp-15bp concession over a curve where the 2027s and 2050s were being spotted in the low 190s and 270bp area, respectively.
“The country has some issues with inflation and it is on negative outlook [from S&P], but that is largely priced in - and in this environment of low rates, it looks attractive,” said a New York-based trader.
Uruguay certainly fit the bill among investors still on the hunt for yield in a market where trillions of dollars of government debt is currently trading with negative yields.
“Investors are looking for yield and duration and this issue fulfills both those requirements,” a syndicate banker away from the deal told IFR.
Ongoing concerns about liquidity also have accounts favoring taps that add size to existing issues - and the relative steepness of the Uruguay curve added extra appeal for buyers comfortable with duration.
“The curve is one of the steepest in EM,” said Sean Newman, a senior portfolio manager at Invesco. “This adds to the attractiveness, as we think the curve will normalize to other LatAm sovereigns.”
Uruguay is coming in the wake of record inflows into EM debt funds last week, with investors anticipating a slower pace of rate hikes in the US and as concerns fade about the fallout over last month’s Brexit vote.
Spreads on JP Morgan’s EMBI Global Diversified Index narrowed about 54bp between June 27 and July 12 to 357bp, within reach of the 12-month low of 345bp seen in mid-July of 2015.
At this stage in the rally, however, some investors are stepping back and taking profits after a decent run-up in prices.
“Uruguay is catching the tail-end of the rally,” said the New York trader. “If they had issued last week it might have been better. Spreads and prices have gotten a bit fluffy.”
Investor push-back was already in evidence on Wednesday after pulp and paper company Argentina Celulosa threw in the towel on its seven-year non-call four bond despite keeping pricing at an attractive 10% area.
The deal was thought to be tainted by the poor performance of a recently issued five-year bond from Brazilian pulp company Eldorado.
That 8.625% bond fell to a low of 74.90 earlier this month, according to data from Trace, marking an approximately 24 point drop since pricing in June.
“It was hurt a lot by Eldorado and it isn’t a well known entity,” said Jason Trujillo, an analyst at Invesco. “They might try later.”
This comes as more junk credits come to market, partly thanks to the renewed surge of supply out of Argentina since market-friendly President Mauricio Macri came to power.
Indeed the vast majority of deals on the roster this week are sub-investment grade credits from the country.
This includes Banco de Galicia y Buenos Aires, the Province of Chubut, Petrobras Argentina and infrastructure company CLISA, which announced initial price thoughts of high 9% on a US$300m seven-year non-call four due to price on Thursday.
“This is a good sign,” said Invesco’s Trujillo. “The market is getting closer to a better distribution [of different credits], but investors are still cautious about high-yield credits ... that need a supportive growth backdrop.”
Conservative price action on a seven-year non-call four expected to price Wednesday by BB+ rated Mexican consumer finance lender Credito Real arguably underscores that reality.
Leads set guidance at 7.5% area (+/- 12.5bp) on the deal, giving them just a touch of leeway to tighten from initial price thoughts of mid 7% area.
“It is one of the higher quality specialty finance companies out of Mexico,” said Trujillo. “But you are subject to the ups and downs of the economy - and pricing reflects that.” (Reporting by Paul Kilby; Editing by Marc Carnegie)