Strong investor appetite for emerging market debt spurred a substantial increase in high-yield issuance in Latin America in the first half of 2011, boosting the amount of debt issued by junk-rated companies and governments close to that of investment-grade entities, Thomson Reuters data and interviews with emerging market analysts show.
"After the tremendous rally in the investment-grade names last year, there is not much room for those companies to tap the market now, and investors are willing to go down the ratings spectrum to seek higher returns," said Anne Milne, Head of Global Emerging Markets Corporate Credit Research at Bank of America Merrill Lynch.
"At the same time, it is not until recently that many of the high-yield companies have reached the critical mass they need to access the market." In the first half of 2011, high-yield issuers accounted for 48% of new debt issued in Latin America, according to Thomson Reuters data that is based on Standard & Poor's ratings. That is a sharp increase from the 27% share registered by the asset class over the same period in 2010. Speculative-grade issuers in Latin America inked a total of 34 deals in the period compared to the 22 priced by investment-grade borrowers.
The biggest deal came from Venezuelan state-owned oil company PDVSA, which in February sold $3.0bn of 10-year notes via Citigroup and Credit Suisse. The bonds were rated B+ by S&P. It is no surprise that the bulk of new junk-rated deals originated in Brazil and Mexico, which are home to two of the deepest and broadest capital markets in the region.
In a research report on Latin American corporates issued last week, Moody's Investors Service calculated that in the first half of 2011 more than 64% of new issuers in Brazil were rated below investment grade. High-yield issuance has particularly increased in the agricultural sector, two analysts noted, mostly as a result of Brazilian sugar and ethanol companies tapping the market. "There is significant demand for high-yield debt and (this trend) will probably continue for some time," said Eduardo Uribe, managing director for corporate & government ratings at Standard & Poor's in Mexico City.
In Mexico, where local investors only buy investment-grade paper, demand from abroad has remained strong and corporates "are actively tapping the market to refinance debt or provide for new capital expenditure," he said. Among smaller players, Argentina has experienced a boost in speculative-grade issuance since the beginning of the second half of 2010, after the country successfully completed a second round of restructuring on its defaulted sovereign debt.
Argentinean companies might have a harder time coming to the market in the second half of the year due to the upcoming presidential elections, he said. Bank of America Merrill Lynch expects issuance in Latin America to continue on an upward trend for the rest of 2011 and to reach US $90 billion by the end of the year, up 20% from the US $75 billion issued for all of 2010.