2017 started with the highest monthly issuance on record from Latin America and the Caribbean in the international bond market, with total issuance reaching US$ 24.2 billion in January, according to the report Capital Flows to Latin America and the Caribbean: Recent Developments, released by the Washington Office of the Economic Commission for Latin America and the Caribbean (ECLAC). Petrobras led the way, issuing a US$ 4 billion dual-tranche bond on January 9, encouraging other issuers to come to the market.
Although the pace of issuance slowed down in February and March, the total amount of debt issued by Latin American and Caribbean borrowers in the first quarter of 2017 reached US$ 45.4 billion, an increase of 53% from 2016 and the second highest quarterly amount ever issued in the region.
The booming pace at which debt sales by issuers from Latin America and the Caribbean took place in the first quarter of 2017, reflected strong investor appetite for higher-yielding bonds and an improvement in the region’s economic prospects, with Brazil beginning to emerge from a deep recession and Argentina’s economic conditions improving.
Few expected this kind of rally in the first quarter, as uncertainty regarding global trade policy was anticipated to adversely affect those countries heavily reliant on exports. But higher commodity prices and a stabilizing Chinese economy led to a change in perceptions toward these countries’ economic prospects, while some of the anxiety regarding global trade policy subsided.
The region’s strong international bond market performance was supported by a tightening in bond spreads, although the credit quality in the region continued to deteriorate: there were eleven sovereign downgrades in the first quarter, and only two upgrades.
Strong bond issuance was part of a broader comeback, which also boosted stocks and currencies. Most of the Latin American and Caribbean debt issuance during the quarter was denominated in U.S. dollars. If U.S. interest rates rise faster than expected or the dollar resumes its ascent, this could pose challenges for some issuers.
The highlights of the region’s performance in the international bond market in the first quarter of 2017 are:
• Oil quasi-sovereign companies and sovereigns led in size, with several issuances above US$ 2 billion.
• There were five debut issuances, as widespread investor interest in emerging market debt led to favorable terms for several Latin American and Caribbean issuers.
• Bonds with a green focus accounted for almost 4% of the region’s total issuance. While only one was labeled a green bond, there were other bonds with proceeds to be set aside for renewable energy investments. There were bond issuances with a focus on infrastructure as well.
• The three top issuers accounted for almost 70% of the first-quarter total: Argentina (29%), Brazil (22%) and Mexico (18%) were the region’s top issuers (sovereign and corporate issuance combined).
• Although dollar-denominated issuance accounted for 78% of the total, there were issuances in many other currencies, including the Euro, Chilean Peso, Peruvian Sol, Brazilian Real, Swiss Franc, Australian Dollar, Hong Kong Dollar, and Norwegian Krone.
Regarding the region’s financial market prospects, with record low market volatility, lofty asset valuations, excessive amounts of debt and a search for yield that results in large orders for emerging market bond sales, there’s certainly no shortage of challenges. However, given the health of the U.S. and global economies, at least for the time being investors see no interruption to the good mood hat has favored emerging markets since the beginning of the year.
The report also has a special chapter with an overview of last year’s trends. Bond issuance in 2016 amounted to US$ 129 billion and was 61% higher than in 2015.