SAO PAOLO _ Latin America borrowed the most on record last month, squeezing the last juice from an era of historically low interest rates. The pace is all but certain to slow as yields rise and investors contemplate presidential elections in three of the region's largest economies.
Companies and governments announced sales of $37 billion in bonds in January after tapping markets for a two-decade high of $240 billion last year. Yet global yields have already marched higher as markets price in more tightening this year from the U.S. Federal Reserve. Voters go to the polls in Brazil, Mexico and Colombia from May through October, stoking political uncertainty that could lead investors to demand bigger premiums and companies to delay borrowing plans.
"There are three potentially important elections that are causing people to think about 2018 with a little more of a pragmatic mindset," said Chris Gilfond, head of Latin American debt and equity capital markets at Citigroup Global Markets Inc., the top bookrunner for the region's bonds in 2017, according to Bloomberg rankings.
Citigroup and Brazil's Itau BBA expect 2018 bond sales to fall short of last year. Deutsche Bank Securities and JPMorgan Chase & Co. forecast volume to stay flat relative to 2017. Here's what top executives at the four banks have to say:
_Citigroup: Volume to slide
Issuers are front-loading their financing needs before the elections, so activity in the year's second half will probably be lower, bringing down total volume by 5 percent to 10 percent, Gilfond said. Still, there's no shortage of interest in Latin America _ and emerging markets in general _ as investors still have money to put to work. He foresees more debt issuance to pay for infrastructure.
"Oil companies own a lot of midstream infrastructure, a lot of the pipes they use to move their product to market," Gilfond said. "A lot of companies are transferring ownership of that infrastructure and maintaining the rights to use and control it."
_Itau BBA: Watch for volatility
As the recent selloff ebbed, market volatility will also be an important determining factor for the pace of new bond sales, according to Baruc Saez, the New-York based managing director of international fixed income at Itau BBA, which is among the top five bookrunners for Latin American bond sales in 2017. The appetite for sovereigns, quasi-sovereigns and blue chip issuers is still strong, but elections, rising U.S. yields and volatility will probably hinder activity.
"The impact on volume will depend on volatility during the rest of the year but it seems likely that it will fall short compared to 2017," Saez said.
_JPMorgan: Fundamentals unchanged
Lisandro Miguens, head of Latin America debt capital markets at JPMorgan, the No. 2 bookrunner, says fundamentals haven't changed. He expects similar levels of primary issuance this year or even a bit higher as economic growth fuel corporate capital expenditure.
Yields still near record lows, debt maturing in 2019 to 2022 and the expectation of higher rates ahead in the U.S. can push issuers into deals with liability management purposes _ as for extending maturities or reducing costs_ but he also highlights the election calendar.
Even so, "Net, net, I believe mostly it'll be positive," Miguens said. Sellers "fully utilized" January as the first opportunity to raise money, he said. More opportunities may arise in March, April, September and October because of large amortizations and coupon payments.
_Deutsche Bank: Much the same
"Investors see the global selloff as emanating from developed markets, and are still optimistic on the underlying fundamentals in emerging markets, and particularly Latin America," said Matthew Dukes, director of debt capital markets for Latin America at Deutsche Bank Securities in New York. He expects similar issuance volumes to 2017, with the potential for more frontloading ahead of the elections and higher rates.
Hard-currency bonds will remain the preferred format for global emerging-market investors, but appetite for local-currency debt will remain, according to Dukes. Investors may demand higher new-issue premiums to compensate for the additional risk of buying the debt.
"The wild card will of course be underlying rates," he said. "The selloff this year has been manageable as rates still remain low on a historic basis. However, if we continue to see a widening here, that could further dampen appetite for local currency issuance."
An economist's view
Neil Shearing, chief emerging-market economist at Capital Economics, says there are good reasons for issuers to tap markets now. Spreads are still low and it's only a matter of time before yields drift up, given the political risk.
"If I was advising an issuance I'd say: Do everything you can to frontload any borrowing you need and do it as soon as possible," Shearing said. "I don't see how this environment, this read on emerging-market credit can be sustained at these narrow rates for very long."
