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Appetite for Codelco highlights strong Chilean market

High levels of oversubscription on Codelco’s local currency bond suggests the country’s local markets remain liquid as its outlook and fiscal situation continues to stabilise.

Aug 26, 2016 // 1:26PM

Codelco, the Chilean copper giant has issued CLP262bn (US$395mn) in an unscheduled market tap to secure funding for its investment programme over the next year.

Low copper prices have affected the company’s investment programme according to S&P. Copper is currently trading at US$209.80/lb, as opposed to US$411.75/lb five years ago.

Codelco’s 10-year bond carries a spread of 81bp over the Chilean Central Bank's 10-year notes, and a yield of 2.09%.

According to the company, the yield is the lowest ever for a 10-year bond in the Chilean markets.

Adam Collins, an economist at Capital Economics, said that Codelco likely tapped the local rather than international markets because the company already has a reasonable amount of foreign currency debt.

The company’s total debts have risen substantially over the last two years. Codelco had US$14bn in total debts as of June 2015, with a net-debt to EBITDA of 3.4x. This was against US$13bn in total debt as of June 2014 and a net-debt to EBITDA of 2.3x.

Despite rising leverage at Codelco, the company was still able to attract significant demand for its most recent transaction, with the local currency issue being oversubscribed by 2.6x.

Such levels of demand highlight the strength of Chile’s domestic markets.

“Chile’s markets are definitely one of the most liquid in the region, alongside Brazil, although the depth of the latter’s local markets are down to the size of the country,” Collins noted.

In addition to receiving financial support from the local markets, the company is likely to benefit from government funding over the next two years.

The government has pledged to put US$4bn into Codelco by 2018, however this could prove to be credit negative for the country, as similar events elsewhere in the region illuminate. Moody’s lowered the outlook on Mexico’s sovereign credit rating from stable to negative in March, citing contingent liabilities in the form of possible government support for state-owned Pemex and its impact on the fiscal consolidation process. The following month, the Mexican government announced plans to provide Pemex with a US$4.2bn bailout.

Collins said that although a potential ‘bailout’ for Codelco feeds into the broader negative picture of Chile’s public finances, there is not a significant amount of concern at present.

“The numbers that we are dealing with in terms of Codelco are not especially large.”

Chile’s public finances have fallen steadily from a surplus of 1.87% of GDP in 2011 to a deficit of -2.2% of GDP in 2015.

However, public debt remains very low in Chile, and despite consistently rising, government debt to GDP stood at 17.5% as of last year.

“The government is already in the process of tightening fiscal policy, albeit quite gradually because they understand that the overall outlook is relatively negative,” he continued.

The country’s benchmark interest rate was kept on hold at 3.5% following Banco Central de Chile’s last policy meeting on August 11. There are indications from the ratings agencies that they have an increasingly negative view on Chile, although it is still one of the highest rated countries in the region. Chile is rated AA- stable by S&P Global Ratings, Aa3 stable by Moody’s and A+ stable by Fitch.

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