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Latin America Credit Markets Brief: July 5 - July 19

CAF approves US$592mn credit facility to Latam nations - Grupo México to get US$1.55bn loan from BBVA and Credit Suisse - A major new oil field discovered in Mexico – Ex-Brazil leader Lula convicted - Brazil's Senate approves labour reform bill - The province of Buenos Aires taps European markets with EUR500mn bond – PDVSA seeks to renegotiate debt

Jul 19, 2017 // 4:49PM

Global Themes

US president Donald Trump met his Mexican counterpart Enrique Pena Nieto on the side-lines of the G20 summit in Hamburg and pledged to continue the NAFTA negotiations. "We're negotiating NAFTA and some other things with Mexico and we'll see how it all turns out, but I think that we've made very good progress," Trump said on Friday after the meeting, adding that he still expects Mexico to pay for the border wall. Pena Nieto, whom Trump called his "friend", added that the meeting would "help us continue a very strong dialogue" on NAFTA, but did not comment on the border wall payment suggestion.

Corporacion Andina de Fomento (CAF), a Latin American development bank, approved US$592mn credit facility to finance development projects in Argentina, Bolivia, Ecuador and Uruguay. This includes infrastructure, water and energy projects in the four selected countries.

Corporacion Andina de Fomento (CAF), issued international bonds for US$1.25bn maturing in 2020 with a 2.2% coupon. Notes were sold at a price of 99.905% with an initial yield of 2.24%.  Bank of America Merrill Lynch, Barclays and Deutsche Bank managed the transaction.

The global sovereign credit cycle reached an inflection point at the end of last year and has turned less negative in 2017, Fitch Ratings said in its mid-year sovereign review and outlook. Fitch said the biggest constraint on ratings is "high and still-rising government debt levels" in both developed and emerging markets.

The worldwide shift into alternative assets gathered pace in 2016 as more institutional investors turned to property, infrastructure, private equity and hedge funds in search of better returns, the Financial Times reported this week. Asset purchasing programmes by central banks in response to the 2007-08 financial crisis have led to strong gains and stretched valuations across many publicly traded bond and equity markets, helping to make alternatives more appealing to investors. Total assets managed by the 100 largest alternative investment managers rose to a little more than US$4tn at the end of 2016, up a tenth on the previous year, according to the latest annual Willis Towers Watson/FTfm Global Alternatives Survey.

Mexico

FHipo, a Mexican investment trust issued US$185mn in asset backed local securities, with Banorte and Actinver managing the transaction. 

Grupo México, a mining conglomerate owner of Mexico’s biggest railway network, got a US$1.55bn loan from BBVA and Credit Suisse as well as US$250mn from Banco Santander to finance the acquisition of Florida East Coast Holdings Corp (FEC). The remainder US$350mn was funded with GMXT's own resources and US$97mn in debt at the FEC level.

Mexican oil giant Pemex tapped the international markets with a double-tranche bond worth US$5bn. The first US$2.5bn tranche matures in 2027 with a 6.5% coupon, and was sold at a price of 105.487% with an initial yield of 5.83%. While the second tranche matures in 2047 with a 6.75% coupon and was sold at a price of 98.094% with an initial yield of 7.01%. Banco Bilbao (BBVA), HSBC, JP Morgan and Banco Santander managed the transaction.

Financiera Independencia, a Mexican microfinance lender, issued international bonds for US$250mn maturing in 2024 with an 8% coupon. Notes were sold at a price of 98.69%. Barclays, BCP Securities and HSBC managed the transaction.

Mexico should receive around US$2bn in investment during the lifespan of the onshore oil and gas contracts awarded, said Juan Carlos Zepeda, the head of the country's national oil industry regulator. In a news conference, Zepeda said he expected the 21 areas awarded in two auctions to yield an additional 79,000 barrels per day (bpd) in crude production by 2025 as well as 378 million cubic feet per day of additional natural gas output, Reuters reported.

A major new oil field has been discovered in Mexico by an international consortium, raising hopes that the landmark reform to open the country’s oil fields to foreign entities is beginning to pay off, the FT reported. Talos Energy of the US, Mexico’s Sierra Oil & Gas and Premier Oil of the UK announced the “historic and significant” find in the shallow waters of the Gulf of Mexico, which is deemed to be fifth-largest discovery in the world over the past five years.

IFC issued international bonds for MXN1.75bn maturing in 2027 with a 7% coupon. Notes were sold at a price of 100.968%. TD Securities acted as the sole bookrunner

Standard & Poor's revised Mexico's sovereign credit outlook up to "stable" from "negative" and commended the government's efforts to rein in a surge in debt. Last year, the ratings agency warned it could eventually downgrade Mexico if debt continued to grow, but the agency pointed to the government's budget cuts and its response to a deep slide in the peso as reasons to affirm its BBB+/A-2 rating.

 

Brazil

Former Brazilian President Luiz Inacio Lula da Silva has been convicted of corruption charges and sentenced to nine and a half years in prison. Lula has rejected claims that he received an apartment as a bribe in a corruption scandal linked to state oil company Petrobras. While the populist leader remains free pending appeal, the ruling threatens to eliminate him from the running for presidential elections next year, an outcome that pleased markets. The country’s benchmark Bovespa stock index rose 1.6% on the news, while the Brazilian real extended its earlier gains to trade 1.4% higher at BRL3.2079 per dollar — a two-month high.

Geddel Vieira Lima, a former Brazilian Cabinet Minister and close Temer ally was arrested Monday on claims he tried to siphon off funds from state-run bank and the country's largest mortgage lender, Caixa Economica Federal. Lima resigned last November after a number of influence-peddling allegations were launched against him. Analysts are at odds over whether the latest arrest in the wide-reaching Lava Jato graft probe will have an influence on a crucial labour reform vote due to take place July 11.

The Brazilian government is preparing a provisional decree to reclaim payments inappropriately made to deceased pensioners and public servants, a measure that could help it save BRL1bn (US$302.93mn) this year, a government source told Reuters. Those savings, combined with other measures to generate extraordinary revenues, should allow the government to revise its spending freeze later this month without jeopardizing its budget target, the source added.

Brazil’s inflation continued to slow incrementally this month, with consumer price increases – as measured by the country’s IPCA index – coming in at 3% in the 12 months to the end of June, down from 3.6% the previous month. The figure marks the 10th straight month of decline and takes inflation in Latin America’s largest economy to their lowest level since April 2007.

Brazil’s government will spare a financial transaction levy from its plans to hike tax rates, Valor Econômico newspaper said, citing a senior policymaker. Fabio Kanczuk, a senior Finance Ministry official, was quoted as saying that targets for hikes include the IPI industrial products tax and the PIS/Cofins social security portion of a fuel tax.

The Brazilian Senate has approved a controversial labour reform bill - the first significant change in 70 years. The new piece of legislation aims to reduce costs for businesses and allow firms to negotiate contracts freely with employees. The main focus of the bill was on giving more leeway to collective bargaining and reducing the scope for legal action in labour disputes.

Brazil launched a program to boost infrastructure investments by municipal governments, demonstrating President Michel Temer's efforts to maintain a positive agenda despite a corruption trial that could remove him from office. The government will offer up to BRL11.7bn (US$3.6bn) in funding for local works in partnership with private companies and state-controlled banks Banco do Brasil SA and Caixa Economica Federal, Planning Minister Dyogo Oliveira said.

A small drop in retail sales in May does not mean the economy is not emerging from a deep recession, insisted Brazil Finance Minister Henrique Meirelles. "Brazil's economy continues to show significant evidence that it is leaving behind the worst recession in our history," Meirelles said in a speech at the presidential palace. Retail sales fell 0.1% in May from April.

Economic activity in Brazil fell in May for the second month in three, contributing to mixed signal about the recovery of Latin America’s largest economy from one of the worst recession on its history. The IBC-BR index, a gauge of manufacturing and services activity, fell 0.51% in May from April after seasonal adjustments.

JBS SA's biggest Brazilian creditors are close to refinancing about BRL18bn (US$5.5bn) worth of loans due within a year, five people with knowledge of the matter told Reuters. Caixa Econômica Federal SA, Banco Santander Brasil SA, Banco do Brasil SA and Banco Bradesco SA are urging larger rival Itaú Unibanco Holding SA to join the plan, under which JBS would get a 12-month repayment extension in exchange for a BRL2bn upfront payment and extra collateral, sources added.

Brazil's federal tax revenues rose in June, data showed on Wednesday, showing marginal recovery as policymakers struggling to meet this year's budget target. Federal tax collection rose 3% from the same month a year ago after adjusting for inflation, to BRL104.1bn (US$33.1bn), the country's tax agency said. Tax revenue rose 0.8% in the first half of 2017 compared with a year before.

 

Argentina

A federal court in Argentina has ordered the suspension of activities at Glencore’s Alumbrera gold and copper mine as part of a pollution complaint, according to court documents seen by Reuters. The mine, in the north-western province of Catamarca, had been scheduled to shut down next year. Glencore owns 50% of the unit, Goldcorp Inc 37.5%, and Yamana Gold Inc has a 12.5% stake.

Argentina presented the US Securities and Exchange Commission (SEC) with a filing that would enable it to issue up to US$12.5bn in debt in the United States in the future. The filing, known as a debt shelf, did not include a time frame in which the South American country may issue the debt, a Reuters report stated. Latin America's No. 3 economy has issued nearly US$10bn of dollar-denominated debt in 2017, most recently a US$2.75bn 100-year bond that took markets by surprise.

The province of Buenos Aires tapped the European markets with a EUR500mn bond. The five-year notes carry a 5.3775% and a yield of 5.5%. The proceeds of this transaction will be used to finance infrastructure projects in Argentina’s largest province. Deutsche Bank, HSBC and Santander managed the deal.

YPF issued international bonds for US$750mn maturing in 2027 with a 6.95% coupon. Notes were sold at a price of 100% with an initial yield of 6.95%, with Credit Suisse and JP Morgan managing the transaction.

Argentina's Central Bank raised interest rates on its short-term securities in its monthly auction, the second such increase in the past three months as it seeks to soak up pesos and rein in high inflation. The monetary authority sold ARS467.623bn (US$27.11bn) in Lebac securities, compared with the ARS532.022bn worth of securities that matured. It raised the interest rate on the 28-day Lebac, the shortest-term security on offer, to 26.5 %up from 25.5% last month.

 

Colombia

The Inter-American Development Bank (IDB), a US-based multilateral finance institution, announced it will extend a loan of US$450mn to the government of Colombia with the purpose of helping to “solidify macroeconomic stability, boost development, encourage public/private partnership financing, strengthen regulation of the financial system [and] promote financial inclusion.” This is to include facilitating financing for small and medium-sized enterprises (SMEs). The facility carries a term of 20 years with interest based on LIBOR.

Colombia will cut spending in the 2018 budget it will present to congress later this month in an attempt to meet its fiscal deficit target, Finance Minister Mauricio Cardenas told the local media. The move comes as the market warns about the likelihood the South American nation will not meet its fiscal targets as the weak economy trims revenue. The Finance Minister Mauricio Cardenas told El Tiempo that the spending cut would amount to about COP5tn pesos (US$1.65bn) and would come mainly from operating expenses. The government set a fiscal deficit target of 3.6% of GDP for this year and has raised the 2018 deficit to 3.1% of GDP from an original 2.7% of GDP.

 

Chile

Chile’s retail company Cencosud issued international bonds for US$1bn maturing in 2027 with a 4.375% coupon. Notes were sold at a price of 99.647%. Bank of America Merrill Lynch and JP Morgan acted as joint bookrunners.

S&P downgraded Chile's long-term foreign currency rating to 'A+' from 'AA-' the country's first downgrade since the 1990s, as weak business confidence and low prices for key export copper have eaten into fiscal revenues. Chile, Latin America's wealthiest country, is the region's highest-rated sovereign debt holder, with a long record of stability, sound fiscal management, and rainy-day buffers in the form of sovereign wealth funds.

S&P Global Ratings downgraded both the foreign and local currency credit rating of Banco del Estado de Chile from the AA- to A+. The outlook for the state run bank is stable.  This comes days after Chile’s grade was cut for the first time in 25 years.

Chile's Central Bank kept the benchmark interest rate unchanged at 2.5% at its monthly meeting, maintaining a neutral bias, even as many analysts expected the bank to hint at more easing. The bank had said earlier this year that future rate cuts were unlikely before year-end, but unusually strong deflation in June caused some analysts and traders to speculate it would cut the rate by 25bp in the coming months.

 

Uruguay

Moody’s Investors Service revised the outlook for both the local and foreign credit rating of Uruguay, from negative to stable. At the same time, the rating agency affirmed the Baa2 credit rating of the South American country.

 

Peru

The former president of Peru, Ollanta Humala, and his wife, Nadine Heredia, have turned themselves in after a judge ordered that they be placed in pre-trial detention. They face 18 months of detention while money-laundering charges are prepared. The accusations stem from Brazil's expansive anti-corruption probe, known as Operation Car Wash. Humala’s detention means that two former Peruvian presidents are currently incarcerated — Alberto Fujimori is serving a 25-year sentence for human rights violations and corruption stemming from his autocratic rule in the 1990s. A third ex-Peruvian president, Alejandro Toledo, is a fugitive from justice on corruption charges, reportedly having fled to the United States.

The Central Reserve Bank of Peru cut its reference rate 25bp to 3.75%. This is the second time the Central Bank cuts rates in 2017and comes just two months after a cut in May that brought the rate down from 4.25%, where it had been for 14 months.

Peru's finance ministry has authorized sovereign bond sales denominated in any currency of up to the equivalent of US$3.5bn, the official gazette El Peruano said without offering additional details. The IFR reported that Peru announced on Monday a Euroclearable local currency 2032 bond and set initial price thoughts at mid-6%.

Peru sold US$3bn worth of sol-denominated bonds due 2032 that can be settled through Euroclear. The notes were sold with a 6.15% yield and will be used to prepay debt in dollars, euros and yens. This issuance is part of an ongoing effort by the Andean country to reduce its debt in foreign currencies, the finance ministry told Reuters. Peru has largely tapped global debt markets in recent years to extend the life of its debt at times when emerging market assets are in demand.

 

Ecuador

OPEC member Ecuador will no longer comply with an agreed OPEC production cut due to the country's financial difficulties and plans to gradually raise its oil output, the government announced. Oil Minister Carlos Perez said that Ecuador's compliance with the agreed cuts was only around 60%, putting current output at 545,000 bpd. The country's fiscal deficit will hit 7.5% of GDP this year, the government says, as it continues to suffer from the global fall in oil prices.

 

Venezuela

Venezuela has offered Indian oil company ONGC Videsh (OVL) an increased stake in an oil field, Reuters reported, as the country seeks to bolster its bruised energy industry and strengthen ties with New Delhi. State-owned PDVSA has proposed selling a 9% stake in the San Cristobal field to OVL, a subsidiary of India’s state-owned top explorer Oil and Natural Gas Corp. OVL already holds a 40% stake in the field, which produces around 22,000-23,000 barrels per day.

Venezuelan state oil giant PDVSA could seek to renegotiate a looming October bond payment given low oil prices, Hector Andrade, PDVSA's managing director for planning, said in an energy conference in Istanbul. "I guess there are a lot of chances of that," Andrade said when asked about a possible payment renegotiation. "Right now, it's not just about the cooperation between producers... (but) cooperation between producer and consumer." The firm also expects to invest US$50bn over the next 7 years to raise capacity by 1 million barrels per day.

S&P Global Ratings lowered Venezuela’s rating deeper into junk territory from CCC to CCC- on both long-term foreign and local currency debt. The rating agency also kept its negative outlook on the crisis-struck nation signalling room for further downgrades. Fitch Ratings and Moody’s Investors Service also rank the country at speculative levels.

The White House is considering a range of options to punish Venezuela, whose president Nicolás Maduro has continued to tighten his grip on power by proposing to create a “constituent assembly” and rewrite the constitution. According to the FT, president Trump has a range of options at his disposal, including putting sanctions on more members of the regime and cutting diplomatic relations. The most drastic step would be to sanction part of the country’s oil industry or limit imports of Venezuelan crude. The US president called his Venezuelan counterpart “a bad leader who dreams of becoming a dictator” and said he would “not stand by as Venezuela crumbles”, after millions of citizens took part in an opposition-led referendum to reject Maduro’s plan.

 

Panama

Panamanian based lender Bladex announced it closed a US$50mn, 3-year syndicated trade facility in favour of BAC Guatemala. Bladex was the Sole Lead Arranger and Bookrunner, and Administrative Agent for the facility. The deal constitutes the first international syndicated facility arranged for BAC Guatemala. The transaction was 1.7x oversubscribed, attracting the interest of financial institutions from Europe, Asia, Central America, and The Caribbean, all of which represent new banking relationships for the Bank. Proceeds from the Facility will be used to finance BAC Guatemala's trade loan portfolio.

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