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Latin America Credit Markets Brief: May 11 – May 25

Mexico’s Unifin hits the market – Mexican authorities probe bond market for wrongdoing – growth estimates in Mexico raised – Brazil still reeling from JBS, Temer scandal – Banco Central do Brasil to boost fintech regulations – Oi bankruptcy stalls amid pressure for new agreement – Brazilian energy firms hit the local market – Inflation in Argentina exceeds forecasts – Argentine sovereign authorises US$20bn in borrowing for FY2018 – Buenos Aires Province cancels debt sale amid volatility – Colombia’s credit outlook at risk of being cut – BancoEstado, ENAP hit the market – Peru cuts benchmark rate – Panam’s Tocumen S.A. looks for fresh syndication

May 25, 2017 // 4:12PM

In Brief


Mexico's Unifin Financiera launched a US$450mn bond in the international markets last week. The notes maturing 2025 were priced at 99.258% to yield 7.125%. Barclays, Citigroup, and Credit Suisse managed the sale.

Mexican authorities have mentioned seven banks, including three from the U.S., as part of a widening investigation into price manipulation in the nation’s bond market, according to Bloomberg. Local units of Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, JPMorgan, HSBC, Barclays, Citigroup and Bank of America Corp. have become the focus of the probe which was launched in April this year.

Mexico's Central Bank raised its benchmark interest rate by 25bp to 6.75% earlier this month, hiking for the third time this year to prevent inflation from getting out of control. The Bank of Mexico (Banxico) has now raised its rate by 375bp since the U.S. Federal Reserve began normalizing its policy stance in December 2015, by 100 points this year and by 150 points since the election of Donald Trump as U.S. president.

Donald Trump has launched the process of the North American Free Trade Agreement renegotiation with Canada and Mexico, as his administration notified Congress on Thursday that it planned to begin formal talks as soon as August. Robert Lighthizer, the new U.S. trade representative, gave Congress the required 90-day notification of new trade talks. During his campaign, Trump vowed to withdraw from the Treaty, but has since softened his stance.

In mid-May, Mexico’s finance ministry raised its 2017 growth estimate to 1.5-2.5% from its previous range of 1.3-2.3%, reflecting on better-than-expected economic performance, but noting that “risks of volatility persist”.

The IMF reaffirmed Mexico's access to a flexible credit line worth about US$86bn that the country could use to stabilise its currency in cases of extreme volatility. The IMF said Mexico expressed that it treated the 2-year- line approved last year as "precautionary."



Brazilian President Michel Temer will not step down even if he is formally indicted by the Supreme Court, he said in an interview in the Folha de S. Paulo newspaper amid the latest graft scandal – which implicated him directly. In the meantime, thousands have taken the streets in Brazil to demand the resignation of the president after the disclosure of a recording that appeared to show Temer condoning the payment of hush money to a jailed lawmaker. It has yet to be determined if a tape recording of Temer arranging bribes was fabricated.

Brazilian equities continued their declines this week following revelations of a possible bribery scandal implicating the country's president Michel Temer. S&P revised Brazil's outlook to "CreditWatch negative," which means it can downgrade the country over the next three months. The Ibovespa index tumbled 2.85% since the close of trading Friday, and down nearly 8.5% since news of the scandal broke last Wednesday. Yields on 10-year government notes spiked from 10.012% on earlier in the week to 11.757%.

Increased political uncertainty triggered by recent corruption allegations involving Brazilian President Michel Temer will further pressure the operating environment for banks while potentially raising asset quality risks over the medium and long terms, says Fitch Ratings. "The deterioration in Brazil's political environment should not cause a sharp and immediate deterioration in Brazilian banks' asset quality or any significant losses through securities' exposures. However, as this implicates the presidency, the heightened political risk could increase policy and legislative uncertainty," the rating agency said in a recent note.

The market could see further upside if Brazil's President Michel Temer stays in power following fresh corruption allegations, according to analysts at Deutsche Bank. "If Temer remains in power for some time (the most likely scenario) we see some USD/BRL upside (towards 3.60) although the healthy state of Brazil's external accounts and the BCB's ample room to intervene via swaps limit the extent to which the BRL will sell off in the near term," the bank's analysts claim.

Brazil's JBS delayed its US IPO due to lukewarm investor feedback. The meet producer is concerned about the impact of a government probe into alleged bribery of health officials linked to a tainted meat scandal, which also sent the company's bonds tumbling. Analysts expect the company could raise as much as US$1bn through the listing.

Brazilian logistics firm Pacer Logística hit the local market to price a BRL24mn debenture due 2024. Sale of the notes, which yield 8.5% of the DI, was led by Itau.

Brazilian wind farm developer and energy firm Potami Energia S.A. hit the market to place a BRL42.4mn debenture in the local markets this week. The notes maturing 2026 were sold at a spread of 7.375% above the DI. Itau led the sale with Banco ABC joining as coordinator.

Brazil state lender BNDES will help finance a 150 MW solar project being developed by EDF and Canadian Solar in the state of Minas Gerais. The Brazilian Development Bank has approved a BRL529mn (US$168.4mn) financing package for the construction of the project, which is scheduled to come online in August 2017. The project, which was selected in the solar energy auction held by the Brazilian government in 2015, once completed is expected to deliver power to the local grid at BRL298.58 ($95.1)/MWh.

Brazil's Central Bank is looking to implement regulations this year to oversee financial technology companies that are expanding rapidly in Latin America's biggest economy, director Otavio Damaso said in an interview with Reuters. Increased innovation and a growing number of fintechs is "very positive" for the efficiency of Brazil's financial system, Damaso said. Damaso said the bank also wanted to facilitate the entry of foreign banks in the local market by eliminating the need of a presidential decree to continue the approval process.

The Brazilian real strengthened this week after the Central Bank resumed market intervention, providing support for the currency ahead of a key vote on pension reform. The Brazilian real firmed as much as 0.6% before losing some gains, dropping 0.34%. The Central Bank sold US$400mn worth of traditional currency swaps, according to Reuters.

The cost of insuring Brazil's sovereign debt against default hit the highest level since January and the country's dollar-bonds fell across the curve after reports implicated President Michel Temer in a corruption scandal. Five-year credit default swaps jumped 68bp to 274bp and Brazil's dollar bond maturing 2045 fell 4.250 cents to 86.425 cents – their lowest level since March.

The bonds of Brazilian energy company, Petroleo Brasileiro SA dropped to six-month lows amid the new political crisis in Latin’s America’s largest economy. The state-controlled company’s €800mn notes due in January 2025 led the slump, falling 4.5 cents on the euro to 102 cents, the biggest decline since November.

The Brazilian government expects to collect between BRL2bn and BRL3bn (US$637mn to US$955mn) this year from a renegotiation of corporate debts owed to federal agencies and authorities, two government sources told Reuters last week. President Michel Temer is expected to issue the presidential decree later this month to start renegotiating the fees and fines following recent efforts aimed at tax debts.

Brazilian authorities are mulling whether to scrap a payroll tax break for dozens of industries in order to shore up the country's fiscal accounts, sources claim. The timeline for such a move is unclear, however, particularly given the recent turmoil.

Brazilian toll road operator Rodovia das Cataratas S/A Ecocataratas issued BRL185mn in simple, non-convertible debentures due 2019 at the end of last week. Banco Bradesco managed the sale.

Brazilian wind farm operator Ventos De Sao Jorge Holding S.A. priced a BRL45mn debenture due 2028 at the end of last week. Banco Citibank led the sale.

Brazilian giant Odebrecht SA expects aviation regulator Anac to approve the sale of its stake in Brazil's second busiest international airport to HNA Airport Holding Group Co Ltd within 90 days, newspaper Valor Econômico reported. The deal is part of Odebrecht's efforts to dispose of assets as it seeks to stay current on about BRL76bn of net debt.

Creditors of Brazil's Oi SA filed a motion this week in U.S. bankruptcy court to pressure the telephone operator to consider a proposal which could give lenders control of the restructured company, a source said, quoted by Reuters. The creditors believe that a U.S. filing made on Monday in the Southern District of New York will allow them the right to reject the company's reorganization plan in the United States if it is confirmed in Brazil without their input.

Brazilian Senator Roberto Rocha said on Tuesday he will request the opening of a congressional investigation into loans that state development bank BNDES has made to big corporations. Rocha, of the Brazilian Socialist Party that recently broke away from the coalition of President Michel Temer amid a corruption scandal, said he has enough votes to start the probe. BNDES will not extend any new loans to meatpacker JBS SA, holding company J&F Investimentos or other companies involved in a corruption investigation, according to multiple reports. The companies will reportedly be barred from receiving any loans or investments from BNDES at least until they sign a leniency agreement with Brazilian prosecutors.

Brazil's Banco Original is currently under investigation by the Central Bank for insider trading following a scandal involving meat packer JBS, according to reports. This week, the lender rebuffed rumours that Central Bank sent an analyst to monitor the lender's liquidity position.



Last week Argentina's Central Bank has renewed its FX purchasing operations and is buying US dollars in the local foreign exchange market in order to taper the peso's strengthening. The peso has already strengthened about 2.1% this year. The Central Bank has bought about US$500mn on the spot market in April and US$600mn in March.

Argentina’s inflation rose 2.6% more than expected by analysts, which expected an increase of 2%. According to el INDEC consumer prices have risen a total of 27.5% over the past 12 months.

Capex, an Argentinean energy company, issued international bonds for US$300mn maturing in 2024 with a 6.875% coupon. Bonds were sold at a par with a yield of 6.875%. Banco Bilbao (BBVA), Deutsche Bank, Itau Unibanco Holdings, and JP Morgan managed the deal.

Argentina has authorized the sale of US$20bn in sovereign bonds to be issued under U.S. and British law, according to a decree published in the government gazette on this week. The bond issuance, to take place under opportune market conditions, is part of the government's 2017 fiscal program. To get the most favourable terms for Argentina, it is necessary to extend the legal jurisdiction of the transaction to state and federal courts in New York City and London, the decree said.

The Central Bank of Argentina announced a new set of norms that will make it easier for companies to purchase US dollars, in an effort to curb excessive regulation in the currency exchange market, La Nacion reported.

The province of Buenos Aires cancelled a US$500mn debt issuance after the new corruption scandal in Brazil hit the Argentinean markets. The bonds were due in 2022 and BBVA Frances, Banco Galicia, Santander Rio and HSBC were supposed to manage the deal. So far, the local authorities haven’t announced the new date of the issuance.

The spread between Argentina’s bond yields and the EMBI index reached 400bp for the first time since 2007, according to a report recently published by the Central Bank of Argentina (BCR). The reduction of the country’s risk spread has allowed the South American sovereign to reduce the cost of its funding in dollars and has allowed it to place longer-term debt, which has also improved the conditions for corporates in the international markets, the report mentioned.



Colombia's Biotoscana is looking to make its listing debut in Brazil, according to a regulatory filing. The pharmaceutical company plans to offer new stock offering known as Brazilian Depository Receipts or BDRs.

Colombia's credit rating outlook is at risk of being cut to negative because of its government's current lack of financial market credibility, according to a Moody’s analyst. Moody's Head of Latin American Sovereigns, Mauro Leos told participants at a conference hosted by the firm that the government faces perceptions of a lack of credibility and weak economic prospects, with average growth for the remainder of the year expected to come in at 1.8%, according to the most recent Central Bank statistics.



Chilean state-owned lender BancoEstado sold AUS100mn (approx. US$73.8mn) in new notes in international markets this week. The 10-year senior unsecured notes were rated Aa3 by Moody's.

Chile’s ENAP, the national oil company, issued a US$250mn bond on the local market late last week. The deal was 2.5 times oversubscribed, according to local press reports.



Peru cut its benchmark monetary policy rate by 25bp to 4% last week, a move aimed at reviving economic growth after heavy flooding weighed on output and business efficiency. The Central Bank also revised down 2017 growth forecasts to 2.5-3.2%, down from 3-3.5% in the wake of the flooding.

The Central Bank of Peru also reduced reserve requirements for banks to 44% of total deposits from 46%, both for the local currency —the Peruvian sol and US dollar—in an effort to foster growth. The move is a credit positive, Moody's Investors Service affirmed, but the rating agency expects real GDP growth for the year to fall to 3.7% from 4.0% in 2016.

Peru's current account deficit narrowed to 1.9% of GDP in the first quarter of this year, compared with 5.5% in the same period last year, the Central Bank said this week. The Central Bank said in March it was planning for a current account deficit of 2.6% of GDP this year.


Puerto Rico

Puerto Rico’s Government Development Bank, once the primary fiscal agent for the US territory, reached a liquidation deal with its creditors. The deal would be executed through a so-called Title VI proceeding under PROMESA, the federal Puerto Rico rescue law, avoiding a protracted Title III bankruptcy. It would split GDB's assets into two separate entities, one for bondholders and municipal depositors, and one for all other depositors.

Puerto Rico's main creditors, meeting before a U.S. bankruptcy judge in the largest public finance restructuring case in history, are prepared to continue mediation settlement talks to resolve the island's unpayable US$70bn debt bill. In the first hearing since the U.S. commonwealth filed for bankruptcy on May 3, a lawyer for Puerto Rico's federal financial oversight board told U.S. District Court Judge Laura Taylor Swain that the two main creditor groups expressed interest in maintaining the discussions while the case proceeds.



Hundreds of thousands of Venezuelans took to the streets on Saturday to mark 50 days of protests against the unpopular government of President Nicolas Maduro, with unrest gaining momentum despite a rising death toll and chaotic scenes of looting. At least 46 people have been killed in the worst turmoil faced by Maduro since he won the presidency in 2013.

Venezuela launched a new foreign exchange auction mechanism to complement its currency control system. The mechanism, known as New Dicom, will offer US dollars within a band determined by the Central Bank, Economy Vice President Ramon Lobo told a press conference, without specifying what that band would be.



Tocumen S.A, Panama’s leading airport operator, will request a US$100mn syndicated loan from local financial institutions, Finance Minister, Dulcidio de la Guardia told the local press. This will allow the state-owned company to secure the remaining funding to complete the expansion of the airport without tapping the financial markets again. The loan will be repaid in full with proceeds from rents of the commercial space inside Tocumen International Airport.


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