The Latin American primary bond market is ready for a more active year in 2024 than in 2023, although borrowers could remain cautious until at least the midway point as they await additional clarity regarding the trajectory of US interest rates, according to a DCM banker, an investor, and a head of research at an investment bank.

“I am expecting an increase of at least 20% in terms of primary issuance for Latin America this year,” the DCM banker said. “We will be working on at least one new deal for the next two-three weeks, and I’m hearing the same from others. In 2022 we didn’t even hit USD 50bn and last year we were almost at USD 75bn. This year I’m expecting at least USD 100bn in new issuance.”

Borrowers issued USD 74.04bn in 2023, from 75 tranches, including USD 33bn from 35 high-yield and split-rated issuances, according to Debtwire data. This represented nearly 50% more than the USD 49.14bn from 58 tranches raised in 2022 (USD 19.23bn from 25 high-yield).

So far in 2024, LatAm has accounted for nearly USD 16bn, more than twice the amount issued during the corresponding period in 2023.

A big portion of that additional expected issuance might be concentrated in January, as a strong rally in the bond market during the last two months of 2023 carried over and investors scrambled to put money to work after the holiday lull and lock-in the temporary drop in borrowing costs. Moving forward, issuers are likely to take a pause until the market has more certainty regarding the first rate cut by the US Federal Reserve, according to the three sources.

“The market had been rallying since 6 November, but now we are finally seeing the hangover after the year-end celebrations,” the DCM banker said. “The recent data published about the job market and consumer prices in the US have borrowers thinking that the first cut in March might not be a certainty anymore, so they might go back to the sidelines after the flurry of the first two weeks,” he added.

One reason why borrowers are rushing to the market in January is also to lock in relatively low borrowing costs before a series of presidential elections across Latin America introduce a political risk component that could potentially increase rates, according to a note to investors BNP Paribas published on 6 December.

El Salvador (B-/Caa3/CCC+) has elections on 4 February, where polls are showing strong voting intentions for incumbent President Bukele to be re-elected, BNP wrote. Panama (BBB/Baa3/BBB-) also has general elections on 5 May, where the next administration is expected to face tough decisions regarding the closure of the Minera Panama mine and the implementation of a needed tax reform. The Dominican Republic (Ba3/BB/BB-) holds legislative and presidential elections on 19 May, though the market-friendly policy is expected to continue no matter who wins, the bank wrote. In Mexico (BBB/Baa2/BBB-), early opinion polls suggest that President Andres Manuel Lopez Obrador will be succeeded by his favored candidate, Claudia Sheinbaum. Finally, Uruguay (BBB+/Baa2/BBB) will have a presidential election on 27 October.

No deal reflected the euphoria of the first two weeks of 2024 more than Mexico’s USD 7.5bn three-part deal on the first business day of the year, its largest transaction ever.

Mexico’s USD 1bn 5.0% 2029 bond last traded 3 January at 99.495 to yield 5.111%, according to MarketAxess. Its USD 4bn 6% 2036 bond last traded at 99.295 to yield 6.083%, and the USD 2.5bn 6.4% 2054 bond last traded at 98.99 to yield 6.477%.

The offering drew USD 21bn worth of demand, demonstrating favorable investor sentiment for investment grade bonds with sound fundamentals, according to the sovereign investor.

Corporacion Andina de Fomento (AA-/Aa3/AA), another highly-rated Latin American issuer, also visited the markets, drawing USD 6.4bn in demand for a USD 1.75bn bond. Orders almost doubled demand for the bank’s previous transaction back in October.

Both deals, though highly successful, are not expected to generate momentum for all of the market. “For lower-rated countries, the higher ‘risk-free’ rates being offered by the US and bumper supply from investment grade debtors will make market access at single-digit rates difficult,” according to a note for clients from investment manager Ashmore published on 15 January.

“Issuers want to come to the market but they are not willing to be squeezed into single-digit or low teens issuance concessions,” the DCM banker said.

Usual suspects in 1Q24

Despite the expectation of a slowdown in new issuances until monetary policy begins to ease by mid-2024, some issuers that have already “penciled in” upcoming deals are expected to come to the markets, especially on the sovereign front, according to the head of research at an investment bank.

“1Q24 will likely see quite a bit of issuance with Costa Rica [B+/B2/BB-], Paraguay [BB/Ba1/BB+] and the Dominican Republic likely visiting the markets before March,” the head of research said. “Panama and Uruguay are also natural candidates to come in Q1.”

Chile (A+/A2/A-) was expected to price a new bond today, and America Movil (A-/Baa1/A-) was meeting investors ahead of a global MXN transaction.

Given the fact that Latin American Central Banks began their respective monetary easing cycles before the developed world, financing conditions are expected to ease this year for corporate issuers, according to a note for clients published in December by Swiss asset manager Vontobel.

“As borrowing costs come down in LatAm and the idea of a global economic slowdown becomes less likely, more corporates are expected to come to the market to raise fresh funds for new capex projects, instead of just refinancing debt like we’ve seen over the past two years,” the DCM banker said.

Valia Energia (BBB/Baa3), for example, this week priced a debut USD 530m 2039 secured bond for the repayment of the acquisition of debt facilities and distribution among the shareholders.

Despite uncertainty regarding the outlook for US rates, which is expected to cause a slowdown in the frenetic pace the primary has shown during January, the three sources agree that borrowers will likely get a second wind towards the midway point of 2024, by which time a first rate cut by the US Fed is widely expected.

“2024 will be the year of the bond after the foundation for it was laid in November,” Vontobel wrote. “Global interest rates have likely peaked in October. It’s not higher for longer anymore, but rather high for a little while.”