believe that this might precipitate a
downgrade by Moody’s.”
Yet while a Moody’s downgrade is likely
to push Pemex prices down further, the
move could incite high-yield investors to
buy Pemex paper in earnest, he said.
That in turn could cause a rally in Pemex paper
and subsequently tighten the spread differential
with the sovereign, which looks expensive incomparison, especially if the economy starts to
contract dramatically because of the coronavirus.
“I think that Mexican sovereign paper is
expensive, as I don’t believe that what could
be a strong decrease in Q1 GDP has been
priced in yet,” wrote Elias.
Indeed, Mexican paper looks particularly
tight against the 800bp–1,000bp spreads
seen on Pemex bonds last week.Mexico’s 4.50% 2050 has widened since
the S&P downgrade but still traded at
around 335bp, while its 3.25% 2030s traded
at around 331bp on Tuesday, according to
2ElNITIVûDATA
“Going long Pemex (with the caveat that
it might get worse –a little – before it gets
better) and short Mexico, seems like a
reasonable trade to me,” said Elias.74 International Financing Review April 4 2020Pandemic weighs on Latin America
but investors see value
BONDS Novel coronavirus and oil price slump hit region’s creditsThe impact of the Covid-19 pandemic and
plummeting commodity prices has started
to weigh on both corporate and sovereign
borrowers across Latin America in various ways
as EM portfolio outflows reach record highs.
As a region with strong trade links to China
and reliance on commodity exports, Latin
American will be hit particularly hard, with some
analysts radically revising growth forecasts
downwards.
Bank of America now expects the region to
suffer an economic contraction this year of 4.4%,
versus earlier estimates of 1.7%.
That compares with revised numbers of a
shrinkage of 0.5% for emerging markets overall,
the bank said in a report released on Thursday.
“Latin America is the second most vulnerable
EM region after sub-Saharan Africa” said Petar
Atanasov, co-head of sovereign research at
hedge fund Gramercy.
“Latin America looks like one of the regions
in EM that will emerge on the other side of this
crisis relatively weaker.”
Sovereign spreads in 15 Latin American
countries tracked by ICE Bank of America hit
four-year wides in late March.
And while markets have tightened a touch
since then, more pain is on the horizon.
Vulnerable sectors from airlines, hotels
and energy companies have already seen
their ratings slashed by the agencies warning
of liquidity risks and falling revenues as the
downturn starts to accelerate.
But credits from highly rated names such as
Chilean state-owned copper company Codelco
down to struggling credits such as Caribbean
and Central American telco Digicel are also
under ratings pressure.
Analysts say the impact of the pandemic on
the credit quality of companies across the region
is only just beginning to emerge.
“We’re starting to see more secondary effects
of the coronavirus crisis, first with the declaration
of force majeure by a few power companies,
and with the largest McDonald’s franchiserin the world, Arcos Dorados (ARCOS), saying
they won’t be paying monthly leases at some
locations,” said Roger Horn.
FX volatility also poses risk for companies that
have raised dollar financing but whose revenues
are in local currency, such as airlines and sugar
and ethanol producers in Brazil.LIQUIDITY NEEDS
As in other regions, cash is king and those Latin
American credits that can have been leaning on
bank lines for support, such as Brazilian miner
VALE and state-controlled oil firm PETROBRAS.
“Vale, Petrobras and other companies are
raising new bank debt,” said Carolina Chimenti,
assistant vice-president at Moody’s.
“For banks these companies are strategic
partners. They are raising new bank lines not
because they are running out of liquidity but from
a conservative cash management perspective.”
Smaller, lower quality names are likely to be
less fortunate as access to credit shrinks at a
time when investors are beating a retreat from
the asset class.
Emerging markets saw a record US$83.3bn
in portfolio outflows in March across bonds and
equities as the novel coronavirus and a sharp
drop in oil prices took their toll on the asset
class, according to data from the Institute of
International Finance (IIF).
“The people who can really issue now are
sovereigns, big super known names, much more
frequent issuers,” said one banker.
Fortunately, many Latin American borrowers
took advantage of the boom in emerging market
issuance to roll over much of their short-term
debt for longer maturities at cheaper rates,
leaving them free of serious refinancing risks
now.
“A lot of companies have been able to
refinance,” said Barbara Mattos, a senior vice-
president focusing on Brazil at Moody’s.
“There are of course some specific cases, but I
think most companies don’t have any immediate
maturities regarding bond payments.”Sovereigns across the region are also
struggling, with rating agencies recently
downgrading Colombia, Mexico and Ecuador –
all credits reliant on the export of oil whose price
sunk to 18-year lows last month.TIME TO BUY?
Even so, investors are increasingly making a
distinction between issuers and see some value
in certain names after the recent sell-off.
“For a very long time there was no credit
differentiation. Everything appeared to be
working fine despite different underlying
fundamentals,” said Atanasov.
“But it will now be a different reality.”
CHILE, PERU and MEXICO have a certain amount
of fiscal space if they wish to stimulate the
economy but the question is can they do it
politically, he said.
However, BRAZIL – once a market favourite – is
in a tougher position because of its shakier fiscal
situation
“It is an already overtaxed economy with an
already high fiscal deficit,” said Atanasov. “Like
Chile it plans to spend about 5% of GDP to
support the economy but unlike Chile it has less
space to do so.”
Jean-Charles Sambor, deputy head of
EM fixed-income at BNP Paribas Asset
Management, thinks much of the negative
news has been priced in and that there is some
value in certain credits such as Mexican state-
controlled oil firm PEMEX.
“We expect to see some oil price stability in
the short term as the meeting between Russia
and Saudi Arabia is likely to bear fruit,” he said.
“Pemex has weak fundamentals but we think the
sovereign is likely to support them. We don’t discount
additional downgrades but we think they are mostly
priced in and we are bottom fishing in Mexico.”
Sambor is also positive on Colombia and Peru- countries with good fundamentals that have
been oversold.
“That is where the sweet spot is,” he said.
Paul Kilby
8 IFR Emerging 2327 p 67 - XX.indd 74 03 / 04 / 2020 19 : 21 : 03