The rapid increase in
Latin American corporate debt has raised eyebrows for some
investors, who wonder if the collective burden is sustainable
for the regions companies. Yet many investors believe
such risks shouldnt deter them from seeking out multiple
Latin American businesses issued $178 billion worth of debt
last year, up from $165 billion in 2013, according to Dealogic,
marking the sixth straight annual increase. The majority
$109 billion was denominated in U.S. dollars, with $47
billion in local currencies. The lions share of the
issuance came from companies in Brazil ($56 billion) and Mexico
($60 billion), which had lost the mantle of Latin
Americas biggest corporate debt issuer to
Brazil in 2009, only to regain it in 2013.
Some analysts worry about the ability of companies to
service so much dollar debt given the weakness of Latin
currencies, which have been hurt by anticipation of U.S.
monetary tightening and by the continued unwinding of the price
boom in commodities. One of the biggest vulnerabilities
is depreciation, says Siddharth Dahiya, London-based head
of emerging-markets corporate debt at $504 billion Aberdeen
Asset Management. A number of companies have been able to
borrow through external debt, but they dont have any
Dahiya points to Mexican homebuilders that constructed
low-cost properties in their native country, funding themselves
largely through dollar loans that have become hard to repay
following the decline of the Mexican peso to a rate of about 15
to the dollar, from 13, over the past year.
Soummo Mukherjee, a Santiago-based debt analyst at
Itaú BBA, the investment banking arm of Brazilian bank
Itaú Unibanco, cites the plight of Automotores
Gildemeister. The Chilean car importer buys vehicles in dollars
and sells them in local currency; its business has been hit by
a 9 percent decline in the Chilean peso, to 605 to the dollar
in late April from about 550 in May 2014. In April the company
asked investors to take losses of as much as 50 percent on its
$700 million in dollar-denominated bonds as part of a debt
restructuring; investors have rejected the proposal, leaving
Gildemeister struggling to shoulder the existing burden.
Our view is that the company will find it very difficult
to meet its ongoing debt service payments, Mukherjee
Gildemeister also suffers from a problem that has afflicted
many other Latin American corporate debt issuers: a slowdown in
the domestic economy, largely because of commodity price drops.
The importer was wrong-footed by an 11 percent contraction in
Chiles auto sales last year, Mukherjee says.
A further vulnerability in some countries is politics. This
is most apparent in Brazil, where a corruption scandal
involving state-owned energy giant Petróleo Brasileiro
and its web of contractors has heightened political
uncertainty, aggravated the countrys recession and caused
international investors to shy away from new and old debt.
Between the start of the year and April 2, only two Brazilian
companies issued dollar-denominated paper, Dealogic
Fears about Brazils politics and economy have sent
yields rising, though they have fallen back a little since the
beginning of the year. The average spread on Brazilian
corporate debt is 4.89 percentage points above U.S. Treasuries,
for a yield of 6.85 percent, according to London-based BlueBay
Asset Management; thats up from 3.81 points above
Treasuries, or 5.51 percent, in April 2013. Spreads for Latin
America as a whole have also widened, but much less so, to 3.67
points over Treasuries from 3.26 points two years ago. BlueBay
cites data from JPMorgans Corporate Emerging Market Bond
Index Diversified family.
The pummeling of Brazilian corporate debt by nervous
international investors spells opportunity, managers at $59
billion BlueBay contend. There are times when there is a
general risk-off sentiment in Brazil, and you see spreads on
all sectors widening out, says Anthony Kettle, a
portfolio manager with BlueBays emerging-markets credit
team in London. That presents opportunities when you see
companies that should benefit from the trends in the Brazilian
currency. The real declined to nearly 3.30 to the dollar
in March from 2.25 in September 2014 but recovered some to
trade at about 2.93 in late April.
Kettle sees promise in Latin American agricultural
exporters, for example. They havent suffered the price
busts experienced by energy and mining companies, so they can
keep earning strong dollar revenue. The rise in the dollar
makes it easier for agricultural exporters to sustain their
business costs, which are in the declining local currency. This
is a case where, far from being a vulnerability, local currency
depreciation can work to the advantage of a company with dollar
debt. Some of these agricultural businesses are big issuers:
Cosan, the Brazilian conglomerate with a large interest in
agriculture, issued $500 million in ten-year debt and 500
million reais ($170 million) in five-year paper in March
Aberdeens Dahiya also sees the bright side of currency
depreciation. Take Brazils Vale, the worlds biggest
iron ore producer: Much of the companys production is in
Brazil, where the fall in the real has reduced costs in dollar
terms. Dahiya also sees an upside to the commodity price slide.
Although he acknowledges that the price of iron ore has
plummeted, Vale is a very low-cost producer, so even in
this environment these guys make money. The yield on
Vales seven-year triple-B bond has eased to 4.4 percent
from a high of close to 6 percent in December, at the height of
the Brazilian political crisis.
Exporters pricing their goods and commodities in dollars
could be in an even stronger position if the U.S. Federal
Reserve Boards first rate hike in many years, which many
analysts are forecasting for later in 2015, boosts the
greenback further. But Latin American corporate debt
specialists tend to play down the positive or negative fallout
from a move that financial markets have expected for many
Dahiya says there could be awkward side effects of a U.S.
rate hike, including a temporary loss of emerging-markets
liquidity as dollar investors return home. If markets
shut down, some companies with imminent maturities could face
pressure, he explains. However, the bigger ones
should be fine because they will have good access to local
In theory, Latin American corporate debt could be harder to
sustain than during previous times of falling global liquidity
because it is so plentiful. But Dahiya is not concerned.
Sometimes people look at the debt numbers and think that
the growth of overall dollar debt looks quite scary, he
says. But people need to look at it in the context of
these economies. Total external corporate debt as a percentage
of GDP has not increased that much, because GDP itself has been
growing a lot.
Notwithstanding the economic weakness of the past year or
so, Latin American gross domestic product is much higher than a
decade ago, and foreign currency debt remains below 10 percent
of output, Dahiya notes. As a result, he adds, the debt does
not pose a systemic risk.
In short, long-standing investors in Latin American debt see
reasons to be wary but reasons to be greedy too.