Latin Finance - March/April 2012 - 16

local currency debt

Market Evolution
by Paul Kilby

T

he surge of flows into EM local currency debt instruments in 2011 and the subsequent spike in international bond issues denominated in pesos and reais, particularly from corporates, has left bankers bullish on the prospects for this growing asset class. But buyside attitudes toward this sector have arguably turned more ambivalent this year after FX volatility burned some investors and sparked a sudden reversal in flows at the end of 2011. This hasn’t stopped bankers from plotting the next stage in the evolution of this market. While finding ways to broaden the menu of investment options and create more liquidity for this asset class are proving tricky, bankers ultimately hope such problems will be solved by breaking down some of the fiscal and regulatory barriers that have so often created bifurcated onshore and offshore markets. Global local currency instruments and even the more recently created global depository notes (GDNs) are approaching the end of their useful life, argue some bankers who see such specialized instruments eventually becoming extinct as foreigners increasingly engage directly with local markets, much like what happened with ADRs in the equity space. The ultimate aim is to have international and local investors buying into the same local currency-denominated corporate bond, and creating the liquidity so coveted by the buyside and the favorable pricing dynamics sought by borrowers. In some ways, this melding of foreign and local investors is already starting to occur, but on an intra-regional basis, with bankers selling not only dollar bonds, but corporate global real bonds to Chilean investors, for instance. This has further lent support to a

Bankers are bullish on global local currency issues from the region’s corporates. Can the asset class evolve to include participation from both locals and foreign investors?
debentures being sold to both Brazilians onshore and foreign investors offshore now that the government has eliminated the IOF tax that previously made such trades so unattractive.

First Corporate GDN

Local currency making a comeback: Gilfond market that last year saw what were arguably record volumes in cross-border corporate local currency trades, with Colombian companies for the first time issuing such instruments. “Local currency has made a comeback,” says Chris Gilfond, co-head of LatAm credit markets for Citigroup. “We saw $8.6 billion in 2011, up from $7.5 billion in 2007. That doesn’t include crossborder transactions like Banco de Chile in Mexico.” Despite the selloff last year, bankers reckon local currency instruments should remain a popular choice among investors seeking yield at a time when Fed Chairman Ben Bernanke has pledged to keep rates low into 2014. The market may soon see infrastructure real-denominated

In Mexico, the first corporate global depositary note from Pemex was also designed to allow international accounts to participate in the country’s local corporate debt market. Already used by sovereigns such as Peru, GDNs are much like an ADR for the bond sector, bundling local currency instruments that can be interchanged for GDNs and vice-versa. For foreign investors who don’t have the time or inclination to set up an on-theground custodian, GDNs are thought to be a convenient way of entering the local market. They are sold under a 144A/RegS format, settled through DTC, Euroclear and Clearstream, paid in US dollars linked to local currency and withholding tax is grossed up by the issuer. “GDNs are the best mouse trap that allows the borrower to capture both international and local accounts,” says Charles Moser, an executive director at Morgan Stanley that acted as sole structuring agent and managed the sale in January, along with HSBC and Santander. Moser sees the use of corporate GDNs spreading to other countries as well, including Chile, Peru, Brazil, Colombia, Panama and the Dominican Republic, though this will require banks to first work more closely with regulators. “Just as happened with the ADR, each country will have to get comfortable with convertibility

16 LatinFinance

March/April 2012
Latin Finance - March/April 2012

Table of Contents for the Digital Edition of Latin Finance - March/April 2012
