LatinFinance - November/December 2013 - 18

around $400 million since 2009 - although around $1 billion has
gone in since may.
that is helping the government's long-term strategy of attracting
more foreign buyers into its colombian peso-denominated debt.
michel Janna, the country's head of public credit, acknowledges
that Global teS bonds - sovereign debt denominated in colombian
pesos but settled in dollars and issued under foreign law - have
become "less attractive" for investors as the dollar has strengthened.
But he says that clarifying the details of the tax reform announced
last year could help increase the international bid for local bonds.
"We still see the possibility of a meaningful increase in foreign
investor participation in teS bonds," he says. "foreign holders of
teS represented 3% of total holdings of teS. that increased to 7%. a
healthy level could be 10% to 25%."

Thinking global, acting local
the number of local currency bonds sold offshore by corporate
borrowers has fallen since the start of the year not just because of
constrained demand but also because of changing tax rules in major
jurisdictions.
after cosan - a double-B rated Brazilian sugar and ethanol
producer - reopened the global-real market in march with a 500
million real ($252 million) bond issue, a host of its compatriots
rushed to follow suit, taking advantage of the format to avoid the
country's 6% iof tax. the burst of deals followed greater interest
in global or euroclearable bonds denominated in local currencies
from other latin countries, including mexico, where there is no tax
incentive to do so.
the format of such bonds simply makes it easier for international
investors to buy into.
But not everyone is convinced on the long-term value of these
instruments. liquidity is a major sticking point.
BlackRock's Rodríguez says the most efficient way to develop
domestic bond markets is to concentrate liquidity in a single
place, with the same documentation and processes and without
operational, fiscal or other impediments.
"that way you can exploit all the benefits of local market
development taking advantage of the offshore demand for
instruments," he says. He acknowledges that such an approach is
"easier said than done", which is where global format bonds come
into play - effectively bridging a gap.
"that's the context in which i like to understand the GDns and
the global format for local bonds," he says. But he adds that they are
problematic in that "you segment liquidity and create inefficiencies
and arbitrage opportunities. When volatility increases, you can see
the drawbacks of the approach."
issuers are acutely aware of the liquidity challenge for local bonds.
Pemex's campos says it was a principal complaint among investors
during recent meetings in new York.
"What we saw back in may after the comments of Bernanke, is
that all the interest rates went up, they were hit by the fX effect, and
some of them hit stop-losses," he says. "When they were forced to
sell, there was no market. there was no liquidity, so they had to pay
a liquidity premium to sell their positions. not only in the GDns, but
in all local currency bonds."
in December 2011, Pemex became the first corporate to sell localdenomination global depository notes - building on a precedent set
by the Peruvian sovereign in 2007. the quasi-sovereign borrower
has already made efforts to keep the instruments as liquid as
possible: issuing a single benchmark that it grows through a series of

18 l atinfina nce.com - November/December 2013

re-openings, and being transparent about that process.
a new leg to the strategy, in the works as of late october, is to
establish a market-making program to maintain liquidity. Pemex
plans to designate four or five investment banks to keep the bonds
turning over between primary issues, says campos.
for américa móvil, the difficulty of maintaining liquidity in local
currency debt is equally stark. the company launched a new format
for selling peso-denominated global bonds, known as títulos de
crédito extranjero, in late 2012. it planned to keep them liquid by
tapping them every quarter - but volatility in the mid part of this
year forced the company to skip two of those reopening.
carlos García moreno, the firm's chief financial officer, says he
expects to be able to reopen the bonds before year-end - and that an
extraordinary series of events in the market should not be taken as
an indication of the longer term outlook.
"these are not regular events," he says. "they were quite
exceptional. they are leading many investors that had gone almost
blindly into local currency over three years to reassess to what
extent they want to continue to be in local currency."

Invitation-only
a local currency corporate bond index launched by Bank of america
merrill lynch at the end of october could help the market develop,
by offering pricing transparency.
"Until now, we have grappled with not having a reference index to
measure performance in this market," says matt claeson, portfolio
manager at compass Group. the latam-focused firm and its
affiliates manage arond $6 billion of assets, including in a dedicated
latam corporate local currency fund.
Still, the market for local currency corporate debt is far from
reaching a "critical mass" of investors that understand the nuances,
says abad. that won't happen until borrowers, investors and traders
have a clearer idea of the pace of policy normalization in the US.
in the meantime, investors are likely to limit the range of
companies they will buy local currency debt from. High grade
borrowers that have built a history of surviving leaner times are
likely to be able to sell these bonds in the coming months. for
second and third tier borrowers, issuing debt is likely to be more
difficult, abad says.
"those are the names where you have to do your homework,"
he says. "in a rallying market it was tough to do that because the
euphoria was there. indiscriminate speculation was there. that
segment of the market will be more hard pressed to access capital,
whether in dollars or local currency, because they represent real
credit risk." LF
International accounts go large
Non-resident holdings in local treasury markets, % of total
60
50
40

Mexico
Peru

30
Brazil

20
10
0
2007

Source: IMF

2008

2009

2010

2011

2012

2013

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