Thwarted Latin American Bond Issuers Face Another Chilly Year

The US reckons with the prospect of higher-for-longer interest rates as a chill that pushed Latin American borrowers out of international bond markets this year sets in.

The amount of dollar bonds sold by companies and governments in the region has been the lowest since the global financial crisis of 2008, as the Federal Reserve sent borrowing costs soaring.

It's a dilemma that analysts warn will delay the typical deluge of early-year bond sales. Junk-rated companies and governments are at greater risk of slipping into distress if foreign bondholders are not involved.

The potential for rates to stay at current levels or go higher may deter issuers from entering the market. It's likely to stay an issue until we reach peak hawkishness.

Latin America, which is dominated by high-yield borrowers, saw bond issuance plummet from a year earlier. Hard-currency debt sales are down in Eastern Europe and in Asia over the same time period.

Wall Street's appetite for risky bonds evaporated this year due to fear of inflation and a potential recession, and it's a bad position for Latin American officials.

Pressure on citizens already feeling the sting of inflation can be added by governments that increase taxes. After recent domestic central-bank hikes, the local debt markets are harder to tap.

"If the world continues like this for another 18 months of high stress and high yields, we might see bankruptcies among companies that aren't able to roll over their debt."

Bond Breakdown

Wall Street has a less appetite for riskier bonds. Latin America's junk-rated borrowers have been locked out of the market by investors this year.

It's still difficult for high yield issuers to access the market at higher rates. The country, which was cut to junk by two credit scoring agencies last year, sold new 10-year bonds on Monday at a higher interest rate. The country offered to buy back debt in two years.

There is a bond coupon shock to cut re financing risk.

Mexico's total of $8 billion in bonds makes it the region's largest debt seller of 2022, followed by Chile with $6 billion in debt. Panama sold another $1.5 billion in debt at a coupon of 6.4% this month and also announced a bond buy back of over $800 million.

The sale of as much as $548 million in bonds is likely to be put off until there is more clarity on the direction of rates.

"Other issuers haven't been willing to sell debt at current rates."

The hope is that we will see more issuance activity next year, first from quasi-sovereigns and then corporations. Once the market tests a few names, investors will be more confident in testingBB+ andBB credits.

Eric Ollom, Citigroup Inc.'s debt strategist, believes that a broad return to debt markets won't happen until the second half of the 20th century. According to Citi, a heavier back-end of the year would mark a break from tradition and likely be dominated by investment- grade issuance.

With help from Fieser.