Mexico’s Engenium Capital, Brazil’s Klabin postpone new deals as investors remain cautious

By Rebecca Melvin

New York, Nov. 16 – Pricing of planned new issues for Mexico’s Engenium Capital and Brazil’s Klabin SA have been postponed as market conditions remain difficult, market sources say.

Engenium, a specialty loan and leasing company owned by private equity firm Linzor Capital Partners, had started a roadshow for a planned offering of perpetual subordinated bonds, and Klabin, the Sao Paulo-based pulp, paper and paper products company, had selected banks and scheduled fixed-income investor meetings for a dollar-denominated notes offering. They are the latest in a string of new issue casualties in recent weeks.

The postponements came against a backdrop of upset in the oil market and difficulties in the equity market, which are compounding emerging markets debt problems, New York-based EM debt strategist Michael Roche said.

But a number of other factors are playing into the equation of emerging markets primary market woes.

Part of the problem is that funding for companies and governments was delayed earlier this year when the normal pace of the new issue calendar was disrupted. This means that there is a rush to the new-issue market at a time when the market is typically quiet.

“Even on the days when conditions for bringing a new issue were marginal, [deals] were pushed through, and there was only measured success in getting the issue off,” Roche said.

In scoring the new issues, one sees that they are coming at terms that are generous compared to existing bond valuations and with peers.

“It sounds a bit odd, but they are priced to sell,” Roche said, with new issue premiums of around 50 basis points, compared to premiums of closer to 20 bps to 25 bps when bonds are pricing competitively.

The hit that oil exporters are feeling due to the drop in oil prices has been compounded by the fact that investors are anticipating the addition of Gulf Cooperation Council sovereigns in the JPMorgan EMBI global diversified index starting in January. The introduction of GCC sovereigns to the index will raise to 50% the percentage of commodity producers in the index, up from 45% currently.

This will create “a closer connection between EM bond portfolios and oil,” Roche said.

The shift will be phased in during the first nine months of the year and during that time portfolios will be adjusted. In anticipation, however, some have lightened up on oil producer risk already and spreads have gone wide, with prices down, Roche said.

Meanwhile not only is the oil market weighing on commodity-based issuers, but there are also agricultural sector problems.

“There has been a stew of things affecting commodities and then there is the strength of the dollar which makes it more costly for these issuers to repay their international debt,” Roche said.

And one more factor that has made the market jittery is the announcement by Mexico’s president elect Andres Manuel Lopez Obrador of the cancelation of the country’s $13 billion airport project.

Seaport Global’s Roche counts this among “missteps” by the Mexican government. It’s almost standard operating procedure to bed down the concerns of bondholders, bankers and others and then discuss the populist agenda, but the president-elect has not done that, Roche explained.

Instead he has made it clear that he is running the country for his constituency. “I suspect it may be a hard lesson learned,” Roche said, pointing to the central bank having to raise interest rates on Thursday by 0.25% to 8% to stem inflation.

Holders of the $6 billion of airport bonds initially sold off the cancelation news, but as of now investors are waiting to see, and poring over bond documents to determine what their legal rights are.

“There is guarded sentiment,” Roche said regarding Mexico’s debt market. “As far as I can see, there is no rush to place more capital at risk.”

© 2015 Prospect News.
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