Impacts on tourism and commodity prices have hit the Caribbean hard this year, driving spreads between corporate and sovereign debt issuances higher compared to the rest of the region.
An analysis of capital flows to Latin America and the Caribbean (LAC) over the first nine months of 2020, prepared by the UN’s Economic Commission for the region (Eclac), said that Caribbean spreads had spiked an average of 316 basis points higher than the Latin America component of JP Morgan’s emerging market bond global index (EMBIG), as the next graphic details.
Source: Eclac
The larger spreads, said Eclac, stem from the fact that tourism accounts for between 50% and 90% of GDP and employment in some Caribbean countries, and the decline in commodity prices hitting hydrocarbons exporters such as Guyana, Suriname, and Trinidad and Tobago.
Reflecting the swell in risk aversion, Eclac reported only one non-sovereign debt issuance taking place in the Caribbean in the first nine months, occurring in Jamaica on February 7 just before the spread of the coronavirus began slamming international financial markets – the US$225mn project bond by Trans-Jamaican Highway Limited (TJH) with a coupon of 5.75% and due in 2036.
This toll road concession, which is owned by the Jamaican government, is the largest infrastructure project ever undertaken in the English-speaking Caribbean, according to LatinFinance, and the relatively low coupon reflects the confidence in the project coming ahead of the pandemic’s initial shock.
According to Eclac, in addition to being the first Jamaican infrastructure asset financed in international capital markets, it was also one of only two infrastructure assets in LAC to have received a credit rating above the sovereign rating at the time of the debt issuance. TJH’s only previous bond issuance took place in 2001.
In March, Jamaica’s National Road Operating and Construction Company (NROCC) sold 80% of TJH for J$14.1bn (US$96mn) via an IPO on the local stock exchange, which is the country’s largest IPO to date.
Corporate issuances during January-September in Central America were likewise centered on only one country, the sub-region’s most industrialized economy, Panama, said Eclac.
In April, airline group Copa Holding’s sold US$350mn in debt with a coupon of 4.5% and due in 2025. The month of July then saw Panama’s largest commercial bank Banistmo make a 2027 issuance of US$400mn, with a 4.25% coupon.
State-owned Banco Nacional de Panamá followed suit in August, issuing US$1bn in debt maturing 2030, with a coupon of 2.5%.
Sovereign debt
Total LAC debt issuance reached US$118bn in January-September with sovereign debt issuances comprising 40.6% of the total, according to Eclac.
Issuance in H1 was the highest on record for a first half in the region, Eclac said. However, while LAC debt sales in Q1 and Q2 were the fourth and sixth highest quarterly issuances on record, a slowdown occurred in the third quarter, “as investor sentiment toward emerging markets deteriorated.”
Source: Eclac
Mexico generated the largest share of debt issues in the first nine months with a combined total of corporate and sovereign bonds at US$32bn – followed by Brazil (US$21bn) and Chile (US$16bn), the Eclac figures show.
The sale of debt from Central America and the Caribbean reached 15.3% of the regional total, equivalent to roughly US$18bn with the largest amount emerging from Panama (6.97%) and Dominican Republic (5.35%), and issuances of about 1% or less from Guatemala, El Salvador, Honduras, Trinidad & Tobago and Jamaica.
On the sovereign side, the Dominican Republic’s US$6.3bn in debt issuances during January-September was surpassed only by Mexico (US$11.4bn) in the entire region, with Panama in the fourth spot (US$5.08bn).
Two supranational entities also sold debt, with a US$750mn issue from Central American development bank Cabei, and US$800mn issued by Latin American development bank CAF.
Factors to watch
Eclac highlighted concerns over the outcome of the US presidential elections as a potential factor of a slowdown in LAC debt issuances during the second half of October, considering that actions taken by the US Federal Reserve and the European central bank had worked to improve market liquidity through much of 2020.
“November could record some deals if post-election volatility does not materialize,” wrote Eclac.
However, it remains unclear how seriously markets will account for the efforts by US President Donald Trump to overturn key election results – efforts that appear to have little chance of succeeding in reversing the victory by president-elect Joe Biden.
Eclac also warned that the small proportion of LAC countries and companies that have access to international markets “may lose it if the economic recovery is weaker and the damage from the pandemic more persistent than expected,” adding “the lockdowns have battered LAC economies, forcing governments to issue more debt under emergency circumstances.”
“Revenues have sharply declined, government deficits have widened, and financing needs have increased, leading to surging debt levels,” wrote Eclac. “Ongoing funding needs among sovereign issuers are expected to continue, and one of the questions is what will be the mix of international debt versus local debt, as the debt burden rises.”
