March 30, 2017 / 4:05 AM / 5 months ago

Latin America may step up bond sales as Trump fears fade

NEW YORK, March 30 (Reuters) - Latin American governments and companies could soon step up bond sales, seizing on an increased appetite for deals as a regional economic recovery gains steam and concerns about aggressive U.S. policy changes ease, bankers and investors said this week.

Returns on Latin American bonds remain attractive and the new openness to deals has already allowed Brazil's government to raise funds at a record low yield.

Argentine's Santa Fé province also recently returned to the capital market after a long hiatus.

Brazil's Suzano Papel e Celulose SA's is one example of the warmer reception for Latin American debt.

Its recent sale of a 30-year junk global bond - the first of its kind by a Brazilian company - underscored investors' receptiveness to less traditional structures, bankers said.

Brazilian logistics firm JSL SA could be next in line, two people familiar with the plans said.

Concerns that U.S. President Donald Trump would lure capital out of Latin America have subsided, according to bankers, who spoke on background on the eve of Brazilian bank Itau BBA's annual debt capital markets conference in New York.

That, coupled with market stability after the U.S. Federal Reserve's single rate hike so far this year, is fueling inflows, the bankers added.

Emerging market funds registered a $6.5 billion net inflow in the week ending March 22, their highest in nearly four years, Institute of International Finance data showed. About $4.5 billion of that total went to bonds.

"We'll still see a lot of debt refinancing deals, but there are a few first-time issuers tapping the market," said Felipe Wilberg, global head of fixed income for Itaú BBA, Brazil's largest corporate and investment bank.

Cheaper funding for the region's borrowers largely hinges on governments' ability to push ahead with key reforms ahead of a busy Latin America election calendar, Wilberg said.

Investors had initially expected Trump-related turmoil to slam the brakes on access to capital markets in Latin America, which has struggled with the end of a decade-long commodities boom.

The premium that investors demand to own Latin American bonds over U.S. Treasuries now stands at about 7.6 percentage points, compared with about 7.1 points at the start of the year, according to JPMorgan's EMBI Diversified Latin America bond index.

DIFFERENT INVESTOR REACTION

However, the pushback has been minor relative to prior U.S. tightening cycles that triggered violent swings in Latin American issuers' borrowing costs.

"Although conventional wisdom states that U.S. rate hikes lead to pressure on asset prices in emerging markets, we are seeing a different reaction from investors," said Marc Nachmann, head of Latin America for Goldman Sachs Group Inc.

Western Asset Management Co has raised the Latin America share of its emerging markets debt positions to 47 percent from 40 percent over the past year, as prices turned attractive and the outlook improved, said Mark Hughes, who helps oversee $40 billion in bonds for the firm.

The ramp-up has been gradual though, Hughes said, noting that bonds from Brazilian exporters now offer a better entry point than those of domestic-oriented companies.

Latin American sovereign and corporate borrowers have raised $34 billion from sales of global debt this year, Itaú BBA data showed. Last year, bond borrowing in the region reached $102 billion.

Bankers are raising their estimates for new Latin American bond supply this year to $80 billion from as low as $60 billion in November as initially negative sentiment on Mexico has recovered.

In the case of Brazil, President Michel Temer's progress in pushing reforms is fueling demand for bonds like Suzano's.

"When the deal hit the road, we sensed that investors were in general more optimistic about fiscal consolidation than they were a year earlier," Marcelo Bacci, Suzano's chief financial officer, said in an interview. (Editing by Guillermo Parra-Bernal, Christian Plumb and Tom Brown)

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