Chile Pension Funds Buy Record Foreign Bonds as Domestic Debt Sales Dry Up

Chilean pension funds are boosting holdings of foreign bonds to record levels as they turn to debt from countries such as Brazil and Mexico after a dearth of local corporate sales pushed yields to a two-year low.

Chile’s six private pension funds tripled holdings of foreign fixed-income assets in the past 12 months to $20 billion at the end of July, while cutting local holdings by $2.5 billion, according to the industry’s regulator.

The average peso-denominated corporate bond yield tumbled to 3.72 percent on Aug. 24, the lowest since April 2008, after a decline in offerings cut the supply of the securities, according to Santiago-based data company LVA Indices. In Brazil, by comparison, local corporate bonds pay yields linked to the country’s benchmark 10.75 percent overnight rate.

“More adventurous investors can buy in other countries in the region where yields are more attractive and swap into local currency,” Ricardo Gomez, head of fixed income at Larrain Vial SA in Santiago, said in an Aug. 18 telephone interview. “There are opportunities in Brazil, Colombia and Mexico.”

Overseas bond investments can return a yield of more than 500 basis points, or 5 percentage points, over interest-rate swaps, compared with less than 350 basis points for Chilean bonds, said Rodrigo Nader, who runs a $427 million closed-end fund at Santiago-based Celfin Capital SA. About 80 percent of his Deuda Latinoamericana fund is invested in Brazilian and Mexican corporate debt, followed by bonds from Colombia, Peru and international bonds sold by Chilean companies, he said.

Nader said he plans to re-open his fund to investors in September after selling out of fund quotas in June. “There’s a lot of demand,” he said in a telephone interview.

Stamp Duty

Chilean companies and banks sold $2.4 billion of local bonds in the first seven months of this year, down from $4.1 billion in the year-earlier period, according to the Santiago stock exchange. Companies sold a record $7.5 billion in all of 2009 as they took advantage of a temporary suspension of the 1.2 percent stamp duty on credit.

The $20 billion that pensions had in foreign fixed-income holdings accounted for a record 16 percent of their total assets under management last month, according to the pension regulator. The percentage is up from 6.2 percent, or $6.4 billion, in July 2009 and 0.1 percent in July 2007, according to the industry regulator, which doesn’t report fixed-income holdings by country.

Corporate Yields

Pension funds increased total fixed-income holdings by almost $11 billion in July from a year earlier. The entire increase is accounted for by purchases of foreign bonds, according to data from the pension regulator. Executives at Santiago-based pension funds AFP Habitat SA, AFP Modelo SA, AFP Provida SA, AFP Cuprum SA, AFP Capital SA and AFP Planvital SA didn’t respond to requests for comment.

Corporate dollar debt yields an average 6.23 percent in Brazil and 6.99 percent in Mexico, compared with 4.33 percent in Chile, according to JPMorgan Chase & Co. indexes.

The extra yield earned on Chilean corporate peso bonds instead of government notes narrowed to 35 basis points on Aug. 17, the lowest since June 2008, from 204 in February 2009, according to LVA Indices.

Facundo Torres, who started a $50 million Chilean bond fund for Celfin in June and still has $10 million left to invest, said he competes with pension funds and insurers in trying to find local securities to buy.

Low Liquidity

“There’s lots of demand and there hasn’t been any supply and that has meant spreads have fallen to pretty low levels,” Torres said by telephone from Santiago. “It’s difficult to get assets. We buy Chilean bonds overseas and we do a cross to local currency and that way we get more attractive spreads, but there isn’t much liquidity in that market either.”

Five non-bank companies sold bonds in Chilean pesos or unidades de fomento this year worth $497 million in the first seven months of this year, compared with $677 million sold in December alone, according to Santiago stock exchange data.

The amount of corporate bonds held by banks, pension funds and mutual funds increased 8.7 billion pesos in the first half of this year after growing 701.8 billion pesos in the last six months of last year, according to central bank data.

Economic Slump

Average Chilean peso corporate bond yields rose to 5.35 percent last year amid the worst economic slump in a decade, according to LVA. At the same time, corporate bond sales more than doubled to 3.6 billion pesos, according to data from the securities regulator.

The extra yield, or spread, investors demand to buy Chile’s 10-year dollar bonds instead of U.S. Treasuries dropped to 90 basis points today from 97 basis points on Aug. 24, according to BNP Paribas SA prices. The difference in yield between Chile’s 10-year international bonds in pesos and its similar domestic debt was 95 basis points today.

The peso rose 0.6 percent to 503.22 per U.S. dollar at 10:12 a.m. New York time today, from 506.45 yesterday.

The government suspended a stamp duty on loans even as banks cut access to credit, enticing companies wishing to take advantage of the tax break to sell bonds. Bank lending fell for seven straight months in 2009 as Chile’s economy shrank amid the global financial crisis.

This year, with the economy growing at the fastest pace in five years, companies have turned back to bank loans as banks cut the rates they charge and eased restrictions, according to central bank loan surveys. The average interest rate Chilean banks charge for a short-term commercial loan in pesos dropped to 3.6 percent in May 2010, from 10.3 percent a year earlier, according to central bank data.

Investment-Grade Notes

Insurance companies including Principal Financial Group Inc. have turned to investment-grade notes abroad, said Valentin Carril, who oversees $3 billion in fixed income as chief executive officer of Principal’s asset management unit in Santiago. Carril, who swaps investments back into local currency, said he will only invest in countries with investment- grade ratings.

“We didn’t do anything for at least two years because yields in Chile were better and it didn’t make sense,” Carril said by telephone. “In 2010 we have been much more active.”

To contact the reporter responsible on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

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