Colombia Freezes as Interbolsa Hits Hottest Market: Andes Credit
The collapse of Colombia’s largest brokerage is burning foreign investors who piled into what had been one of this year’s hottest emerging markets.
Yields on $5 billion of dollar bonds sold by Colombian banks have jumped since the government was forced to take over Interbolsa SA (INTBOL)’s brokerage this month, pushing up borrowing costs by an average 26 basis points, or 0.26 percentage point, from a record low on Oct. 17. That’s about five times the average increase in yields of emerging-market financial institutions’ bonds in the same period, according to JPMorgan Chase & Co.
Interbolsa’s implosion sparked concern that regulators are failing to contain financial risk after the nation’s biggest lending boom in four years led banks to issue $3.6 billion of bonds overseas this year, more than they sold in the previous 12 years combined, according to data compiled by Bloomberg. The bond market seized up for six days after the failure and the benchmark stock index is headed for its worst month since June.
“If you start to peel back the onion, what else are you going to see?” said Raymond Zucaro, who helps manage about $240 million of emerging-market debt at SW Asset Management in Newport Beach, California. “It’s not like it was some obscure little broker in the middle of nowhere. It was the largest one.”
Yields on benchmark Colombian peso bonds due in 2024 have soared 18 basis points over the past month, the worst 30-day selloff since May, to 6.2 percent while the cost to insure the country’s debt against default climbed to the highest in more than a year relative to neighboring Peru’s. The IGBC benchmark stock index slid 4.25 percent while the peso weakened 1.1 percent, its worst slump in three months.
The declines cut into a rally that had driven the peso up 7.9 percent this year as banks repatriated funds from their record overseas debt offerings. Yields on the government’s peso bonds due 2024 reached a record low 6.01 percent Oct. 19.
Interbolsa’s brokerage, one of 10 government-authorized market makers for Colombia’s debt market, will be liquidated. Regulators stepped in after Interbolsa said Nov. 1 that it couldn’t make a payment on a 20 billion peso ($11 million) loan because it was facing a “temporary” funding shortage.
Finance Minister Mauricio Cardenas said in a Nov. 5 interview the failure was caused by “bad business decisions” that don’t reflect any system-wide risk. The press office of Bogota-based Interbolsa didn’t return a telephone call or an e- mail seeking comment.
As part of the government-orchestrated effort to avoid disruptions in financial markets, Bancolombia SA (BCOLO), the country’s largest bank, took over from Interbolsa transactions in the government bond market worth 1.6 trillion pesos ($880 million).
The measures, which also include letting brokerages use a so-called liquidity window at the central bank and appointing Bancolombia to take over Interbolsa’s equity operations, have failed to reverse a selloff in the nation’s financial bonds.
“Whenever this type of issue happens with a major player in any market, it generates a little bit of uncertainty, of systemic uncertainty,” said Marco Aurelio de Sa, head of trading at Credit Agricole SA (ACA)’s Miami brokerage.
Bancolombia’s $1.2 billion of notes due 2022 sank 2.43 cents from an Oct. 17 record high to 102.94 cents on the dollar, pushing yields up 30 basis points to 4.75 percent. Banco de Bogota SA’s $600 million of debt due 2017 fell 1.31 cents to 106.32 cents on the dollar over the same period, driving up yields 29 basis points to 3.35 percent.
Local government bond trading volume, which is typically low in December, will probably rebound in January, Maria Fernanda Suarez, Colombia’s director of public credit, said in an interview at her Bogota office yesterday.
“A situation like we had with Interbolsa created levels of uncertainty much higher than what we had previous to the event,” Suarez said. “The reading I have is that a lot of bank treasuries and many institutional investors have said for now, ‘I’ll stay put.’ I’d expect a recovery at the start of 2013.”
Bancolombia and Grupo Aval Acciones y Valores (AVAL) SA, the banking group that controls Banco de Bogota, the nation’s second-biggest lender, led debt issuance by Colombian financial firms this year with a combined $2.2 billion. Both are rated Baa3 by Moody’s Investors Service, the lowest investment-grade level.
In Latin America, only Brazilian banks have sold more international bonds this year.
The Colombian bond sales have helped fund a 16 percent increase in lending in the 12 months through August, propelling economic growth that has surged in the last decade as the army retook swathes of jungle and plains from rebels and freed up land for investment in mining and energy.
That helped Colombia last year to earn its first investment-grade ratings since 1999. Colombia is rated Baa3 by Moody’s and an equivalent BBB- by Standard & Poor’s, data compiled by Bloomberg show.
Economists surveyed by Bloomberg forecast the $332 billion economy will expand 4.5 percent this year, compared with 2.9 percent for Latin America as a whole, as the government predicts foreign direct investment will soar to $17 billion from a record $13.2 billion last year.
The peso has also appreciated 47 percent against the dollar in the past 10 years, making it one of the five best-performing currencies in the world, data compiled by Bloomberg show.
Those “sound fundamentals” will help spark a rebound in Colombia’s dollar bonds, including the bank securities, according to Isabel Olivos, a fixed-income analyst at Santiago, Chile-based financial firm Munita, Cruza & Claro SA.
“People will start focusing on the country’s sound fundamentals and the credibility of the central bank,” she said. “The impact will only be temporary” because the liquidity crisis was confined to a single brokerage.
The bond market still hasn’t recovered after Interbolsa’s collapse caused trading to seize up.
There were no trades in the government’s benchmark peso bonds due 2024 on the central bank’s platform known as SEN on Nov. 13, six days after regulators said they were liquidating Interbolsa because they were unable to find buyers for the brokerage.
The cost to protect Colombian debt against non-payment for five years fell one basis point to 101 basis points at 4:09 p.m. in New York, according to data compiled by Bloomberg. It costs 101 basis points to insure debt issued by Peru against default. On July 9, it was 22 basis points more expensive to insure Peru than Colombia against default.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
The extra yield that investors demand to own Colombian government dollar bonds instead of U.S. Treasuries narrowed seven basis points to 124 basis points, according to JPMorgan’s EMBI Global Index. The peso strengthened 0.1 percent to 1,816.8 per dollar.
Yields on Colombia’s dollar bonds due July 2021 rose three basis points to 2.43 percent. Yields have declined two basis points this month even as those for bank bonds rose.
While it’s unlikely that other financial institutions are facing the kind of cash shortage that caused Interbolsa to fail, the specter of further takeovers is depressing demand for bonds issued by banks and brokerages, according to David Olivares, an analyst at Moody’s. He said Moody’s isn’t considering lowering Colombian banks’ ratings.
The bond selloff is “a sensible reaction,” Olivos said in a telephone interview from Miami. “It’s difficult to know if there’ll be more cases. We can’t rule it out.”