Commentary & Deal Flow

At Aa3/AA+/AA-, how Corporación Andina de Fomento fares in the primary market doesn’t tell us much about appetite for EM credit*. But CAF did score the first benchmark bond of the week from a Latin American issuer on Thursday as it priced a $750m floating rate note via BMO, Morgan Stanley, Scotia and TD. Full pricing details below ICYMI.

Perhaps the more important first, though, was for the issuer: it was CAF’s first public FRN ever. And it was supported, like much of the recent innovation and diversification that CAF has carried out in bond markets^, by its upwards ratings trajectory.

“Given this product is highly focused on bank treasuries, until recently I don’t think it would have been viable for us,” said Manuel Valdez, head of DCM funding and derivatives at the development bank. “Despite the broader geopolitical risk and an extremely volatile market, we managed the biggest order book for an FRN all year – and priced $750m, when it’s more common to see $500m.”

Valdez added that the 4bp of tightening from IPTs was also unusual, suggesting 2bp-3bp is more normal. Amid a pretty volatile secondary market, he saw fair value in the 55bp-57bp range; the bond priced at Sofr+53bp. (SSA FRNs typically come flat to slightly inside an issuer’s fixed rate curve.)

If you’re wondering why this bond tasted a little maple syrup-y, it wasn’t just the sweetness of a $3.8bn book. Three out of the four leads were Canadian banks, who tend to be strong in these products, with good relationships with bank treasuries.

“For us the FRN gave us the option of doing something new,” said Valdez. “Bank treasuries is a section of the investor base that we’ve been working on expanding, and this deal allowed us to do so.

“It’s another product to make CAF a more attractive investment to more accounts, and we were able to attract a few new names.”

Before Thursday, CAF had issued three times this year: a $2bn 10-year fixed rate dollar trade on 01/08, a £1bn sterling 5-year on 01/19, and a CHF125m 7-year Swiss franc bond on 01/29. They came after S&P upgraded the lender’s rating by two notches to AA+ in November, upon revising its criteria for multilateral lenders.

“When you look at the triple-A supras, many of them have 0% credit charges, which is very attractive for bank treasuries,” said Valdez. “For us it’s 20%. This deal involved a lot of work, but it’s definitely paying off, and obviously the rating upgrades have helped.”

Banks ultimately took 49.3% of the deal – by some distance the largest portion. Full breakdown follows, but for context they accounted for 20% of CAF’s 10-year fixed-rate note in January.

POST-CPI WINDOW

CAF had been monitoring the markets for a couple of weeks, and had held a couple of go/no-go calls previously. But Wednesday morning’s US CPI print presented an opportunity.

“After CPI we saw some market stability and felt confident that it was the right window,” said Valdez.

Although the tone was softer as books opened officially on Thursday, the borrower already had around $2.2bn of IOIs, so felt fairly sure about moving forward. Books ended above $3.8bn.

After Thursday’s transaction, CAF has raised $4.25bn in public bond markets so far this year. It is looking at annualy funding needs of $8bn-$9bn – though this could increase if it issues another hybrid. But the decision to make thus week’s deal 144A/Reg S was to leave the borrower with more space in its US shelf.

“We probably still have a couple more benchmarks to go,” said Valdez.

BOOK BREAKDOWN

[CAF]

Corporacion Andina de Fomento (“CAF”), Aa3/AA+/AA- (p/s/p), 144A/Reg S US$750m senior unsecured floating rate note due 09/19/2029. Joint bookrunners: BMO/MS/Scotiabank/TD. Coupon: FRN, Compounded SOFR + [ ] bps, Quarterly, Act/360. Convention: SOFR Index, where SOFR Index Start and SOFR Index End will be 5 days prior to Interest Period. Law: English. Denoms: $250k x $1k. Listing: London Stock Exchange. Target Market: Manufacturer target market (MIFID II/UK MiFIR product governance) is eligible and professional counterparties only (all distribution channels). Advertisement: The applicable Final Terms, when published, will be available on the website of the London Stock Exchange. 144A ISIN: US219868CR53. Reg S ISIN: USP31890AM13.

Price: 03/12. Settle: 03/19 (T+5).

IPTs: SOFR+57bp area (announced 03/11).

GUIDANCE: SOFR+55 area. IOIs in excess of $2.2bn (excl. JLM interest).

UPDATE: spread set at SOFR+53. Books above $3.5bn (excl. JLM interest).

FINAL TERMS: $750m @ SOFR+53bp. Books closed in excess of $3.8bn (excl. JLM interest).

PRICED: $750m 09/19/2029 FRN at SOFR+53bp, at 100. Final book above $3.8bn. (TOE 2.30pm UKT / 10.30am EST)

*Indeed, so ensconced is CAF in the true SSA universe that these days we do not typically count it among LatAm issuance volumes – though we realise some banks do, so our end-of-week deal tracker sheets include tabs with and without supranationals.

^In the past two years alone, CAF has issued its first hybrid bond ever, its first 10-year since 2012, and returned to the sterling market for the first time in over two decades.

Olly West: olly@creditflowresearch.com