Latin American sovereigns re-examine art of allocation to boost liquidity

DMOs adapt allocation process and seek more international demand

In order to improve the diversification of their bonds and boost their liquidity in the secondary market, Latin American sovereign debt management offices are paying more attention to how their syndicated bonds are allocated.

These topics were discussed in detail at the annual Latin American public sector debt outlook held by OMFIF’s Sovereign Debt Institute. This virtual event brought together senior officials at the DMOs of Chile, Mexico and Uruguay, along with investors, to discuss the issuance environment in the region.

‘At the moment, we are discussing with our underwriters how to allocate the accounts in our syndicated bonds,’ said Antonio Juambeltz, senior financial adviser, debt management at Uruguay’s ministry of finance, at the briefing. He noted that syndicate banks on occasion only give the issuer a few minutes to finalise the allocations. But now, the Uruguay DMO has spoken to their bookrunners saying they will take their time to allocate to accounts in order to maximise the liquidity of their bonds in the secondary market.

‘Some banks say ‘I’ll give 10 minutes’, but now I say, ‘No, I want to take half an hour or one hour to distribute the bond,’ said Juambeltz. He added that being able to ‘maintain a fluid communication with potential new accounts’ is crucial for the Uruguay DMO – which includes visiting them in-person or virtually.

Other DMOs in the region are also re-examining how they allocate their bonds.

‘We have conducted a lot of changes in our market-making programme that is helping us to have a very broad reach,’ said María del Carmen Bonilla, deputy undersecretary for public credit at Mexico’s ministry of finance and public credit. This broad reach includes allocation to hedge funds and foreign investors, the latter of which has increased with Mexico’s sustainable issuance.

The role of hedge funds in both primary and secondary markets to boost liquidity has been a core focus of OMFIF’s SDI over the last year. It is also something that European DMOs are scrutinising.

Mexico’s broader reach helped it size its biggest ever cross-border transaction in 2024 with a $7.5bn three-part bond sale. Bonilla added that bonds placed in the European, Japanese and US markets are all helping to drive the liquidity of Mexico’s bonds.

Brazil, however, only issues in the local or US dollar markets but they too are looking to increase their allocation to international investors, with only 10% of their debt currently held by foreign accounts. ‘We can enhance that a little as we move towards investment grade,’ said Otavio Ladeira de Medeiros, national treasury undersecretary for public debt at Brazil’s ministry of finance. ‘Maybe we can find new non-residents in our domestic debt and reduce red tapes and costs for them to invest in Brazil directly’.

Issuing with an environmental, social and governance-label is another way to increase Brazil’s share of international investors, admitted de Medeiros, particularly to European accounts. Brazil made its long-awaited debut in the ESG bond market in November 2023 with a $2bn green bond, of which investors from Europe and North America accounted for around 75% of the distribution. The issuance of a green bond also served as a way of emulating habits of other investment-grade sovereigns as Brazil aims to reclaim its investment-grade status after losing it following a deep recession in 2016.

Burhan Khadbai is Head of Content, Sovereign Debt Institute at OMFIF.

More discussions on the strategies of issuance by sovereigns in Latin America and other emerging markets around the world will be explored at the inaugural Global sovereign debt forum. This new annual flagship event by OMFIF’s Sovereign Debt Institute will take place exclusively in London on 20 June. For further details and to book your place, click here.

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