Latin American companies have developed a taste for American-style junk bonds in recent years.
Though U.S. investors backed off from the region after the downturn last fall in high-yield and emerging markets, there are signs that Latin issuers are creeping back.
"It's going to be a year of recovery, but we will have high-yield issuance in Latin America," said Simon Noble, a vice president in J.P. Morgan & Co.'s Latin American debt capital markets group.
Morgan priced $150 million of seven-year bonds for Arica last week to help finance the Chilean soft drink maker's purchase of bottling plants in Chile and Peru. The issue was priced at a slight discount, yielding investors about 10%.
The blue-chip bank was the biggest player in the Latin American market last year, primarily due to its leadership in yankee bond issues for governments in the region. J.P. Morgan managed 21.5% of the $9 billion of dollar-denominated issuance, according to Securities Data Co.
The nascent Latin high-yield market has evolved during the last three years, Mr. Noble said. "Emerging markets grew out of a banker mentality," he said. "The initial approach was to look at them in the same terms as a bank loan with fixed covenants.
"In '96, people started putting together covenant packages that looked more like U.S. high-yield deals, where they were thinking in terms of upside stories and the idea that cash flows would follow investments."
Most of the Latin issues that hit the U.S. high-yield market last year are trading below their issue price, though spreads have narrowed considerably.
The J.P. Morgan Latin American bond index, which includes both investment and noninvestment grade debt, rose to 950 basis points over comparable Treasuries last October before receding to 675 basis points now. The high-yield portion of that index would have wider spreads.
U.S. investors did not welcome Latin corporates again until November, when Pemex hit the market with a $570 million issue led by Morgan Stanley Dean Witter & Co.
The Mexican oil company has often tapped the U.S. junk bond market. Since September, high-yield investors have been favoring large issues from companies with a history in the market.
Mexican companies have the best market access now, with Argentinian firms paying slightly more to issue debt. The yield that investors would demand of a Brazilian company would be prohibitive, according to market observers.
Though spreads have narrowed, the pricing is more attractive today than it was a few months ago because the outlook for the region is clearer, according to Margaret Patel, a manager of high-yield portfolios with Third Avenue Funds.
Improvement in emerging-market stock indexes also indicates increasing investor confidence, said Art Penn, head of global debt capital markets for BT Alex. Brown, a Bankers Trust unit.
"There are some pretty compelling risk-reward ratios for investors," Mr. Penn said. "You can buy a great company at a discount in emerging markets where the credit quality will improve over time."
Mr. Penn said three sectors are likely to drive a reemergence in the Latin junk bond market: telecommunications, energy, and leveraged buyout sponsors.
Ms. Patel said she would prefer to stick with Latin telecom issues, favoring large well-known companies. "There is plenty of extra yield there. There's no reason to dig any deeper," she said.
But buyout shops are becoming a bigger presence in the region. BT Alex. Brown has a long and deep relationship with Texas-based buyout shop Hicks, Muse, Tate & Furst, which indicated last year that it intends to pick up its investment in this region.
And Latin America has spawned its own buyout shops in recent years patterned after the U.S. model. Argentina's Excell is one example.