Central American and Caribbean Forum (NYC) - June 12 2013 Central American and Caribbean Forum (NYC) - June 12 2013
Central American and Caribbean Forum (NYC) - June 12 2013

EMTA Panel Focuses on Central American and Caribbean Credits 

EMTA’s Fourth Annual Central American & Caribbean (CAC) Forum was held on Wednesday, June 12, 2013, in New York City.  Oppenheimer & Co. sponsored the event which drew an audience of 100 market participants to its downtown headquarters.

Carl Ross (Oppenheimer &Co.) served as the event moderator, and asked speakers to opine on each of three categories of CAC countries --  highly-rated CAC credits (which included potential “falling angels and generally weakening stories”); a group of BB-rated credits ranging from Costa Rica to Guatemala and El Salvador; and distressed names, including Belize, Jamaica and Grenada.

First, though, in order to provide context, Franco Uccelli of JPMorgan was asked to review recent CAC performance.  Uccelli underscored that, overall, CAC countries had lower correlation to the larger EM credits and had performed better than the broader EMBIG index.  Uccelli pointed out that the best CAC performer year-to-date had been Belize, followed by the highly-illiquid Cayman Islands.  The worst performer in the group was Grenada, following its announcement of a debt restructuring.

In his discussion of the investment-grade rated Caribbean countries, CIBC’s John H. Welch observed that economic performance varied.  He identified the Bahamas as among the region’s better performers, due to its banking sector and a recovery in tourism.  On the other hand, Welch expressed concern at deteriorating economic policies in Bermuda, and noted that Aruba continued to suffer following the closure of its Valero oil refinery.  While summarizing that, “we like many of the investment grade CAC credits because they trade cheap compared to lesser-rated credits,” Welch conceded that many highly-rated CAC credits were highly illiquid (“it’s hard to find the bonds.”)

In a discussion of the region’s BB-rated credits, Uccelli reminded attendees that Honduras, Costa Rica and Panama have elections scheduled in the near future, while arguing that dramatic policy changes were unlikely regardless of who wins.  Elections in El Salvador were “anyone’s guess, with a second round likely and inconclusive polling.”  The Dominican Republic was being priced by the market as a BB credit, and was an improving credit story, although Uccelli didn’t foresee an immediate upgrade from its current B rating.

There were generally negative comments on the economic situation in Barbados, a country which lost its investment grade ratings in 2012.  Welch noted that the growth outlook was not impressive, although he praised the improving amount of economic data being available on the country.  “Barbados is resting on its laurels,” suggested Ross.  “It’s a country getting poorer and they haven’t come to grips with that.”

Estes saw the region’s B-rated countries as being rated correctly.  Wide-spread violence related to drug-trafficking deterred investment, while the drug trade and money-laundering crowded out legitimate business, he stated.  Political risk was a significant concern for investors in Honduras according to Estes, who participated in the nation’s recent bond offering.  In addition to weak institutions, he also wouldn’t rule out the potential for a repudiation of official debt if deposed President Zelaya’s wife won the presidential election (and claimed debt issued by the government that overthrew her husband was not legitimate).   

Sean Newman of GE Asset Management speculated that Jamaica had “bought itself maybe two or three years to improve its fiscal situation” following its recent domestic debt restructuring.  One interesting sector, according to Newman, was the country’s wind power business, whose performance had started to attract Chinese investors.

Estes described his experience as a creditor of both Belize and Grenada in debt renegotiation discussions.  On the current Grenada negotiations, he noted that “there has not yet been a lot of communication with the government,” while calling for multilateral organizations to be “part of the solution as they hold such a large percentage of Grenada’s debt.”  On Belize’s default, which occurred despite primary surpluses and economic growth, bondholders were able to achieve “a decent result” after joining forces.  However, Estes called attention to the country’s continued high debt to GDP ratio and suggested future defaults were possible.

The panel debated the effects of the death of Venezuelan President Hugo Chavez on CAC economies.  “So far nothing has changed, but the cut-off of Venezuelan oil is a significant risk to a number of CAC credits,” Welch stated.

The panel concluded with each speaker’s top investment choices.  Estes recommended Belize and most BB-rated credits (except Panama) on a relative value basis.  Newman expressed interest in CAC bottlers and airport owners.   

Welch chose Barbados despite its fall from grace, disagreeing with Ross and Uccelli’s more negative forecasts.  He also would own Jamaica, while expecting a restructuring after two years.  Uccelli spoke constructively on Aruba, the Cayman Islands, and Trinidad and Tobago.  He also saw potential upside in the Dominican Republic “if they continue on their current path.”

Ross suggested Belize could be an attractive credit based on “a reasonable amount of optimism that they will find more pockets of oil.”  However, he warned that the country was still likely to restructure in “six or seven years.”  El Salvador might have been “beaten up too much,” and the potential for a positive political outcome added some upside.  Jamaica could be a tactical trade with a short time horizon, he concluded. 

CENTRAL AMERICA & CARIBBEAN FORUM
Wednesday, June 12, 2013 

Hosted by Oppenheimer & Co., Inc.
Global Headquarters
85 Broad Street
New York City

3:30 p.m. - Registration 

4:00 p.m. - Panel Discussion
Opportunities and Challenges for the Central American / Caribbean Region
Carl Ross (Oppenheimer & Co.) – Moderator
John H. Welch (CIBC)
Sean Newman (GE Asset Management)
George Estes (GMO LLC)
Franco Uccelli (JP Morgan) 

5:00 p.m. Cocktail Reception 

Additional support provided by CIBC and JP Morgan.