Corporate Bond Sales Drop 85% as Shocks Hit Colombia Market

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(Bloomberg) — Colombia’s local corporate bond market is all but closed.

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Only two companies have sold debt this year, borrowing just 292 billion pesos ($70 million). That’s 85% less than in the same period of 2022, according to data from Colombia’s stock exchange, and a steeper plunge than the 16% dip in issuance seen across Latin America over the span.

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“We’ve never seen a drop that steep, but then again, we’d never had so many market shocks at the same time,” said Nicolás Mayorga, head of issuers, analysis and research at Colombia’s stock exchange. 

The dearth of borrowing is partially explained by one of the region’s most stubborn bouts of inflation, which remains high after a year and half of interest-rate hikes. Even as consumer price increases peak, helping turn investors bullish on other assets, corporations aren’t expected to return to the market soon. 

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Issuers — and investors — are also shying from the market amid a tumultuous period of politics a year after the nation’s first leftist president, Gustavo Petro, was elected. As his administration contends with a widening scandal, Petro continues to push controversial reforms, including limiting the role of private pension fund managers — some of the biggest buyers of corporate bonds.

“It’s not so much about companies wanting to issue or not,” said Luis Carlos Sarmiento Gutiérrez, chief executive officer of Colombia’s largest banking conglomerate, Grupo Aval. “It’s about issuing large amounts of debt at such a high cost and maybe not being able to sell it all because uncertainty overseas is still high and everyone is waiting to see how these reforms pan out.”

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The decline started last year and deepened when Petro, who took office in August, announced ambitious social programs and policies meant to lift millions out of poverty. Investors feared his agenda would run up debt and hurt the currency. 

The Colombian peso hit record lows and yields on local government notes, known as TES, rose above 15% in October. 

One of the two companies to tap markets this year was a vehicle financing firm, Finanzauto SA, which borrowed about $15 million in notes due in 2 years, paying rates as high as 17%.

More recently, signs Petro’s agenda may crumble were met with enthusiasm by investors. 

Dollar-denominated bonds have rallied since late May, when a scandal involving allegations officials improperly used phone taps and polygraph machines led to resignation of Petro’s chief of staff and a campaign finance probe. Since then, discussions in congress about key reforms have been either pushed to a later date or failed to gain necessary support to advance.

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The Colombian peso has gained more than 15% against the US dollar this year, making it one of the best performing currencies in the world. It continued gains Thursday, hitting its strongest level in nearly a year.

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The respite hasn’t flowed to the local bond market. Many companies are postponing plans to sell debt amid the debacle and as inflation proves sticky. Colombia’s central bank, in two years, lifted interest rates to the highest level in nearly a quarter of a century. Inflation is still running above 12%, even as it cools in other Latin American countries.

The government recognizes that the local market has been “withering” and is working with the stock exchange on measures to stimulate liquidity, Public Credit Director José Roberto Acosta said in an interview from New York.

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Pension Overhaul

Petro’s proposal for the pension system seeks to push more worker contributions to the public retirement system, effectively cutting flows to the private funds that hold around a quarter of the 75 trillion pesos ($18 billion) of outstanding corporate debt. The public system does not invest in the securities. 

Arnoldo Casas, a money manager at Credicorp Capital, which holds peso-denominated corporate bonds, said the market will get a boost when interest rates start to come down. But for now, the market is lacking liquidity as private pension funds and insurance companies are the main buyers. “The complicated issue is the uncertainty around the pension reform,” he said. 

Meanwhile, other parts of Petro’s reform agenda, such as plans to ban new oil drilling, have a direct impact on the economy. The finance ministry estimates gross domestic product will expand 1.8% this year, from 7.3% in 2022. 

“The political issue has impacted the market in two ways: first, the energy transition, as the economy’s performance depends on it,” said Juan David Ballén, a strategist at brokerage Casa de Bolsa in Bogota. “And secondly, the pension reform, because pension funds are one of the main investors in capital markets.”

(Updates with currency move on paragraph 12)

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