Corporate bonds

 

Colombia’s corporate bond segment is an important component of the country’s capital market, despite its relatively small size and liquidity. The total amount outstanding at the end of 2016 was COP48.1tn ($14.4bn), or an estimated 5.5% of GDP.

All corporate bond trading is registered on the Colombian Stock Exchange (Bolsa de Valores de Colombia, BVC). The average monthly traded volume in 2016 was COP16.4trn ($4.9bn), which is about 14.2% of the total traded volume of local public debt. However, it is worth noting that the country’s public debt market is among the largest and most liquid of its kind in the region (see dedicated share analysis).

Background

Corporate bond issuance had a strong performance in 2016, reaching COP9.7tn ($2.9bn) – 64.4% higher than in 2015 (COP5.9tn, $1.8bn) and 10.2% higher than its 10-year average of COP8.8trn ($2.6bn). This occurred amid increasing liquidity needs, higher inflation and interest rates, and high volatility resulting from external factors.

The 2016 figure was equivalent to roughly 26.5% of local government debt issuance in 2016, compared to a 10 year-average of 33.2%. The financial sector continues to be the largest issuer of corporate bonds, with 65% of total placements in 2016, while its debt outstanding represents about half of the total. Inflation-linked bonds are the most common, with a 65% share of total issuance in 2016 – although fixed rate bond placements saw an upturn to a 31% share of total issuance. Interest rate-linked bonds (to both the fixed-term deposit rate and the inter-bank rate) comprise the remaining of corporate debt issuance.

In terms of credit quality, the corporate bond market is highly concentrated in “AAA”-rated securities (this is a local rating). About 77.5% of total debt issued in 2016 was rated “AAA”, while the remaining was rated “AA+”. Similarly, the share of “AAA”-rated bonds was 79.6% of total debt outstanding at the end of 2016, and that of “AA+”-rated was 20.2%. As a result, the high-yield market is practically non-existent, which is a symptom of the lack of risk appetite by local investors, partly due to regulatory constraints.

Projection

In 2017 corporate bonds are expected to pay COP9.5trn ($2.9bn) in amortisation and interest, and debt rollover should be high as economic and investment growth is expected to rebound gradually. Thus, debt issuance should be similar to that in 2016.

Fixed-rate bond issuance should moderate as inflation and monetary policy rates are expected to decline throughout the year. Net debt issuance by the financial sector should evolve in line with the growth of the loan portfolio, which is likely to remain weak, while longer-term issuance may increase, partly due to a pick-up in bank loans related to the fourth generation road infrastructure programme. The government’s ambitious infrastructure plan for the next 10 to 20 years, worth about $15bn-18bn, could boost the corporate debt market in that timeframe through the development of an infrastructure bond market.

The Latin American Integrated Market (Mercado Integrado Latinoamericano, MILA), of which the BVC is a member alongside the stock exchanges of Chile, Mexico and Peru, only trades equities, but fixed income trading is expected to be included sometime in the next few years. This should be positive for the development of the local corporate bond market.

Lastly, the Private Debt Visionaries Group, composed of the BVC, the Ministry of Finance and private sector participants, has been discussing a number of initiatives aimed at improving the size and liquidity of the corporate debt market. Some changes that could take place in the short term include using firm quotations for valuation purposes, allowing two-way quotes for time deposits and implementing measures to reduce issuance costs. Other initiatives require regulatory changes related to counter party quota rules, investment regimes for local investors, and asset and liability management requirements.

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