The bond market in Colombia was the fifth-largest fixed-income market in the world in terms of traded value at the end of 2013, according to the World Federation of Exchanges. The market expanded dramatically between 2002 and 2011, when the number of outstanding titles grew by 249% and the total of traded volume doubled during the same period.
During those years, inflation diminished from 6.4% in 2002 to 3.4% by 2011. This helped the Central Bank of Colombia (Banco de la República de Colombia, BRC) to lower interest rates and increase money supply. These favourable macroeconomic conditions allowed the fixed-income market to grow, thereby providing the companies and local government with cheaper financing options.
The government became the largest issuer in the bond market when it decided to substitute external debt for internal debt in 2001. The offer of government bonds in the local market increased by 76.7% between 2002 and 2006, reaching COP94.4trn ($47.2bn). Additionally, 2005 marked the beginning of bond issuances with 15-year maturities, establishing a long-term reference for the market and expanding the interest rate curve.
This achievement generated conditions needed for the corporate sector to issue its first medium- and long-term notes, and also created opportunities for the securitisation of assets. As a result, corporate debt grew by 402% between 2002 and 2006. However, during 2007 and 2008, public and corporate debt issues contracted due to the decision of BRC to increase interest rates and reduce money supply. In 2007 corporate debt issues grew just 4%.
In 2008 the over-the-counter market was implemented, without having the expected positive effect. Even after the traded volume recovered in 2009, the years 2010 and 2011 saw a decrease of 43.6%, going back to levels reached in 2004. This drop coincided with the international financial crisis, which saw large flows of capital exit emerging markets.
After two years of contraction, fixed-income trade volumes grew by 0.41% in 2013 to reach COP1516trn ($758bn). The behaviour of the market was marked by high volatility and uncertainty due to external and internal economic events. Despite the growth, however, this is still 30% below the COP2,161trn ($1.08trn) traded in 2010.
The drop in activity that began in 2010 affected both the public and private debt markets, which, at the time, presented trading volumes of COP1749trn ($874.5bn) and COP411bn ($205.5bn), respectively. However, analysing both markets separately demonstrates that each segment did not perform the same. For example, while the public debt market rebounded in 2013, growing by 5.7% from COP1283trn ($641.5bn) to COP1356trn ($678bn), the private segment dropped 29%, from COP226trn ($113bn) to COP160trn ($80bn).
Adjustments to the tax regime in 2012 are expected to drive more foreign investment to the Colombian fixed-income market. For example, tax rates for non-residents were reduced from 33% to 14% on fixed-income and derivatives products on the Colombian Stock Exchange (Bolsa de Valores de Colombia, BVC). For residents in tax haven countries, however, the tax rate for these products is 25%.
The Colombian fixed-income market is the largest market in the country in terms of traded volume. It is 31 times larger than the equities market and is highly concentrated towards public debt. Government issues represent around 90% of the total traded volume in the fixed-income market.
The most important instruments in the public debt market are the treasury bills (tìtulos de tesorería, TES), which are notes issued by the Colombian government. TES are issued either with a fixed rate or with an inflation-linked rate (unidad de valor real, UVR), which are more liquid. There are two classes of TES: Class A and Class B. Class A TES are negotiated in the primary market and are used to cover the liabilities of the central bank. Class B TES, on the other hand, are issued to finance the needs of the country and are traded in the secondary market.
The macroeconomic stability reached by the country in the past decade has helped the Colombian government obtain financing from the markets at longer terms. Thanks to this situation, TES issues have achieved longer maturities. In the case of fixed-rate TES, the issue with the longest term is a 6% coupon TES that matures in April 2026 (16-year term). In the case of inflation-linked TES, the issue with the longest term matures in March 2033 (20-year term).
As of March 2014, the Colombian government had COP174.48trn ($87.24bn) in active issues, with fixed-rate TES accounting for almost 76% of the total, while UVR TES represented the remaining 24%. In 2013 the BVC’s TES market reached a traded volume of COP1333trn ($666.5bn).
With respect to external debt, Colombia has numerous sovereign bonds with different maturities, with the US dollar as the primary currency. As of January 2014, the value of the active sovereign bonds was $20.9bn, the great majority of which were bullet bonds. Similar to what happened with the TES market, the Colombian government has been able to issue sovereign bonds at longer terms, expanding the yield curve. Today, the sovereign bond with the longest maturity in the market matures in 2044.
In January 2014, the Ministry of Finance and Public Credit reported that fund administrators were the largest holders of Colombian sovereign bonds, at 67%, followed by hedge funds (10%) and banks (9%). In terms of investor nationality, 66% of bondholders were from the US, 21% from Europe and 5% from both the UK and Latin America.
The corporate debt market continued its downward trend in terms of traded volume, ending 2013 with COP159.7trn ($79.85bn) compared to COP226.4trn ($113.2bn) traded in 2012. However, corporate debt issues in 2013 showed some positive dynamism, placing COP9.26trn ($4.63bn) in the market, slightly lower than the COP10.15trn ($5.08bn) placed during 2012. Of this total, the “real” sector (primary and secondary producers) and the public sector dominated the issues, accounting for 54% of the total, a behaviour that had not been seen in recent years.
Of the 68 debt issuances in 2013, only six were issued with a fixed interest rate. In terms of total value, fixed-rate issues represented 10% of listings at the end of 2013. The great majority of bonds – 47 titles, representing 70% of the total value – were linked to the inflation index. The remaining 20% was distributed among titles linked to reference rates such as the benchmark interest rate or the UVR.
Of the total value of the issues, 34.2% of the titles had terms up to five years, 33% between five and 10 years, 22.2% between 10 and 20 years, and the remaining 10.6% had longer terms.
Colombian oil and gas company Ecopetrol allocated COP900bn ($450m) in four different issues, one of them with a 30-year maturity (COP262.95bn, $131.48m). The energy company Celsia followed with a total allocation of COP800bn ($400m) through four different issues with different maturities, the longest of them having a 20-year term (COP212.08bn, $106.04m). Other large issues were placed by Organización Terpel and Leasing Bancolombia, with COP700bn ($350m) and COP600bn ($300m), respectively. Other companies from the energy sector also allocate bonds with 20-year maturities. Promigas issued COP250bn ($125m), Surtigas COP70bn ($35m) and Empresas Públicas de Medellín issued a 20-year bond worth COP229bn ($114.5m).
Small Corporate Issues
Mid-sized companies in Colombia face difficulties allocating their debt issuances, as large institutional bondholders such as pension funds and mutual funds tend to focus mainly on large issues with local AAA ratings. As a solution to this problem, some smaller companies have explored the option of allocating their issuances in the Panamanian capital markets.
As Mauricio Rincón, a partner at Arca International Group, told OBG, “Medium-sized companies that wish to go out and issue debt in the local market face three difficulties: the first has to do with ratings. If they are of medium size, companies may be unable to attain a rating from the rating agencies. Second, an issuance less than an equivalent of $250m is considered small and illiquid in the local market in Colombian peso. Third, the cost of debt in pesos can be more onerous (compared to issuances in US dollars), depending on the term of the issuance.” ARCA’s experience has shown that there is appetite for Colombian issues in Panama and financing is generally less costly and in US dollars.
Despite the challenges facing smaller firms wishing to list on the BVC, Credifamilia, a company focused on providing financial services, managed to allocate COP18.23bn ($9.12m) in assets during 2013 with the help of the BVC’s programme, Colombia Capital.
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