It is well known how important it has become to have natural hedging against the USD/CLP exchange rate due to the unprecedented volatility following the social unrest and the pandemic. It is precisely these events—along with a coordinated increase in interest rates worldwide—that have significantly boosted dollar-denominated yields for Chilean companies, both investment-grade and high-yield. By holding exposure to these types of issuers, which are well known to the market (Celulosa Arauco, Cencosud, Falabella, Entel, Telefónica, CCU, BCI, among others), and depending on the duration, there could be attractive entry points yielding between 5.5% and 7% annually to maturity.

We do not want to delve into specific companies that are experiencing operational and financial upheavals due to these very factors, but rather focus on those issuers that have solid balance sheets, stable cash flow generation, and corporate governance and capital structures that put even the most cautious investor at ease.

To give a couple of examples, a Celulosa Arauco bond (BBB- credit rating) maturing in 2030 offers an annual nominal yield of 6.25%, representing a premium of 220 basis points over the benchmark U.S. Treasury yield for that maturity. This absolute rate has been exceeded only twice in the last five years: first, at the height of the pandemic, and second, when central banks began aggressively raising interest rates in 2022. Other examples where credit risk is limited: Entel (BBB-) maturing in 2032 with a yield to maturity of 6.25% (225 bps), Antofagasta Minerals maturing in 2032 (BBB) yielding 5.75% in foreign currency, and BCI (A-) maturing in 2031, yielding 5.5% (150 bps) annually. 

Furthermore, market conditions lead us to believe that we will see sharp drops in interest rates during the second half of the year or early next year. Therefore, by holding exposure to these issuers, investors would realize additional capital appreciation gains, in addition to the annual carry from interest accrual. In addition, the local institutional environment has been calming down, which has provided some relief for investors holding Chilean assets. Finally, exposure to the U.S. dollar has become highly sought after following unprecedented levels of peso depreciation.

Adolfo Erpel, Fixed-Income Trader