Chilean Giants Embrace Hybrid Bonds for Multi-Billion Dollar Investments

In a notable shift within Chile’s financial landscape, hybrid bonds have emerged as a crucial financing mechanism, enabling major corporations to undertake ambitious, multi-billion dollar investment projects without compromising their vital credit ratings.

The use of these innovative debt instruments has a history in the region, with AES Andes pioneering dollar-denominated hybrid bond sales in South America back in 2013, a market it revisited in 2019. More recently, in 2024, Banco Estado also entered this space, issuing AT1 notes, a similar instrument favored by banking institutions. The trend has broadened across the region, with Mexico’s cement giant Cemex completing a US$1 billion issuance in September 2023, followed by the Corporación Andina de Fomento’s US$500 million sale in June of the current year.

The local Chilean market witnessed its own significant adoption of these instruments in 2024. In August, Inversiones CMPC, a prominent forestry company, initiated this trend by issuing 10 million Unidades de Fomento (UF) in hybrid bonds. Just two months later, Celulosa Arauco y Constitución followed suit with an even larger placement, issuing 20 million UF. This transaction marked a historic moment, becoming the largest corporate bond issuance ever recorded in Chile. Most recently, lithium giant SQM became the third major Chilean firm in four months to tap into this market, issuing 10 million UF (equivalent to approximately US$432 million) at a rate of 3.84%.

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These companies are facing substantial capital expenditure plans. Arauco’s investments reached US$897 million in the first nine months of the year, putting it on track for its highest annual level since 2022. CMPC’s investments totaled US$653 million during the same period, heading towards a ten-year peak. SQM, for its part, has outlined an ambitious three-year capital spending plan amounting to US$2.7 billion.

Such significant investment demands necessitate financing strategies that protect the issuer’s credit standing. Hybrid bonds offer an attractive solution: typically, half of the issued amount is recognized as equity, thereby mitigating the increase in the company’s overall debt burden. This allows for substantial expansion without risking a downgrade to their crucial investment-grade credit ratings. Francisco Mohr, head of fixed income at BTG Pactual Asset Management in Chile, explained that these notes are placed “with an explicit objective of defending a high investment grade rating and a solid balance sheet as companies increase their investment.” He further noted that the debt comes with “an attractive trade-off,” as it “pays more than traditional debt, but improves rating metrics, reducing the risk of downgrade.”

While hybrid bonds command higher interest rates compared to traditional debt, this premium is precisely what attracts investors. The CMPC bond, for instance, was placed at a rate of 4.19%, which was 230 basis points above an equivalent central bank UF bond and 110 basis points higher than its senior debt. Arauco’s issuance achieved a yield of 3.97%, 168 basis points over the reference rate, notably adjusting downwards from an initial registration rate of 4.5%, signaling robust investor demand. Similarly, SQM’s notes saw their yield adjusted lower from an initial 4.4% to 3.84%.

Diego Pino, head of trading and equity at Scotia Corredores de Bolsa, highlighted that these instruments “offer investors a higher spread, around 80 to 100 basis points over what they would get with a traditional bond.” He also clarified that while hybrid bonds “act as subordinated debt,” the companies undertaking these transactions are typically “large and solid enough to successfully place them.” All three Chilean issuers maintain investment-grade ratings from S&P: SQM at BBB+, CMPC at BBB, and Arauco at BBB-. These ratings fall within the lower “triple B” category, underscoring the importance of maintaining their financial health amidst aggressive expansion.

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The need for substantial capital is ongoing. Arauco continues to finance its Sucuriu project, a major pulp plant in Brazil requiring a US$3 billion investment. CMPC is also planning another significant plant, valued at over US$4.5 billion, which could commence construction within three years if its board approves the project in 2026.

Deneb Schiele, director of corporate finance and head of capital markets at Scotiabank, emphasized that “hybrid bonds primarily aim to support the issuer’s risk rating,” a goal particularly relevant “amid scenarios of low commodity prices and the heavy investments facing issuers.” Given these persistent capital demands, the market anticipates a continued presence of such operations. Mohr suggested that “it is reasonable to expect that other investment-grade issuers with relevant investment plans will study similar structures,” provided there remains an appetite for UF duration and rating agencies continue to grant equity credit. He further advised that these future issuances would likely come from companies with established, solid credit ratings to prevent the hybrid notes from descending into high-yield territory.

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As major Chilean corporations continue to pursue ambitious expansion strategies, hybrid bonds have firmly established themselves as a critical and effective financing tool. This innovative approach allows these firms to fund significant capital expenditures while diligently preserving their investment-grade credit ratings, a trend that is expected to persist as long as substantial investment plans remain on the horizon.