Tuesday, 16 October 2018

Latin America Loan

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Reign of steel: Steel products producer Ternium’s financing to acquire a stake in Brazilian peer Usiminas stood out in a market characterised by smaller vanilla transactions. For demonstrating how larger acquisition loans could be syndicated, even in times of great uncertainty, Ternium’s US$700m loan is IFR’s Latin America Loan of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

Syndicating US dollar loans in Latin America became a dying art in late 2011 and 2012 as European banks moved into risk-off mode and shrunk the number of institutions participating in the market. Asian, US and local banks moved in to fill the void, but loan volumes continued to fall, with the region’s borrowers raising just US$20bn in the 12 months from mid-November 2011.  

In years past, steel products producer Ternium’s US$700m, five-year acquisition loan may have been lost in the crowd, but coming at a time when M&A deals were notable by their absence, and its ability to lure 12 banks, including several European institutions, made it stand out. It was also Latin America’s largest corporate loan of the year.

In January, with the loan market suffering from a lack of confidence, and with Ternium under a time pressure to pay for the 27.7% stake in Brazilian steelmaker Usiminas, four global co-ordinators – Citigroup, Credit Agricole, HSBC and JP Morgan stepped up to pre-fund the transaction, later joined by Santander as joint bookrunner to reduce the initial ticket size.

“We were OK with that as we knew there was interest from other institutions, but we took the risk,” said a banker at one of the co-ordinating banks. “This client has strong relationship banks so we were willing to pre-fund, but with other companies we probably wouldn’t have.”

Underleveraged, many Latin American companies had no need to refinance and were reluctant to approach the loan market anyway. Loans were proving difficult to navigate, given the disparities in funding costs between the European banks that have long dominated the market and their peers in the US and Asia. Under such circumstances, putting together a broad syndicate that could agree on pricing was often impossible, leaving borrowers to fall back on more competitively priced club deals or bilateral loans.

Disintermediation was the name of the game, with the cheap funding costs and the longer tenors in the bond market clearly overshadowing loans in 2012. European banks were often unwilling to lend in dollars or participated simply to win ancillary business. For those with deposit bases in Latin America, they turned their focus to local currency financing.

Ternium’s ability to raise financing for the acquisition was impressive in light of the difficult market backdrop. 

“It was an acquisition where timing was difficult as there was a lot of noise around Europe,” another banker involved in the transaction said.

Share buy

Ternium, along with its Argentine subsidiary Siderar, and Confab Industrial, a subsidiary of pipemaker Tenaris, acquired the shares in Usiminas from Camargo Correa, Votorantim and the employee pension fund CEU.

Funding came from cash on hand as well as through two loan transactions – a US$350m five-year amortising deal from Confab and the larger US$700m transaction for Ternium. The former was arguably less of a success after leads were forced to flex up to Libor plus 210bp, but Ternium’s more sensible pricing helped make the deal a success.  

Carrying a margin of 337.5bp over Libor, Ternium’s loan satisfied European institutions that were still suffering from higher cost of funding. As a result, the company was able to draw local, Japanese and US banks, as well as European relationship institutions familiar with the credit. 

“Ternium was a blowout. It was oversubscribed by 50%,” said another banker. “It was done in the first weeks of January after a disastrous year for European banks.”

In the end, seven banks joined the global co-ordinators and Santander. Mizuho came in as a joint bookrunner, while Inbursa, Intesa Sanpaolo and Natixis joined as MLAs. At the arranger level were Bank of Tokyo-Mitsubishi UFJ, Corpbanca and UniCredit. 

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