Latin American Loans Roundtable 2007: Part 1
IFR: What is the outlook for the rest of the year? What impact is the current credit crunch likely to have on the Latin American loan market?
Alonso Molina (BBVA): I think so far it is difficult to determine exactly what is going to be the impact in the medium and long-term in Latin America. But I would like to underline two points. The first one is that investors are increasingly starting to differentiate among asset classes. And Latin America has not been hit or at least the market has not been closed as far as we can see. There are some deals in the market right now, and they are going well.
The second thing is if the bond market continues to struggle, definitely the syndicated loan market will continue to be a reliable source of financing for Latin American companies. So in that way, I think we’re going to see how it changes in terms of pricing, structure and tenors. But definitely it will be a source of financing for companies.
Michael Jakob (Credit Suisse): I think one thing is clear: the market continues to be open, but certainly pricing is finding a new equilibrium. I think it has yet to be determined where the supply and demand equilibrium is going to end up, even it is for the simple fact that for a lot of banks the cost of funds have gone up. That will have the most immediate impact that leads to higher pricing.
I think the most notable outcome is that prices are moving, probably for the first time in a long time, and I would say in the right direction, but certainly northward. There is not that ongoing pressure to lower pricing.
Rodrigo Gracia (Calyon): Banks are closely monitoring all the transactions that are about to be launched, or have just recently been launched, because they will be the indicators, or benchmarks, that will be a gauge of what will happen for the rest of the year. We will see if those prices clear the market, and if those transactions will be the benchmarks we will use for the rest of 2007.
Eugenia Wilds (Deutsche Bank): Michael's point about cost of funding for banks is an extremely interesting one. It's probably the first time that there has been a material impact in cost of funding across all geographies, not just Latin America. Interestingly, it's not just a US phenomenon – it's a European phenomenon also. And to the extent that pricing in the region has always been much closer to the European benchmarks than the US benchmarks, where there is not nearly as much transparency as the US market, it will be very interesting to see where pricing shakes out.
Helena Radzyminski (Standard Bank): I think what helps the region, compared to previous crises, is that Latin American fundamentals are strong. Hence you haven't seen a big effect so far compared to other crises when Brazil and Argentina were impacted quickly. So that is helping the region.
IFR: Are the large US and European banks really making that distinction and not painting the markets with just one brush? Are strong fundamentals really helping?
Radzyminski: I think it helps. Compared to Eastern Europe in emerging markets, I think they’re suffering much more than Latin America right now.
William Donovan (Santander): You know the only country that really has been affected through this, as would've happened five years ago, has been Argentina. You haven't seen this in Brazil nor of course Chile.
Ricardo Rubio (JPMorgan): Most of the credits we're looking at in the market are very strong. The companies are in very good shape. That's totally different from say ten years ago, when companies were more leveraged, and that is helping. On the one hand you have strong fundamentals, and on the other, you have good credits out there.
It would be interesting to see what would happen if you put a very leveraged credit in the market because banks are being more cautious than they were three or four months ago. Banks are very concerned about final holds and are scrutinising credits more. I guess all of us are being asked more questions than we normal. It's okay, but sentiment is more cautious out there.
Michael Lopez (ING): I would agree, but then you have Lamosa, for example, which was a leveraged transaction. That was a dual currency landmark, if you will, that was successful.
So I think it’s still unsettled. There is definitely more scrutiny, but there are successes. So in that sense, I think that there is some insulation. It’s just a matter of seeing how much things continue to slide on key fundamentals like cost of funding.
Katia Bouazza (HSBC): I think timing is going to be a key point, because it seems we have just passed the eye of the storm on a global basis. Or we think we have. If we continue to see the credit crunch in Europe and in the US, it’s going to trickle down and have a more negative effect on our region. We have not seen the full impact south of the border yet. If it drags out and becomes worse, we could have more instances where a Lamosa runs into trouble because the liquidity within the Mexican banking sector could start being affected.
So far banks are being cautious and selective. They are doing their homework, which we should all be doing in the first place. But no one has said that they’re going to stop lending to this name versus that name. It will depend on how long this goes on. We could start seeing the real effects in a few months.
IFR: Have we seen any pull-back yet in terms of lending to certain credits?
Bouazza: We haven’t seen any transactions fail, so far. I agree with all of the comments so far, in that most of the names have been good names. But the transactions that were struggling before the market disruption are still struggling. But it is not that they weren't challenging deals two months ago.
Jorge Wilmer (UniCredit/HVB): I would agree with Katia that timing has yet to be determined. There’s uncertainty about what the economic effect is going to be in the US, and what that means for Latin America. I think that then strategies may or may not be revised in terms of how aggressive people are in the region.
Marcia de A Vorona (ABN AMRO): There are certain adjustments on pricing, a flight to credit, that we are starting to see, and some adjustments in structures. Perhaps this will be a trend to start making structures a little bit tighter than they have been lately. The structures that we have seen in the last months have been quite loose, and I think this might change because of the environment.
Gracia: Adding to Marcia's comment, there's a bigger acceptance of market flex on proposals that are going out, whereas before the market flex language tended not to be customary for some of the top names. And some of the names out there used to be more restricted. Now it seems to be slightly more commonplace.
Vorona: Even in Chile, we have seen pitches with market flex.
IFR: What other structural changes are you seeing now or going forward? Will terms and conditions be more stringent?
Radzyminski: I would agree with Marcia. Definitely in Brazil, I see second-tier names whose structures are getting tighter, and people are much more conscious on what is the right pricing, and concerned if things are going to get done. I agree market flex is something that you’ll see in all proposals.
Rubio: You see some changes in terms of covenants. Many deals used to be covenant-lite, so to speak, but now I think we are all getting more pressure from our credit groups to tighten those covenants when there are proposals.
IFR: How is Latin America holding up versus other emerging markets in Asia and Europe? How do banks view the different regions?
Radzyminski: I know in emerging markets in Eastern Europe, there are a couple of deals in Kazakhstan that have been very difficult. They have not been placed – no commitments – but we haven’t seen anything like that in Latin America yet. From talking to my colleagues in London, I think Eastern Europe is suffering much more than Latin American right now.
Wilds: But the Kazakh thing is actually very location-specific. They’ve got a political problem.
IFR: Where are tenors and spreads heading? How is pricing likely to change?
Jakob: Pricing is going to move upward. Where is it going to settle? No one really knows. As a number of my colleagues alluded to there will be market flexes, and people will see much more flexibility in finding that equilibrium price in new transactions.
It will be very hard to really underwrite a price for a transaction in the current environment, because nobody really knows what cost of funds are for the various banks, and at what levels people are really interested in certain structures. The new equilibrium has to be found, but it’s certainly north of where it used to be in June or July.
Wilmer: For that equilibrium to be found, we have to distinguish between issuers that are in need of funds, let's say, in short order, versus a lot of the refinancing that has taken place in the heyday, that they may have no requirements in the short term. But those issuers that do require funds, I think, will be hard-pressed to test where that market actually is.
IFR: How many issuers in Latin America are hard pressed for short-term funds. The impression I have is that most corporates are in good shape? Or do some borrowers have their backs to the wall in terms of funding needs?
Wilmer: I think certainly the blue-chips are in good shape. But there are some strategic acquisitions being made that require funding.
Gracia: They'll have difficulty accepting the new pricing and structural mechanisms which the market is willing to accept. We’ve been noticing some surprise reactions from many of the corporates.
IFR: What sort of feedback are you getting from borrowers about the new pricing reality?
Gracia: They definitely know the market has moved. So they're trying to determine how much this will affect them, and probably the picture's still not too clear about where it will stabilise. But definitely we've seen some surprises.
Molina: Also I would add that they are not only surprised about where the price is going to end, but also the approach of the banks toward deals. As we have mentioned, in terms of underwriting, best efforts, strategy and final holds, they are much less aggressive.
We are definitely seeing an impact right now in terms of how willing banks are to underwrite the deal, and what mechanisms such as market flexes are being implemented in different names. Final holds are also very important if we are going for aggressive pricing. So taking all that into consideration, what definitely has changed is the approach banks are taking toward the deals.
Wilmer: I think that’s an interesting point, particularly in regards to final holds. There’s much more sensitivity to the extent that the credit default market is much more expensive in terms of hedging and so forth. I think that’s going to affect the ability of banks to swallow larger final holds.
IFR: Are more companies looking at the loan market now that the bond markets are more or less closed?
Vorona: I think they certainly are trying, but not all the names, of course, will be eligible, because it is tied to flight to quality. It has become a natural perception that the corporates have to move to the loan market, but many of them will want to wait as to be better prepared in a market where the conditions are still unclear for certain names.
Radzyminski: The main difference is that a couple of months ago you had a lot of bridge to bonds. Now a lot of companies are saying, "I don’t want a bridge or a bond. I want a five-year loan that I can take out to a bond if the market comes back." They don’t want to be thinking that this is a bridge to nowhere. So I think definitely that has changed.
IFR: In terms of countries and sectors, where do you see most activity going forward?
Bouazza: That has nothing to do with what's going on in the market. You have to look at what the trend has been and the trend has been the growth and strength of commodity prices and the dynamics within that industry. Most of the acquisitions have been happening in that sector and that is generating a lot of new funding needs both in the loan and bond markets.
So I think that's going to continue, and it has to do more with sector growth, and the dynamics within that sector. The fundamentals remain quite strong, so we do not expect companies to slow down. Which markets will they go to? Again that will be a question of where we are in the next few months.
The international bond market is not necessarily active at the moment. But local markets remain open. So the syndicated loan market will acquire a lot of the supply and volume that would have been going to the bond market. But instead of taking the form of a bridge loan, it will likely be permanent financing. I expect to see that continue.
On the other hand, a lot of companies, which did not necessarily need to refinance or were not in a rush may come back and reconsider their options, the minute there is a strong window. And if that window does not occur in the bond market, then we may start seeing more of those opportunities fall into the syndicated loan market, which was the case a few years ago.
Lopez: I think the pipeline for projects is also going to be pretty strong. Energy in Chile, and other types of projects in Mexico should be pretty robust. I also think that some structured trades should be open to more countries. Those pipelines should be fairly full going forward, definitely for Brazil, and hopefully for Argentina. We'll see what happens with Colombia and Peru, as well. But projects are definitely going to take up a good chunk of the pipeline through 2008.
Vorona: Also oil platforms in Brazil.
IFR: Won't poor market sentiment have an impact on project finance or infrastructure type deals, given their riskier nature?
Lopez: I think they will, but they’ll just get tighter and stronger.
Donovan: These deals have to get done. If it not a question of “if” – these countries and municipalities cannot pick and choose. A lot of these projects have to get done. It depends on how critical they are to the particular country.
Wilds: Project deals tend to be better structured. The universal project lenders are a subset of the broader market, and that's all they do, and they're comfortable with their risk and the credit metrics, and that really hasn’t gotten pushed as much as the plain vanilla market.
Jakob: It remains to be seen. If the projects depend, for instance, on commodity prices and if there is an impact on that market, nobody knows really where the dust will settle. If it's a project that has a component of dependency on commodity prices, and should the current challenging credit environment impact the market on a global scale and affect commodity prices, then I think even project financing might be more challenging to get done.
While I agree that normally there is a subset of investors that feel very comfortable with project finance risk, the jury is still out on how the overall situation affects the global economy.
Wilds: But that just means the project sponsors will have to put in more equity.
Jakob: Sure. I think that that is certainly something we see already. Whether it is projects or loans, we are seeing requests for tighter structures. And that very often might mean more equity. I agree with that.
Wilmer: It goes back to finding the pricing equilibrium. It would be interesting to see what will happen to those sectors that are more sensitive to the economic cycle such as automotive. It remains to be seen what the real economic effects are, but companies that are exposed to that sector will find a different pricing equilibrium.
Click here for Part two.