Tuesday, 22 January 2019

Quick, quick, slow

  • Print
  • Share
  • Save

Related images

  • Tango Dance World Championship in Buenos Aires

As they look back on a bright recent past Latin America’s lending markets are expecting a more uncertain future, with one of the changes they face being a slow but systematic transfer of capital out of loans and into a choppy bond market.

Latin America’s lending market is in a strange place, caught between a bright past, a turbulent present and an uncertain future.

Last year was a genuine blessing for an asset class that has struggled for traction and relevance in recent years. Borrowers benefited from better pricing and terms as lenders rushed back to an asset class they once shunned. 

Landmark deals were hammered out in 2014, notably a US$1.8bn, five-year term loan issued by Peru’s Sociedad Minero Cerro Verde, one of the largest unsecured financings ever issued for a regional single-asset mining group.

The plethora of banks that swarmed on to the deal, from HSBC and Citigroup to BNP Paribas and Bank of Tokyo-Mitsubishi, attested to both the region’s allure and to the willingness of lenders to be amenable and pliant over terms and tenors. (The Cerro deal was priced, out of the box, at 190bp over Libor.)

Syndicated loans made to Latin American corporates reached US$35.6bn in 2014, up from US$33.8bn the previous year, and the highest volume on record since the bumper year of 2007, according to data from Thomson Reuters. Including loans to financial institutions, volumes jumped to US$43.9bn, another post-financial crisis record.

This year has started on a rather different note. Investors retain reasonably “healthy” appetite for loans across the region, said Michael Jakob, head of Latin America loan syndication at Credit Suisse.

“In the near term I see liquidity remaining strong in key markets, and I see investors and lenders willing to put their capital to work,” he said.

Barring a major M&A deal or two, with all the fanfare and bridge financing such events entail, bankers predict solid loan growth across key markets as the year wears on, notably within growth economies.

But the year is also likely to be marked out by a host of other metrics, some negative, some necessarily pragmatic, from decelerating loan growth in core markets, to more competitive pricing, to pickier and more selective lenders.

One of the big changes – a process that began in late 2014 and continued into the new year – has been a slow but systematic transfer of capital out of loans and into a choppy bond market.

“You can draw a direct line connecting the weakening of the bond markets in key Latin America markets to the growth in loan volumes across the region,” said Credit Suisse’s Jakob.

Daniel Darahem, head of Latin America equity capital markets at JP Morgan said: “You’re seeing a sharp pick-up in inflows from foreign investors keen to benefit from higher Brazilian interest rates.”

Another shift over the past year has been a growing appetite for local currency bonds, notably those issued in the Mexican and Colombian pesos, and the Peruvian nuevo sol.

Diverse inflows

Inflows into the region, meanwhile, have become ever more diverse in their source and nature. European banks, while hardly the force of old, have returned with reasonable vigour to the region, with Santander and BBVA leading the way.

Both Spanish lenders were among the list of eight global banks syndicated on a US$1.93bn loan to Colombian state oil firm Ecopetrol in late February, alongside the likes of JP Morgan, Mizuho, and Bank of America.

In early February, Santander announced a sharp rise in group fourth-quarter profits, singling out its “improved” Brazilian loan book for special praise. Net income from its Brazilian unit, which accounts for nearly one-fifth of group profit, jumped 30% year-on-year in the fourth quarter of last year.

Nor are European lenders alone in tapping the region’s potential. Growth may be patchy across the region, ranging from reasonably robust to underwhelming, but that has not discouraged inflows from lenders in North America and East Asia.

Perhaps the most notable sovereign source of fresh finance to the region in recent years has stemmed from the People’s Republic of China. Total lending into the region by Chinese state-run banks jumped from US$3.8bn in 2012 to US$22.1bn in 2014.

Brazil received US$8.6bn last year, according to a survey co-published by Boston University’s Global Economic Government Initiative and the China-Latin America Finance Database, followed by Argentina with US$7bn and Venezuela with US$5.7bn, much of it pumped into the infrastructure and energy sectors. China is now the biggest lender to the region, overtaking the World Bank and the Inter-American Development Bank.

But has the tide already peaked? Some say the market, following a robust and impressive 24 months, is on the wane. In January, Fitch tipped the loan growth-to-local currency GDP growth ratio to ebb to 1.4 times this year, from 1.7 times in 2014 and 1.8 times in 2013, driven downwards by lower corporate loan growth and rising rates of non-performing loans.

Marcela Galicia, director of financial institutions at Fitch, said the deceleration was “due to a challenging economic environment in Latin America”, exacerbated by China’s slowdown and tepid economic conditions across much of the developed world.

As ever, market conditions vary by country and lender. Loan growth is set to slow sharply in Peru this year, hit by a slowing economy and central bank efforts to curb unhealthy credit expansion. Loan quality is also expected to deteriorate in Brazil and Colombia, Fitch said, while Mexico’s loan market is set for another steady if unspectacular year, driven by its steady if unspectacular economy.

Mixed year ahead

Leading regional lenders are also predicting a mixed year. In February, Banco Bradesco trimmed its 2015 loan-growth forecast to between 5% and 9% after missing last year’s target. Despite targeting growth of between 7% and 11% in 2014, the loan book of Latin America’s second-largest lender by market value expanded by just 6.5%.

Yet a sluggish market may prove to be a blessing in disguise. Forced to chase business over the past two years, many banks are beginning to take stock. The upshot is likely to be a more judicious decision-making process, with lenders cherry-picking better customers and juicier deals.

One of the great uncertainties hangs over the resources sector. Banks are becoming “more selective and more conservative when lending to energy and commodity producers”, said one Brazil-based banker.

Yet not all energy producers are struggling. Ecopetrol’s eight-way syndicated loan was a “clear sign of the trust that capital markets have in the company’s ability to navigate” low oil prices, and its “capacity to generate its own cashflow”, said the company’s chief executive, Javier Gutierrez.

He added that the terms of the five-year loan were also “substantially better” than the pricing on its bonds maturing in 2019.

A more demanding lending environment would also, said Credit Suisse’s Jakob, lead to “more secured structures, to higher prices, and to a shift in the risk-reward formula. Credit fundamentals will matter more, and will ultimately also drive pricing.

“Banks are going to become selective as the year develops, and more concerned about putting their capital to work in credits and sectors that are likely to offer a better risk-reward ratio.”

Brazil fault line

If there is a fault line in the region, it surely runs through Brazil. Latin America’s dominant economy has slipped its moorings in recent years. Growth slowed to a crawl in 2014 and is widely expected to contract this year for the first time since the financial crisis.

Banco Bradesco’s downbeat estimate of internal loan growth was taken by many analysts as yet another sign of the country’s broader economic malaise. Domestic consumer loan growth in 2014 expanded at its slowest pace in seven years, data from the country’s central bank show.

Then there’s the scandal gripping Petrobras (see separate chapter on Petrobras), which includes allegations of kickbacks and political slush funds, and which reaches into virtually every crack and crevice of the economy.

Lenders downplay fears that the financial sector could be undermined by events playing out at Brazil’s dominant energy group. Bradesco’s chief executive Luiz Carlos Trabuco Cappi has said that the financial system faces “no system risk” stemming from the investigation.

Others, though, are already feeling the pain. Petrobras sits at the heart of Brazil’s economy. For years, hundreds and even thousands of companies, many closely linked to the state, have flapped along profitably on its coat-tails, benefiting from its ability to raise capital in the form of loans and bonds, before reinvesting it in everything from oil rigs to refineries to drilling equipment.

Those good times may now be at an end. The firm is slashing costs and capital expenditure. A host of local corporates dependent on its largesse have seen their credit ratings cut due to perceived higher liquidity risks.

In February, Sete Brasil Participacoes, a company founded solely to lease rigs to the oil major, lost a key US$6bn deal to build drillships for a shipyard, EAS, that was dragged into the graft investigation. And Sete’s misery may not end there. The scandal engulfing Petrobras is likely to postpone the disbursement of a US$3.5bn loan from BNDES, the Brazilian development bank, which Sete desperately needs in order to stave off default.

All in all, Latin America’s loans market finds itself in a strange old place, facing an uncertain future offering slower growth, a lumpy economy, and a return to form for the region’s debt markets. While last year offered good cause for cheer, this one offers hope but little certainty, particularly in the one nation, Brazil, struggling for economic traction and relevance, that really matters.


To see the digital version of this report, please click here

To purchase printed copies or a PDF of this report, please email

  • Print
  • Share
  • Save