Signs of life
A recent uptick in lending may be the start of a more positive trend with the economic recovery in Latin America gathering pace and interest rates set to rise.
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There has been little reason to be optimistic about the prospects for syndicated lending in Latin America in recent years as fragile market conditions have tipped the balance in favour of the bond market where more attractive tenors and pricing have been available. But while loan issuance in the region dropped to a three-year low last year, banks widely expect the market to recover in 2014.
“Capital markets issuance has remained strong, but the loan market is now becoming attractive again as interest rates look set to rise and the opportunities in loans are improving. Eurozone banks are coming back to the LatAm market very aggressively and we also see the presence of Japanese and Asian banks growing in the region. For the first time in several years, there is significant liquidity in the loan market,” said Monica Macia, head of loans syndication for the Americas at HSBC.
In a Thomson Reuters survey on the outlook for 2014 in LatAm, 69% of lenders surveyed said they expected overall issuance to increase this year, calling time on a multi-year trend in which the success of the region’s bond market has displaced that of the loan market.
The drop in lending in recent years was driven by low interest rates and the reticence of US and European banks to lend as they recapitalised their balance sheets after the financial crisis and the subsequent eurozone crisis.
Both factors made the bond market a more attractive avenue for corporates and financial institutions looking for financing, with issuance in LatAm rocketing from US$24.31bn in 2008 to a high of US$112.72bn in 2013, according to Thomson Reuters. On the flipside, loan issuance fell from a post-crisis high of US$35.47bn in 2011 to US$27.42bn in 2012, and further to US$22.93bn in 2013.
“With interest rates at record lows over the past few years, we have often recommended our clients to issue to the bond market rather than the loan market because it was the perfect opportunity to lock in a good rate and tenor,” said Macia.
While loans and bonds might not always move in opposing directions, the attractiveness of LatAm’s bond market certainly played its part in the fall in syndicated lending as demand from the region’s banks and corporates plummeted, said Steve Aloupis, regional head of capital markets in the Americas at Standard Chartered.
“Tenors have shortened materially in syndicated loans since the crisis whereas clients have still been able to get reasonably long tenors in the bond market. Certainly for corporates we have seen some of the volume that would have gone to syndicated lending has gone into bonds – even if they pay a bit more, they can lock in a rate for longer,” Aloupis said.
Scouring for green shoots
While lending professionals have long scoured the market for signs of green shoots, there may now be more reason to be optimistic than in previous years. With central banks poised to start raising interest rates in the coming months and many banks back in force in LatAm, the region saw a spike in lending at the end of last year, with issuance rising sharply from US$1.59bn in November to US$5.72bn in December.
Meanwhile bond issuance in the region plummeted towards year-end, falling from US$35.78bn in the third quarter to US$20.87bn in the fourth quarter.
Some participants believe the pick-up in lending to be part of a global trend as the economic recovery gathers pace.
“Following a period of decline since 2010, volume in loans increased by 10%–20% in the latter half of 2013 in most regions. The two biggest drivers are the imminent increase in interest rates that could tip interest back from bonds to loans, and the fact that both American and European banks have emerged from the period of restructuring and recapitalisation and are generally now in a better position to deploy capital,” said Mario Espinosa, head of loan markets for Latin America at Citigroup.
Despite low overall issuance last year, there were some positive signs even before year-end, including a US$1.5bn loan syndication from Brazil’s Itau Unibanco in June 2013, which Standard Chartered’s Aloupis sees as a sign of the underlying strength of the region’s loan market.
“The Itau Unibanco loan was the largest syndicated loan ever done for a financial institution out of LatAm, with 40 lenders participating globally. It really demonstrated that with a quality borrower and a properly priced asset, there are opportunities in this market, even when overall issuance is down,” he said.
Acquisitions on the rise
Besides interest rate hikes and the increased presence of banks in the region, the potential for a surge in the loan market is also driven by other factors, including an increase in acquisition activity.
“With the European economies starting to accelerate again, we should see increased demand from Europe, which should drive increased export from Brazil and the need for increased lending into Brazil,” said Aloupis.
Brazil is actually one of the few countries in LatAm to have already seen a modest bounce, with loan issuance rising from US$6.34bn in 2012 to US$8.36 in 2013, according to Thomson Reuters. Colombia, Panama and Peru are the only other countries to have seen a rise in the same period.
In Mexico, which is widely acknowledged to dominate the region’s loan market alongside Brazil, issuance fell significantly from US$14.29bn in 2012 to US$8.31bn in 2013, but it remains one of the most attractive countries in the region for lenders.
“Mexico is the darling of LatAm at the moment, given the energy reforms, the recent credit rating upgrade by Moody’s and the general expectation of further economic growth. Colombia and Peru are also on an upward curve, although on a smaller scale than Mexico,” said HSBC’s Macia.
“Peru has had some of the highest GDP growth in LatAm over the past several years and several industries have grown, including construction, hospitality, oil and gas,” said Aloupis. “It has a very impressive record from a macroeconomic perspective and that has translated into increased demand for growth and funding of that growth, so it is presenting more opportunities for lending.”
Out of control?
But the increased activity does not come without its cost. As European, Japanese, Asian and American banks jostle to take advantage of the uptick in demand for loans in Latin America, some participants believe pricing is getting out of control.
“My main concern is the pressure on pricing as the market picks up and loans are priced very aggressively,” said Michael Jakob, head of loan syndication for LatAm, ex-Brazil, at Credit Suisse. “This could drive some participants to consider moving into frontier markets such as Ecuador and Bolivia, or to consider transactions for smaller or riskier credits – areas that they had traditionally shied away from. The margin pressure for blue chips in the larger economies means it may just not be economical to deploy capital there exclusively.”
That pressure on pricing could lead, Jakob believes, to a bifurcation of the market as some banks continue to serve large clients at very aggressive prices and smaller banks are forced to focus on smaller clients and frontier economies in LatAm. But while the increasing presence of banks in the region might drive more aggressive pricing, the need to raise regulatory capital ahead of Basel III deadlines is pulling some banks in the opposite direction.
“The increased liquidity in the market is putting some downward pressure on pricing, but on the other hand banks are also preparing for Basel III – even though some are doing so more quickly than others, the need to raise capital puts upward pressure on pricing. Overall it’s a healthy dynamic, but there isn’t a uniform trend in pricing so every transaction has to be looked at carefully to make sure it is properly priced,” said Citi’s Espinosa.