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Sunday, 17 December 2017

Still reeling

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Latin America’s syndicated loans market has still not recovered from the international financial crisis, when many banks ceased lending and companies turned to the bond market. But activity is expected to pick up this year as the region’s M&A activity gathers momentum. Jason Mitchell reports.

To view the digital version of this report, please click here.

Last year the volume of syndicated loans in Latin America reached US$20.5bn with 59 separate deals, according to ThomsonReuters data. Mexico and Brazil were the two key markets: Mexico saw US$9.34bn raised from 16 deals, while Brazil’s 19 transactions raised US$6.35bn. In 2009, a total of US$26.1bn was raised in the whole of Latin America, in 52 deals, of which US$13.3bn (19 deals) came from Brazil and US$9.84bn (13) from Mexico.

Volume is a long way off its peak of 2006 and 2007, when US$71.8bn and US$65.2bn was raised, respectively, throughout Latin America (114 deals in 2006, 108 deals in 2007). In 2007, Brazil raised US$25.2bn (34) and Mexico US$19.8bn (29).

“Currently, Latin American syndicated loans activity is much slower than many people expected at the start of last year,” said Michael Jakob, head of the loan syndicate for Latin America at Credit Suisse. “They thought that strong M&A activity would drive it but overall we have seen very little M&A-driven activity.”

One M&A deal that stood out was the acquisition by Sigma Alimentos, Mexico´s largest producer and distributor of refrigerated and frozen food, of Bar-S Foods, the US processed meats producer. The deal required a US$575m syndicated loan issued in September, with Bank of America, Grupo Financiero Inbursa, BBVA, Rabobank and ING acting as bookrunners. The loan had a final maturity of September 2013 and was priced at Libor plus 237.5 basis points, with the terms of the acquisition not disclosed.

Last year, the biggest two deals both came out of Mexico in December: a US$2bn loan issued by CFE, the electricity generation and distribution group, and another US$2bn loan issued by Pemex, Mexico’s state-owned petroleum company. The CFE deal matures in June 2014 and was priced at Libor plus 130 basis points, with Bank of America and Bank of Tokyo-Mitsubishi acting as bookrunners. Pemex matures in December 2015 and was priced at Libor plus 150 basis points, with BBVA, BNP Paribas, Credit Agricole, Citi, HSBC and Inbursa the bookrunners.

Brazil’s biggest deal last year was a US$1.04bn loan issued by Votorantim Group, the industrial conglomerates operating in the finance, energy, siderurgy, and steel sectors, in June. This has a maturity until June 2018 and was priced at Libor plus 225 basis points. The bookrunners were Bank of America, BBVA, Banco do Brasil, Banco Itau, Banco Santander Brasil, Citi, Deutsche Bank, HSBC, JP Morgan and Societe General.

Last year, all the major loan deals received considerable attention from banks and some were up to two and half times oversubscribed.

“There’s an incredible pressure on spreads,” said Jakob. “In certain instances we are seeing that spreads that companies get are lower than the funding costs of some banks participating in syndicates.”

Turning a corner

During the international financial crisis, many banks worldwide de-leveraged, so the syndications market dried up. Demand also took a knock, as companies, feeling very cautious about the world economy amid talk of a possible depression, scaled back their investment ambitions. However, most banks have now turned the corner and have achieved the debt capital ratios they wanted, freeing them up to lend again. Companies also seem more optimistic.

“Now, a confluence of events have made companies’ management confident enough to invest in expansion and the demand for bank credit is returning, although still significantly below the 2007 peak,” said Mario Espinosa, a managing director and co-head of Latin America debt markets at Citi. “Commodity prices have been high and that has helped, too.”

Neither has the syndicated loans market been helped by the prowess of the bond market, which has been highly liquid and open to a broader range of companies then ever before.

“Last year, the market for syndicated loans was certainly better than in 2009,” said Gonzalo Isaacs, head of Latin American loans at Bank of America Merrill Lynch. “However, the debt market is still dominated by corporate bonds. Following the international financial crisis, many of the larger issuers of syndicated loans left the market because of the excellent conditions in the bond market. They could secure bonds with a cheaper yield, longer terms and with more flexible covenants.”

In 2010 underwriting was back on the agenda. “The cost of financing for banks has been reducing, despite events in Europe and North Africa. Suddenly, the market has become very liquid again. For example, in Brazil there is a scarcity of deals and they tend to be 40% oversubscribed,” Isaacs said. “Issuers have more options now, as they are able to obtain bank credit at very attractive rates and terms as well as attractively priced bonds.”

Food for thought

Companies now have more of a capital structure decision to make. Many firms prefer to diversify their sources of funding by issuing bonds and syndicated loans. Loans tend to have a maximum life of five years, and if a company wants to secure financing over a longer period it may turn to bonds, or even a perpetual. However, bank debt has the advantage of being more flexible. Latin American corporates have also recently been more likely to seek credit lines to win favour from credit ratings agencies, which take this into account when awarding ratings.

“During the second half of last year, there was a resurgence in demand for bank credit [in Brazil and Mexico], as a result of increased capital spending by companies, and we expect that to continue this year,” added Espinosa.

Inflation is also encouraging companies to borrow. It is mounting up again in emerging markets, including in Mexico and Brazil, driving companies close to the limits in their capacity. One way to alleviate that problem is to invest in plant capacity and that has resulted in greater demand for bank credit.

“There was a pronounced pick up in Brazil in the final quarter last year,” said Espinosa. “There has been strong M&A activity as well and often acquirers require syndicated loans to finance this. Syndications are often driven by events in the M&A market and some significant acquisitions have taken place.”

Large cap corporates remain the principal companies tapping this market. Transactions tend to have a five-year tenor but can go up to seven years. In Mexico, Colombia, Peru, Brazil and Chile there is an abundance of local liquidity and companies can tap into the local credit markets rather than going international. Larger deals and situations when discretion is paramount are still likely to be issued in the international markets.

Brazilian banks - including Itau Unibanco, the country biggest retail bank, Banco do Brasil and Banco Santander Brazil - have become very active in the loans market: several deals have taken place in which the local banks have been able to finance the whole amount in a club style. The country’s financial institutions are highly liquid in reais and US dollars.

The number of banks participating in syndications has increased during the past two years. Some predicted the big Asian banks would start to take part in the Latin American syndicated loans market but that has not materialised yet. And despite being some of the world’s biggest financial institutions, Brazilian banks are not yet ready to participate in deals in the rest of Latin America.

Experts expect project finance activity to pick up, especially in Brazil. The Brazilian market is helped by the existence of BNDES, the state-run development bank, which is expected to pump huge sums of money into the country in the run up to the Olympics and the World Cup.

Many countries in Latin America have poor infrastructure but are keen to improve roads, ports, airports, and power generation. “This should create opportunities for syndicated loans,” said Sandy Severino, the New York-based head of international debt markets at BTG Pactual, the independent Brazilian investment bank. “These types of projects require considerable flexibility and that favours loans over bonds. An issuer only has to deal with a handful of banks in the case of loan. Loans suit the amortisation schedule of this type of project better.”

Overall, bankers are optimistic that volumes could pick up this year but are concerned, as that was forecast at the start of last year, as well. “We are receiving a record level of inquiries currently, so this year could prove to be a good one,” said Jakob.

Since the international financial crisis, Latin America’s syndicated loans market has been weak but experts expect it now to pick up. Banks are returning to the market and companies’ appetite for this type of finance is growing, as they hit the acquisition trail or embark upon major capital expenditure.

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