Syndicated Loans 2005 - Good times roll for LatAm borrowers
After another year of top-heavy syndications at razor thin margins bankers are hoping for pricing to bottom in Latin American syndicated loans. Some argue that pricing is out of line with the risk, but there is little on the short-term horizon to tip the balance away from borrowers. A slew of elections and the global economic environment have the potential to turn things around. James Crombie reports.
The highly liquid Latin American loan market has seen tightening margins on new-money deals and refinancings, longer tenors and transactions going into general syndication already oversubscribed. Telmex, the Mexican telecom, was the latest example of this, as its aggressive refinancing of a US$2.425bn facility put together in July 2004 saw demand of US$3.2bn in the preliminary phase and was set to be increased to just over US$2.7bn.
The four-year tranche was priced at a 30bp over Libor margin and the six-year tranche at 42.5bp over Libor, a reduction of 15bp and 10bp respectively. This looked aggressive, but the strength of demand surprised even bankers on the deal and was yet another sign of the liquidity in the region's bank market. Fees were said to be 17.5bp and 27.5bp respectively, not bad on an amendment. MLAs were ABN AMRO, BBVA, Citigroup and HSBC.
"This has been another very good year for issuers," said Katia Bouazza, senior vice president and head of Latin America syndicated finance at HSBC. "Favourable cross-market conditions and a liquidity glut have helped borrowers achieve better terms." Positives include low global interest rates, high commodity prices and a relative lack of deal supply.
Those taking advantage of the good times include, from Mexico and Chile: Pemex, Bancomext, Cemex, CFE, Entel, ENAP, Banco Security, CTC, Carso, Bavaria, Hylsa and TFM. A wave of Brazilian credits heralded a comeback in lending to that country, including Grupo Votorantim, Braskem, CVRD, Banco Itau, Coelba and Telemar.
All of them came in at margins that initially looked aggressive. They turned out to be higher prices than the market was subsequently willing to bear. Only one deal was pulled, IUSA, and bankers said this was credit specific although it could affect lower-tier Mexican names.
"There have been few deals," said Bouazza. "The pricing has been very competitive."
Argentina back on the map
While bankers complained about the lack of returns in the staple markets of Chile and Mexico, many were unable or unwilling to reach down the credit curve into deals from comeback credits Argentina and Venezuela. Those who jumped in were sometimes disappointed by the pick up relative to the extra risk – and in some cases subordination – they had to take on.
Techint, the Argentinean conglomerate, wrapped up its ground-breaking US$1.38bn loan with 15 banks on board, in line with expectation. The deal confirmed the lending-to-Argentina trend but its complexity and bespoke structure made it an inefficient benchmark. Bookrunners were Citigroup, BNP, HSBC and HVB.
Techint vehicle III issued a US$500m three-year bullet and US$500m five-year amortiser, while Siderar did a US$380m three-year. The US$380m Siderar tranche at 200bp over Libor set a benchmark for that market, though bankers said that the acquisition finance cost was higher than what will probably follow in Argentina.
"We have to be careful with benchmarking Argentina," said one banker. "It was definitely a landmark deal for Argentina." The III piece was backed by cashflow from Sidor (Venezuela), Siderar and Hylsamex and secured with shares of the latter. III is a Luxembourg entity.
"It was innovative, it opened up the market more for Argentina," said a banker on the deal. "It was amazing that an Argentine company can come and raise almost US$1.4bn in a very complex transaction," said another.
Bankers away from the deal said it took longer than expected to get through syndication and that some ended up holding more than they had wanted. They noted a reluctance to commit to a subordinated structure that includes Argentina and Venezuela. But bankers on the deal denied this. "We are where we want to be in terms of our hold levels," said one. "The deal was sold to a very targeted audience," said another.
Despite the fact that all seems too good to be true, there is little on the horizon to knock LatAm borrowers off their pedestal.
"I don't see any major shift for the remainder of the year. The trend will continue," said Bouazza. "There isn't a huge pipeline to scare people."
But Latin America is entering a major election cycle, which has the potential to disrupt supply and pricing. Some 13 Latin and Caribbean nations are going to the polls starting in October and ending in April 2007. Most worrying is the fact that the big polls in Mexico and Brazil were still up in the air as of the end of the third quarter 2005.