Monday, 10 December 2018

Year of the megaloan

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Mexican oil giant Pemex set the tone for 2006 with a US$5.5bn blowout loan in January that heralded the year of the Latin American megaloan. Pricing continued to fall as the refinancing wave continued, while the region's M&A boom spawned CVRD's US$18bn bridge loan, easily the largest emerging markets loan in history. James Crombie reports.

In 2006, bankers threw away the rule book on Latin American loans. All previous price, size and credit assumptions flew out the window with landmark transactions culminating in CVRD's astonishing acquisition financing in August.

As Brazilian pricing converged towards high-grade Latin American levels, Mexican borrowers like Bancomext, Carso and Pemex proved that new lows were there to be struck. And Tenaris showed how an Argentina-based entity could swiftly raise US$2.7bn to buy a US-based firm.

Flexes down for Pemex wrong-footed the market, while a flex up for Embraer suggested resistance was near, but the liquidity machine lumbered on regardless. Telmex managed to place a US$3bn three-tranche refinancing with zero resistance, while America Movil wheeled out a bookbuilding to help shave off a few basis points.

VTR, meanwhile, brought out the region's first term loan B in recent memory with a dual-currency that is expected to spur the development of a leveraged loan market in the region.

CVRD fireworks

If anyone doubted it was Latin America's year to shine, CVRD destroyed those doubts with a US$18bn bridge loan, the largest emerging markets loan ever, eclipsing Gazprom's US$13.1bn loan last year. And as of late September, the deal raised more than US$31bn.

Leads ABN AMRO, Credit Suisse, Santander and UBS were in for US$1.5bn and joining as MLAs on the same amount were Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Bradesco, Calyon, Citigroup, HSBC, JPMorgan and Scotiabank. Banco do Brasil, BBVA, Standard Chartered and SMBC also came in as MLAs but on US$1bn tickets.

Other banks are still working on the transaction and it was fast-tracked to general syndication, implying a quicker takeout in the loan, bond and equity markets. A syndicated export pre-payment facility for up to US$5bn could be part of this takeout.

"It's nothing short of spectacular," said one banker working on it. "We have a number of banks that have never before been in Latin America.

Pricing on the bridge is 40bp over Libor in year one, rising to 60bp over Libor in year two, ratcheting along a ratings grid. At the senior level there is a 3bp initial underwriting fee, a 4bp allocated underwriting fee and a 25bp participation fee. MLAs get 2bp, 3bp and 22.5bp respectively.

CVRD's huge success led to speculation that pricing might be flexed down. This is the first year in recent memory that the region's banks have used flex and many bankers think this is a positive development.

"In certain cases it can be a useful tool, rather than going to the market with something that none of the banks want and ending up with a much smaller group when the momentum is not there," said Katia Bouazza, head of syndicated finance for Latin America at HSBC.

However, not everyone is happy. Pemex rattled some lenders in March with a flex on most of a US$5.5bn issue that was done even after it was funded. It coincided with an aggressive US$2bn five-year for America Movil that confirmed the Mexican market had gapped lower.

On the flip side, Embraer did a pre-launch flex upwards after going out too aggressively on a US$400m multi-tranche deal in June. This suggested to some that the tide was turning and lenders were finally saying no to declining margins.

As the market split into a handful of blue chip multinational credits and the rest, it was uncertain whether prices had hit resistance. For certain names in some sectors, they may still have a way to go, and this means continued top-heavy syndications, club deals or bi-laterals.

It also implies further pain for lenders, some of whom are losing money on deals just to maintain a presence. Those with no ancillary business to gain from this are starting to walk in greater numbers.

"We have exited some relationships that we've been in for a long time because it just does not make sense any more," said Michael Jakob, first vice president at BayernLB, a retail participant in the region. "If there is a drive of supply and demand and further downward pressure [on margins], I think you'll see more banks like us exiting because the overall risk reward balance is just not there any more."

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