Latin American Loan House
Drawing a crowd: In a loan market that was overshadowed by the torrid pace of bond issuance in 2010, BNP Paribas stood out among its international peers as it helped revive syndications for the region and set the stage for a busier year ahead. BNP Paribas is IFR’s Latin America Loan House of the Year.
Despite high initial expectations, 2010 proved to be a year of slow recovery for Latin America’s loan market, which largely remained in the doldrums as high funding costs crimped banks ability to lend.
More often than not, the best advice loan bankers could give clients was to go to the international bond markets and lock in ultra-tight yields. Nevertheless, BNP Paribas managed to remain active, as others stayed sidelined, leaving it well positioned to take a leading role when markets finally took off later in the year.
Volumes were lacklustre between November 2009 and November 2010, when the region’s loan market was hard pushed to reach US$20bn in turnover, marking a stark contrast to the high-water mark in 2006 when volumes hit US$70bn on the back of Brazilian miner Vale’s US$18bn acquisition package for Inco.
From a league table perspective, however, BNP Paribas was head and shoulders above its competition during 2010. The bank led some nine transactions in a variety of countries, including Panama, Mexico, Brazil and Chile, allowing it to garner a 37%–40% market share either as mandated lead arranger or bookrunner.
That market share was boosted by the French bank’s sole lead-arranger position on an unusual syndication of a €4.3bn loan to the Republic of Brazil, which used the proceeds to buy submarines from France.
In a market where most of the action was taking place under the radar screen through clubs and bilaterals, BNP distinguished itself as a bank that broke the mould and helped revive true syndications with several key transactions, including an upsized US$1bn loan from Brazilian aircraft manufacturer Embraer.
“We were the first bank to open up underwriting and the retail market in Brazil this year,” said Ernesto Meyer, regional head of loan syndication Latin America at BNP.
Earlier in the year, borrowers stuck to smaller clubs and bilaterals because they could better negotiate with a handful of relationship banks for more flexible margins and better documentation than they would get in the broader market.
Banks, meanwhile, were concentrating on improving capital ratios and maintaining relationships with a few core clients, resulting in less lending and a slow start to the year.
Add to that a bond market that has seen record volumes and one that offered borrowers longer tenors and very attractive pricing, and it is hardly surprising that much of 2010 proved to be particularly quiet for loan bankers.
Pricing was also an issue among international banks, particularly for Europeans, which still suffered from relatively high cost of funds thanks to concerns over bank exposure to sovereign debt issued by peripheral European countries.
Often this left European banks declining invitations to participate in refinancing of even strong credits such as Peru’s Cofide.
“There was a wide spectrum in the cost of funding,” said Meyer. “You could see the difference between German, Portuguese and Spanish banks and that is why you couldn’t go with an underwritten deal because of the spectrum in the cost of funding.”
“Given the disparity in the relative cost of funding, you line up the highest common denominator and then the price was high so bilaterals were prevailing,” he added.
Against that backdrop, it was vital to find liquidity elsewhere, namely in Asia and in the domestic financial system. Flush Latin American banks stepped into the void, writing large cheques that shocked international bankers and resulted in them losing market share to their domestic peers.
However, the supply-demand dynamics began to shift later in the year as bankers began to scramble for assets after being pressed to meet long-forgotten budgets. And, with costs of funding dropping to more manageable levels, it was easier to compete.
At about this time BNP seized the opportunity and led a string of deals that tapped into various pockets of liquidity and helped restart true syndicated lending in the region. “We came with four mandates at the same time,” Meyer said.
The first was a US$200m three-year loan for Brazilian banking powerhouse Itau, drawing on a theme that also prevailed in the bond markets, namely the expansion of local credit in rapidly growing economies.
Turning to Asia
This was not necessarily an easy task as Itau is a demanding borrower that also wanted low cost of funds, and many European banks could not satisfy those needs. So BNP turned to the Asian markets.
This was not the first time the bank had brought Itau to Asia. Just months before the Lehman Brothers’ bankruptcy sent markets into a tailspin, BNP helped Banco Itau BBA close a US$200m three-year deal that was oversubscribed thanks to a strong Asian component.
This time, however, the bank focused almost exclusively on Asia, with Italy’s UniCredit dropping out and Mizuho taking its place as mandated lead arranger. In the end, leads saw seven of the 11 banks that participated coming from Asia.
“BNP Paribas has been looking to build relationships with Asian banks. They already know all the banks in the Americas and Europe. And with all the trade with China it is good to build these partnerships. Asian banks are very liquid,” said a banker at the time.
The deal left the Brazilian bank satisfied enough to invite BNP to participate on several of its transactions in 2010, including the latest one from its Chilean subsidiary.
At the same time, BNP Paribas led a US$350m syndicated facility for Banco Votorantim that was placed among 13 institutions from a broader group of countries.
True syndications such as Itau and Votorantim were rare in 2010 and only a few banks led the charge.
The French bank also came up with a solution to the problem of transitioning from a club environment to one more conducive to syndications. Instead of leaping to full syndications, the bank decided to fully underwrite loans for clients but then invite a first-tier group of banks and confer equal status to all of them. More important, fees for the lead group of sub-underwriters were not based on final holds, but on initial commitments.
This provided a strong incentive to the sub-underwriters as they were generating so-called skim income, which would typically go to the leads. Despite losing somewhat on the economics of the trade, BNP saw these measures as a necessary intermediate step before the market could move towards more traditional syndications.
“At that stage it would have been the wrong strategy to go straight to a classic syndication,” Meyer said. “The banks would have clubbed against BNP Paribas. So we told banks that they are not going to be below us: you are joint bookrunners but you are going to sub-underwrite.”
BNP used this strategy with Itau and Votorantim but perhaps the jewel in the crown was the upsized loan from Embraer, which saw massive participation.
The success of the Embraer deal had a lot had to do with timing as banks were becoming more active in a market where there were few assets. But through this transaction, BNP also brought back the practice of large bank meetings, with representatives from more than 50 shops attending.
“Embraer was an interesting deal. It was very aggressive but very successful,” said a rival banker.
By the time the bank meetings took place, BNP had US$700m in commitments from seven banks after bringing together a group of sub-underwriters.
“When the company saw that, they upsized the transaction to US$1bn and then we went to general syndication, with meetings in New York and Sao Paulo,” Meyer said.
In the end, 25 banks committed more than US$1.5bn to what was initially a US$750m deal, with tickets ranging between US$15m and US$150m in size.
The US$1bn two-year credit facility consisted of a US$400m pre-export tranche and a US$600m working capital portion. Margins were Libor plus 165bp and 185bp, or 60bp and 70bp undrawn, respectively.
After that, the market opened up and BNP participated as a joint lead arranger on another significant deal, Mexican frozen food company Sigma’s US$525m three-year loan through Bank of America Merrill Lynch, which was used for an acquisition in the US.
It also carved out a niche in the increasingly important Brazilian offshore oil and gas space, acting as original underwriter and joint bookrunner with HSBC on a US$1.05bn, 12-year credit facility for Brazil’s Odebrecht as it looked to finance to the construction of two drillships. In the end, the deal saw 19 banks participating despite a 20bp flex down.
By November the market looked back on track, with hopes that 2011 would see a return to normality in the syndicated loan market.
Paul Kilby
