Left behind at the starting line

IFR LatAm Special Report 2012
11 min read
Natalie Feary

Unlike the bond market, which has barely had to time to catch its breath, the syndicated loans market may take a while to get into gear this year, as reduced liquidity means tighter conditions.

The increased cost of funding is hampering the ability of banks to lend at attractive levels which will probably mean a fall-off in syndicated loans this year, as companies shy away from the higher borrowing costs in the bank market – and turn to bonds instead.

It has already been a slow start to the year for loans, with only a handful of deals announced. Banks are charging more than 100bp than they did this time last year, and faced with shorter tenors and higher prices, many borrowers will be making the flight to bonds. In February Brazilian oil giant Petrobras had been looking at both the loan and bond market before going for the latter route and issuing its biggest ever bond, a US$7bn four-tranche deal.

“They have huge infrastructure spending and had been considering the loans market, but chose to go the bond market. They were not going to do a three-year tranche, as they would normally get this sort of tenor in the bank market, but it turned out to be more attractive,” one banker said.

The higher pricing for syndicated loans, which started in the second half of last year, is not going away any time soon. In addition to higher funding costs, the new capital requirements banks are facing under Basel III will also be weighing on liquidity.

“It is very quiet in the loans space. Banks are retrenching – especially European banks – and we expect to see fewer syndicated loans this year, though there could be an increase in club deals involving Japanese and Canadian banks compared to 2011,” said one syndicated loans banker at a European bank.

The five-year CDS for US banks is at least in the low 200s, for Japanese banks it is in the mid 200s, and for the European banks it is at least in the mid 300s. These were around 100bp lower around this time last year.

“We expect to see fewer syndicated loans this year, though there could be an increase in club deals involving Japanese and Canadian banks”

In December Banco de Bogota priced a three-year term loan at 225bp over Libor spread. A similar lender, Banco de Credito de Peru, priced a term loan with the same maturity at Libor plus 175bp just nine months earlier.

One of the first companies to come to the market for a syndicated loan this year, Confab, had to revise pricing upwards for general syndication from the price that was offered to relationship banks. The Brazilian subsidiary of steel pipe maker Tenaris is looking for a US$350m five-year amortising loan. At the bank meetings in New York and Sao Paulo it offered a price of 210bp over Libor out of the box, moving up to Libor plus 288bp on a leveraged grid. The pricing was 35bp higher than the range of Libor plus 175bp–250bp that had initially been given to relationship banks.

While this showed that higher spreads will be needed to attract banks to participate in loans, it also demonstrated that Japanese banks are expected to be among the most active. Bank of Tokyo-Mitsubishi was the only institution to put in an MLA ticket before the meetings even took place.

Japanese banks, however, are also faced with the same general constraints. “Even Japanese banks are not lending at such tight spreads as last year. Their cost of funding has gone up too,” said one banker. “I don’t think any bank can justify lending at lower than their cost of funding based on ancillary business.”

Among the new deals being syndicated, regional banks and multilaterals have been involved – a trend which is also expected to continue in 2012.

Brazilian coffee co-operative Cooxupe is seeking a three-year pre-export credit facility for US$150m, according to market participants. Itau is the lead bank, and bank meetings were only held in Sao Paolo.

Meanwhile, Peruvian cosmetics brand Belcorp is looking for an A/B loan, which the IFC is leading. The US$130m loan, with the B Tranche for US$80m, is offering banks six, seven and eight-year tenors. The syndication process launched in mid-January, and proceeds will be used to expand the company’s operations to other parts of LatAm, including Brazil, Colombia and Venezuela.

Aside from more involvement from local banks and multilaterals, loans bankers expect shorter tenors and fewer banks in deals. “There will be more three-year instead of five-year loans for the non-investment grade names that cannot access the bond market,” said a syndicated loans banker. “In project finance there will not be as many 15-year deals.”

“Market conditions are now changing so quickly that, with the syndication process for loans taking several months, pricing may need to go up by the time a loan closes”

With the cost of loans going up, some borrowers will look to use cash on hand to repay upcoming loans that are due. The total volume for dollar-syndicated loans that are due from LatAm in 2012 is expected to be close to US$100bn. “Local lenders or multilaterals won’t be able to fill the gap, so companies will have to swallow the pill regarding higher costs or repay with cash,” said a head of syndicated loans for LatAm.

Some companies that have, for example, a US$500m loan due are saying they will repay US$300m with cash and do an extension for the remaining US$200m for two years in the form of a club deal with the three closest relationship banks, according to the loans banker.

While 2011 was characterised by revolving credit facilities and refinancing of existing loans, these are expected to be less frequent. “There will be more bridge loans that will then be taken out in the bond market, as well as more loans for cross-border mergers and acquisitions,” said another head of syndicated loans.

“We see this being where there will be more loan activity compared to, say, revolvers – especially if you consider that a bridge loan doesn’t always have to be funded,” said one banker.

Another adds that internal credit committees are not as stringent regarding loans for M&A activity, making them more probable. “There is always more money, higher fees, and a quicker repayment. If the company needs the money fast for a potential acquisition, it is willing to pay up, compared to for a refinancing,” said the banker.

During the second half of 2011, when banks struggled with accessing dollar funding, local currency tranches were added. In 2012 local currency components are expected to be seen from the start. “There will be more lending in pesos, and cross-regional lending by Brazilian, Colombian, Peruvian banks will be seen more,” said a banker.

The structures of the syndicated loans that do take place are also expected to change, so that there are options to flex deals, and there will be less fully underwritten deals.

“Market conditions are now changing so quickly that, with the syndication process for loans taking several months, pricing may need to go up by the time a loan closes,” said the banker. “Clients will have to start understanding little by little that conditions are different. Banks just can’t lend at the same levels as before, and it will be like this for the foreseeable future.”

Filling the funding gap

While commercial banks are having trouble lending, multilaterals and development financial institutions are expected to have a busy year. As was the case in 2008, they may need to fill some of the gaps left by international lenders’ retreat from parts of Latin America.

Particularly important to the lending capabilities of some of the multilaterals was the approval of the general capital increase, for US$70bn. Member countries of the Inter-American Development Bank approved a resolution authorising the increase in February.

There had been some concerns that this would not be passed. Towards the end of last year, the US, which has a 30% stake in the IDB, was dragging its feet. If the increase had not been approved by the US, even if it had been passed by all other members, the IDB and some of the other multilaterals would have had to reduce lending drastically.

“There will be decent volume this year and we have a robust pipeline. We expect to be particularly busy with project-finance deals in some of the smaller countries in Latin America in which commercial banks are not as involved,” said a member of the syndications team at the IDB.

IDB had a busy year in 2011, and is expected to have an even fuller pipeline for 2012. The development bank was involved in 13 transactions, totalling US$1bn – its second-highest annual volume after the US$1.4bn it raised in 2007.

Meanwhile, the International Finance Corporation expects to be involved in more deals.

“We are able to finance long-term deals, such as those in project finance, which European banks used to do more and we do not have problems with doing local currency or dollar financing either,” said a member of the syndications team at the IFC.

He added that being part of A/B loans under the IFC umbrella made banks feel more comfortable about participating in deals. “Having said that, some still can’t come in to deals as they can’t finance for longer than three to five years now and that is not enough for some of our projects,” he pointed out.

As a result, he expects more deals to be syndicated only among multilaterals and development finance institutions, such as through the Master Cooperation Agreement signed by some of these institutions. This was created in 2009, precisely when commercial banks were having trouble providing financing, to facilitate the cooperation between the different DFIs and multilaterals to make funding available to clients.

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Left behind at the starting line