Faced with the choice of quick, cheap, simple bilaterals offered by domestic banks or the more complicated and expensive syndicated facilities available internationally, it is no surprise that most Latin American borrowers elected to secure their funding in their home markets last year. Danielle Robinson reports on the consequences for the dollar market — and the reaction from the New York-based syndicate teams chasing the mandates.
“Thanks, but no thanks,” was the response US and European banks received more often than they liked in 2003 when they went knocking on Brazilian and Mexican corporates’ doors to offer syndicated loans.
In an ironic turn of events, international banks, so quick to pull trade lines to Brazil in tough times, found their syndicated loan product struggling to compete with the more popular, better priced bilateral loans that Brazilian banks were offering their corporate clients.
And in Mexico, the domestic bond and loan markets in pesos reached such depths last year that a substantial amount of potential business for the US loan market was taken locally.
The result was a disappointing year for bankers managing Latin American loan syndicates outside the region.
In a year when they had hoped to see a resurgence of business as Brazil came back to the markets, deal volume barely reached above 2002’s numbers. Bankers estimate that about $21bn was lent in 2003, compared with about $20.4bn in 2002 and $40.2bn in 2001.
The situation looks worse when restructurings are taken out of the equation. “The volume of new deals, excluding restructurings, was substantially lower than in previous years,” says Juan Martin, Latin American loan syndication manager at ABN Amro in New York.
The year began with banks still reluctant to re-open their books to Brazilian corporates until the country’s new left wing president, Luiz Inácio Lula da Silva, had demonstrated his resolve to follow market-friendly policies.
At best, only top borrowers like Petrobras could consider accessing the international loan market in the first quarter of the year, and then only for one year on an unsecured basis.
“We syndicated a $150m one year bank loan for Petrobras in March and at the time, finding liquidity for a one year tenor was a challenge,” says Jaime Frontera, head of Latin loan syndicate sales at Barclays Capital in New York. “However, it turned out to be the first unsecured syndication to be successfully placed in the Brazilian loan syndication market since the 2002 crisis.”
Banks were more prepared to offer three year loans once the situation looked more promising in Brazil in the late spring, after the sovereign had executed a triumphant return to the international bond market. Yet by November nothing had been done beyond a year on an unsecured basis. All three year loans were highly structured with export pre-payment (EPP) facilities established offshore.
While not willing to go beyond a three year EPP structure, international banks hacked away at margins to compete with one another for Brazilian business.
“Margins for banks shrunk considerably from over 200bp for one year loans to around 50bp-75bp,” says Therese Rabieh, managing director in charge of Latin American loan syndication at JP Morgan.
Margins on three year EPP loans also tightened sharply, from north of 500bp to around the 200bp region for the top names.
Yet even as the year was drawing to a close, certain Brazilian issuers such as steel company Ascecita were still paying margins of 400bp on $125m three year EPP loans — inviting bolder domestic banks to undercut their US and European competitors.
The international bond markets, quicker to re-open their doors to Brazilian issuers than the loan market, started accepting as early as February a stream of asset backed securities from Brazilian banks. The seven year final, five year average life investment grade bonds backed by diversified payment rights provided a collective $1.2bn of dollars for Brazilian banks to on-lend to their best corporate clients.
Banco Bradesco, one of the biggest commercial banks, also boosted its capital structure with a blowout $500m 10 year lower tier two subordinated debt issue in the 144A US bond market and Unibanco was hoping to do the same.
When international banks were finally ready to go beyond the one year unsecured loan structure, they discovered they had been muscled out of the Brazilian market by local banks offering bilaterals.
In some cases corporates were securing bilaterals from domestic banks with five, seven and even eight year maturities at margins as tight as 300bp over Libor.
“Bilateral deals have generally been much more aggressive on terms than syndicated deals,” says one Latin American loan syndicate manager at BNP Paribas in New York. “If there is a ton of liquidity and you can get much better terms doing a bilateral deal, then why not?”
Some bankers argue that international banks are ready to offer three year unsecured syndicated loans to Brazilians, but can’t because of the competition from bilaterals.
“I think that had there been a three year syndicated loan for a top name in Brazil it would have sold very well, even with somewhat aggressive pricing,” says Martin at ABN. “But it did not happen because of bilaterals.”
Several companies also prefer bilateral deals for their simplicity, especially after seeing how difficult it can be to negotiate with a group of banks on a loan restructuring.
“There are a lot of borrowers doing bilateral loans because in 2002 a number of companies had problems restructuring debt because of some banks holding out,” says JP Morgan’s Rabieh. “Companies feel they can negotiate better on a one-on-one basis with the banks, as they do with bilateral deals.”
Brazil’s GDP is forecast to grow by as much as 3% this year, and bankers hope that the accompanying rise in funding needs will make it easier to persuade the country’s top borrowers to take out syndicated dollar loans.
“If the borrowers have relatively low requirements they are able to live with bilateral loans,” says Pierre Joseph Costa, head of commodity structured finance in Latin America for BNP Paribas. “We may see this change as the Brazilian economy grows. What you will probably see is more volume for the top names because they will need more funds to grow and to invest.”
The situation in Mexico is more problematic than in Brazil. The peso market for loans and bonds has mushroomed over the past 18 months, now that assets under management in privatised pension funds have reached a size that can support a thriving local bond market. Banks in Mexico are also flush with liquidity and eager to lend.
The local markets will only get stronger. “The supply of pesos will continue because the machine is already running,” says Costa.
Given the strong local liquidity conditions, top corporates were able to secure cheaper and longer funding in pesos of last year.
“Most top Mexican corporates are now able to issue in the local capital markets for very competitive rates for longer tenors,” says Martin. “Because financing costs are lower in pesos and there is no currency risk, the peso market has taken away a very important piece of business that used to be in the dollar loan market.”
In September Sigma Alimentos, a frozen food company owned by Mexico’s Grupo Alfa, decided to stay at home and refinance a $60m five year amortising loan brought to market in 2001 at a rate of 175bp over Libor. It raised Ps1bn ($92.25m), more than expected, of five year bullet peso money in the local bond market at 130bp over the 182 day Cetes, which was swapped into 135bp over Libor. Doing a deal in pesos not only negates currency risk but is also tax effective, because unlike with a dollar loan, a company does not have to pay withholding tax on its local bond issue of peso denominated certificados bursatiles.
|Top mandated arrangers of loans to Latin American borrowers (Jan 1-Dec 9, 2003)|
|Rank||Bank||Total ($ m)||Issues||Share %|
|4||Bank of America||1,568.13||7||10.46|
|10||Banco Santander Central Hispano||632.59||2||4.22|
|11||Dresdner Kleinwort Wasserstein||582.59||1||3.88|
|14||Sumitomo Mitsui Banking Corp||200.00||1||1.33|
|15||Crédit Agricole/Crédit Lyonnais||139.99||4||0.93|
|17||Mitsubishi Tokyo Financial Group||114.00||2||0.76|
The pricing was so tight that even the local banks complained, but a thirst for good quality assets drove some initial critics into the deal and it was ultimately increased from its original Ps1.2bn.
“Mexican companies were able to borrow at very attractive pricing in pesos, sometimes below what they couldk [achieve] in the dollar market, for longer terms, sometimes going out to seven years,” says Rabieh at JP Morgan. “The local markets are definitely taking business away from the dollar market.”
This occurred despite the dollar loan market for Mexican borrowers becoming even more aggressive than it was in 2002, when companies were receiving dollar loans inside their US comparables.
Pemex, for instance, raised a $750m loan of three and five year tenors late in 2002, with the three year tranche priced at what was then an aggressive margin of 65bp.
In November 2003 Pemex was wrapping up a $1.5bn deal in which a three year tranche was being priced at 60bp over Libor.
Dollars bring kudos
Indeed, the dollar market will always receive a relatively steady flow of business from Mexican corporates that value the image and relationship gains to be made from dollar loans. “There are issuers like Cemex that like to challenge themselves and arrangers by getting the most out of the international market,” says Frontera.
“By having lots of banks involved it gets new relationships. It is seen as a more successful transaction in the eyes of the international markets and so the perception of the name increases.”
Cemex raised $1.1bn in 2003, split into a Eu256m two year piece, a $550m three year tranche and a ¥32.69bn three year portion, led by Citigroup and JP Morgan.
The two year euro tranche was priced at 62.5bp over Libor, a tighter margin than it paid for a two year LC backed CP programme earlier in the year.
The dollar and yen tranches were priced at 92.5bp.
Chilean deals were also hard fought for by international banks because of their single-A investment grade status. But the Chilean high grade market remains small and dominated by an elite group of banks with strong relationships. The Chilean copper producer Codelco, for instance, raised more than $300m in a five year bullet loan with a margin of 45bp over Libor, but the number of participants was limited to its closest banks.
“Codelco and the bookrunner were able to achieve what they needed from the participants and were happy with the outcome of the syndication,” says Frontera.