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Balance sheet and ESG prevent US shutout in LatAm

Rio de Janeiro, twilight, Brazil, cityscape, LatAm, 575

US banks continue to rule the roost in LatAm DCM, but some say league tables don’t tell the full story. Olly West reports

In a region as politically and economically volatile as Latin America, the top of the DCM bookrunners league table has been an island of predictability. Since 2016, Citi and JP Morgan have done battle for the throne, and have between them taken at least a quarter of the share of Latin American and Caribbean international new issues.

After Citi took the crown for the three years before the pandemic — according to data from Dealogic, which provided all the league table data for this article — JP Morgan pipped its rival to the top in 2020 and is likely to do so again for 2021. As of November 9, JP Morgan had increased its market share in 2021 to 14.85% — versus second-placed Citi’s 11.43%.

“The pandemic hit JP Morgan’s LatAm DCM business while we were in the advanced stages of changing our strategy,” says Lisandro Miguens, the bank’s head of LatAm DCM. “This change had begun in 2015, when we broadened our focus beyond the flow of loans and bonds and expanded into more bespoke products like infrastructure, project finance, restructuring, private credit and private placements.”

Miguens says that the shift had “created value” for the bank by enabling it to serve clients with a broader suite of products, and to serve new clients it had not reached before.

“When Covid-19 hit, we were therefore very well prepared for the increased volume,” says Miguens. “Working from home and not travelling translated to increased productivity, while clients were very focused on executing deals.”

Wall Street heads south

There is a sense, talking to other DCM bankers, that the pandemic favoured the most established players.

“I’d agree that, in difficult times, borrowers are more likely to migrate to stronger banks with larger teams,” says Miguens.

In 2021, for the first time ever, the top five US banks — JP Morgan, Citi, Bank of America, Goldman Sachs and Morgan Stanley — look likely to take more than half the LatAm league table pie between them. As of early November, their combined market share was 51.95%, up from about 47.75% in the previous two years and the low 40s between 2016 and 2018.

“The pandemic did play a part in cementing the market share of the top banks in LatAm,” says Max Volkov, head of LatAm DCM at Bank of America, which entered November in third spot. “When spreads are widening by 20bp a day, if you need dollar funding you tend to go to the top US banks that have had the best platforms for several decades.”

Yet, the major recent changes in LatAm league table dynamics occurred before Covid-19. Some of the European banks that were fixtures in the top five a few years ago had already started to slip as strategies changed. Goldman Sachs, which fell as low as 15th in 2016, had already jumped to fourth in 2019 as it re-equipped its LatAm DCM team, and it has remained in the top five.

Sovereigns to the fore

Sometimes, changes in league tables reflect the changing funding needs of different issuers. The importance of certain previously rare sovereign issuers has increased sharply, for example.

Those who did not win Chile mandates in 2021 are quick to highlight that running deals for Latin America’s best rated sovereign is an extremely low-fee business.

However, with the sovereign issuing more than $15bn in 2021, it still translates into both healthy business and hefty league table credit. Peru also issued far more abroad in 2021 than ever before, raising more than $10bn across two dollars and two euro deals.

“One of the biggest changes in the post-pandemic world is the dramatic increase in funding needs of certain jurisdictions,” says Andre Silva, head of LatAm DCM at BNP Paribas. “We have increased our LatAm bookrunner market share in 2021 but haven’t changed our strategy dramatically to do so.

“We are a little bit more focused and conscious about where to spread resources, but our clients have been very active.”

BNP Paribas has led several deals for both Chile and Peru in 2021, and so far in 2021 is boasting both its highest ever LatAm market share (5.43%) and highest ever league table position (seventh). Still, it’s not all about jumbo sovereign trades — the 27 deals that the French bank has led is also an all-time high.

“The competitive environment in LatAm DCM is changing all the time, and part of this is because in recent years the business has become more complex,” says Silva. “To be successful you definitely need a solid strategy for the region, which we have right now, and are leveraging our strengths as an institution on top of that.”

Certainly, one consensus among bankers is that the pandemic favoured institutions with the ability to lend a lot as companies looked to shore up liquidity.

One rival banker describes Santander — which owns some of the largest commercial banks in Mexico, Brazil, Argentina and Chile — as the “poster child” of balance sheet.

The Spanish bank sits in fourth place in the 2021 league tables, its highest ever position, with its highest ever market share of 8.11%. It is the only European institution in the top six.

Max Volkov

Yet one DCM source points out that most of Santander’s recent gains are not attributable to its lending power. Indeed, the Spanish bank has boasted a strong balance sheet in Latin America for several years. Rather, the bank has been adding business in countries where it does not have a large commercial bank.

Despite the pandemic making visiting borrowers impossible until recently, Santander has added several first-time clients — including its first ever deal for Panama in June 2021.

There are other cases that show there is still room at Latin America’s top table for DCM teams that do not necessarily have a major lending business backing them.

As of mid-November, Credit Suisse is up to 10th in the league table — up from 15th in 2019 and 12th in 2020. Morgan Stanley fell from seventh in 2019 to 10th in 2020 as the pandemic hit, but has surged to sixth place in 2021, with its market share having increased from 4.8% in 2019 to 7.13% in 2021, according to Dealogic.

Moreover, only a handful of banks do battle on all fronts in a market as diverse as Latin America, and there are pockets of outperformance that suggest the overall league tables do not tell the full story — and that an institution can build a dominant position in a certain niche without massive balance sheet.

For example, Credit Suisse, 10th overall for LatAm, is third in Colombian DCM in 2021. The bank has taken advantage of its strong exploration and production (E&P) practice to win key mandates for companies such as AI Candelaria, Frontera and Canacol. The bank was also sole adviser on Avianca’s $1.6bn DIP financing, which is not included in league table data.

Looking ahead

With dollars the dominant currency, Latin America’s external bond markets always maintain a close connection to US credit markets, and Volkov says that the region is moving “in sync” with global trends in credit markets. “Banks have to be willing to offer aggressive structures, similar to the US leveraged finance market, whether that’s in covenants, pricing, committed financing, or acquisition financing,” says Volkov.

Miguens at JP Morgan, meanwhile, believes that balance sheet will continue to be highly valued in the region — but no longer for reasons related to Covid-19. He says that banks will be required to provide a lot of acquisition finance in Latin America, as M&A is “booming”.

Latin American bond issuers have also fully embraced ESG in 2021, with the advent of sustainability-linked bonds, in particular, allowing many of the region’s smaller issuers to offer ESG-themed deals even though they would have struggled under the traditional use-of-proceeds format. This is fast becoming another area to seek competitive advantage.

“Our ESG team in DCM has expanded exponentially to match the demand,” says Volkov. “Providing advisory on an SLB, for example, takes weeks of work and involves sitting down with people at a company that you would not have seen before — strategic development, or sustainability officers, for example — to discuss what can fit into the SLB framework.

“Only the top global ESG platforms can compete on this, and we think that our approach of incorporating people with ESG expertise into DCM is a major differentiator. ESG continues to contribute to our market share gains in Latin America.”

European banks can also do well here, given that the sustainable finance boom has its roots in Europe. BNP Paribas’ mandates on Chile and Peru’s jumbo deals were all for social or sustainable bonds, for example. Crédit Agricole is also reporting its highest ever LatAm league table position and market share, with at least half of its 16 mandates from the region in 2021 for ESG deals.

A better balance

As working practices across industries evolve, changes in the traditionally hectic travel schedule of Latin American DCM bankers will be telling. New York-based bankers acknowledge that much of the local content aspect of the LatAm DCM job cannot be replaced by Zoom or a telephone call, and most institutions started visiting their clients in person in late 2021.

For now, most are expecting a better balance between being in the office, working from home, and being on the road. But will DCM bankers still end up catching those 10 hour red-eyes from New York to São Paulo as they fight for mandates?

“LatAm DCM bankers will continue to travel, but I expect a better balance between being in the office and on the road, as video conferencing has been proven to work for many things,” says Silva at BNP Paribas. “The open question is: will banks fully return to face-to-face meetings with clients after seeing competitors do so?” GC

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Oliver West
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