Many of Latin America’s larger financial institutions have strong links with Europe, but Latin American banks are traditionally closer to the US financial markets. While plenty of European institutions outside the top tier of large global banks struggle to make use of the US retail market, most Latin American banks have a loyal following among North America’s ‘mom and pop’ investors.
“Most of the Latin American banks can issue in SEC-registered format,” says Gerald Podobnik, head of capital solutions at Deutsche Bank in Frankfurt. “That means they can access the US retail market. They are well known in that space, and they have not relied heavily on Asian demand for capital.”
But recently the region’s lenders have been looking further afield for senior unsecured funding, travelling across both the Atlantic and the Pacific to meet investors hungry for their paper.
The Swiss franc market has become extremely popular with Latin American issuers, and in Asia, the internationalisation of the renminbi has opened doors, with issuers like BTG Pactual taking advantage of strong trade links between Brazil and China to gain funding arbitrage.
“In a globalised debt capital markets world, [Latin American banks] are looking for alternatives to local currencies that make sense from an FX perspective,” says a DCM banker in New York who specialises in Latin American financial credits.
“We’ve seen issuance in Swiss francs and Australian dollars, and that paves the way for new financial institutions. We’ve had four renminbi deals. They’re looking for cost-effective funding across the world.”
Banco do Brasil priced its inaugural Swiss franc deal in November last year, which at Sfr275m was the largest ever deal in the currency from a Latin American FIG borrower. It didn’t take long before that deal was knocked off its perch – Banco Santander Chile brought a Sfr300m July 2017 deal in January this year. In spite of pricing with a 3bp premium to the issuer’s own Swiss franc curve, the deal still offered Santander Chile a comfortable arbitrage to where it would have priced in dollars.
February saw Banco Safra, a lesser known Brazilian issuer, print its debut Swiss franc trade, with Banco de Chile following up the same day. Banca de Credito e Inversiones, another Chilean bank, also printed in the currency recently.
COST SAVINGS
Bankers estimate that Latin American bank issuers can save around 15bp by printing in the Swiss franc market at the moment, compared to where they would fund in the dollar market. That doesn’t mean they have to have a dollar curve already, though – in fact it can be beneficial for them not to have one, because it means Swiss investors cannot get exposure anywhere else.
“It’s a great opportunity for investor diversification because you’re effectively guaranteed a 100% Swiss distribution,” says a Swiss franc syndicate banker who worked on one of the February deals. “The market is also more accepting of tailor-made deals. You can issue in small sizes that wouldn’t be feasible in dollars, and it isn’t unusual to tweak maturities by a few months to suit what an issuer wants. The documentation is also much simpler than dollars.”
While Santander and BBVA’s subsidiaries have been dominant of late, it wasn’t always that way, he says. It’s easy to imagine that the Latin American businesses of Spanish banking giants like these would get an easy ride, but the eurozone crisis took its toll.
“Two years ago it was much harder to sell a peripheral name than a genuine Latin American issuer. Now they’re basically level pegging. Institutional investors prefer Chile for the strong rating and pick-up over Europe. Private banks prefer higher yielding companies like Brazil and Mexico.”
The Chinese renminbi market has not been quite as busy, but bankers are keeping an eye on it nonetheless. While the renminbi market is obviously important from a strategic point of view and has its benefits in terms of investor diversification, the real attraction is the arbitrage – which may explain why it has been less popular among LatAm issuers since BTG Pactual priced its debut public renminbi deal in March last year.
BALANCE SHEET CONTRACTION
But issuance of senior debt by Latin American financials is yet to reach the heights of 2012, which was a boom year for such credits. As the continent’s economies have slowed, funding needs have dropped, and so has the supply of new debt.
Exports have performed poorly for the past two years, mostly as a result of lower export prices. They began to grow again in the second half of 2013, but growth rates remain subdued, and analysts expect that to continue in 2014.
On average, Latin American exports increased by barely 1% year-on-year in December 2013. Mexico is leading the charge in export performance, and it may well be Mexican banks – eventually – that lead the charge back into the bond markets.
Bank of America Merrill Lynch analysts forecast GDP growth of 1.9% for Latin America in 2014, and 2.8% in 2015.
“Loan portfolios just aren’t growing anymore,” says the New York DCM banker. “Growth is flat, so why would you want to go out and raise funding? The US has finally started growing again and Mexico will follow, but Brazil is still a relatively weak growth story. They have elections this year, and the World Cup, so they could be shut down for a long time.
“But Mexican banks may need more funding. The local market there is so developed that it doesn’t make sense for them to issue internationally. Mexican issuance will be based on arbitrage.”
SUB DEBT: NO RUSH
When it comes to subordinated debt, this lack of balance sheet growth, combined with the fact that Latin American banks have conservative regulators, means that supply is unlikely to pick up anytime soon – the opposite to what is happening in Europe.
“The reality is that most of these banks are well capitalised in the first place,” says Rodrigo Gonzalez, regional head of debt capital markets for the Americas at Standard Chartered in New York. “Regulators in Latin America are conservative, and they have already asked for higher than necessary capital ratios.”
For example, the Basel III guideline for tier one capital is 6%. Brazilian banks, however, are expected to hold 11%, he says.
“The top three banks in most countries should have access to these alternatives to equity,” says Gonzalez. “The question is, do they need it? Santander Brazil and Santander Mexico only did it (both issued tier one capital instruments recently) because they were over-capitalised.”
And as and when those banks do need capital, the dollar market may not necessarily be the best place for them to find it, he says.
“Some of these countries, like Brazil, Chile and Peru, have a big local market for tier two capital. If that market is big enough to absorb their needs, they will use it because it is cheaper and easier. If that changes and they grow a lot, they will go international. Again, with tier one we will see more issuance as banks continue to grow and need capital. But there is simply no rush.”
IT’S COMPLICATED
But planning for the future is never a bad idea, and when investors are falling over themselves to get hold of high yielding additional tier one and Coco instruments from European issuers, it is understandable that Latin American banks want to be able to tap that demand when they need to.
In Colombia, the banker’s association (Asociación Bancaria) is working with the country’s top banks to convince regulators that allowing new types of hybrid capital would be a positive step for the country’s banking system. And with good reason: one banker estimates that Latin American banks can save between 200bp and 300bp by raising capital in the additional tier one capital rather than issuing equity.
“The fact that banks are already well capitalised relieves some of the pressure to be innovative,” says the DCM banker in New York. “Regulators are erring on the side of caution. They are sceptical of engineering these kinds of products and that has been their modus operandi for the past 15 years or so. That is why in Brazil it has taken so long, but it is Brazil and Mexico which are at the forefront.”
If investors thought European AT1 and tier two paper was complicated, however, they will get a nasty shock when they attend a Latin American roadshow. Structural idiosyncrasies abound between the continent’s various jurisdictions, partly because Brazil, Mexico and Argentina are the only countries with ties to the Basel Committee.
In Brazil and Mexico, regulators require contractual point of non-viability language in tier two debt, with a 4.5% common equity tier one trigger. For tier one, both countries require a 5.125% trigger for loss absorption. Colombia, Chile and Peru, meanwhile, are not members of Basel.
For capital requirements, Mexico, Brazil and Argentina must stick to the basic Basel III metrics: a CET1 ratio of 4.5%, which rises to 7% when the capital conservation buffer is included; a tier one ratio of 8.5%; and a total capital ratio of 10.5%.
Colombia, Chile and Peru are more basic by comparison. Colombian banks must have a tier one ratio of 4.5% and a total capital ratio of 9%. Chilean banks, meanwhile, must meet a total capital ratio of 8%, while Peruvian institutions need 10%.
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