For Latin American corporates the doorway to international bond markets is now locked and bolted for the foreseeable future. But what about the loan market? According to Eugenia Wilds, head of the Latin American loan syndication group at JP Morgan, the key bank lenders will hold fast in a storm.
“Like the Mexican crisis of 1994 it offers the opportunity for relationships to come to the fore in a region where they were previously not quite as developed,” she argues. “Those relationships are now more mature. There is a strong basis on which people can say: I need to be there for my clients.”
Reassuring words. But not everyone is so sanguine. “Typically loan markets tend to react more slowly than bond markets to a downturn,” observes one banker. “The bond market has been shut for a number of weeks and the loan market is now getting there.”
Even before Russia fell off the cliff and dragged the rest of the world’s emerging markets with it, the Latin American loan market was experiencing a tough year. The local retail banks that had in the past provided the market with residual liquidity pulled out of loans en masse following the Asian crisis. One banker estimates that the universe of banks active in the market has shrunk to 60 or so, from the 150 or more that were participating in loans prior to the Asian crisis.
“Liquidity is a real issue,” admits one syndication head. “Bank market capacity has been constrained all year, and there is no relief.” Those banks that were still lending during the first half of the year have invariably been less active since, as their country limits have been reined in.
And yet the lenders themselves remain upbeat. “It is not like the situation in the bond market, where people are asking: should we be looking for who is likely to default in three or six months time?” says one senior banker. “We don’t see that being the situation.”
According to Stephen DeSalvo, managing director, head of emerging capital markets and syndications at BankBoston, the advances made by the market in the past couple of years are now paying off. “Luckily the market had already evolved in terms of longer duration and so we don’t have such a big backlog of upcoming maturities,” he says. “The problem situations have yet to pile up.”
But there is still more than $8 billion worth of Latin American loans maturing before the year end. Potentially some of the most problematic are the short-term bridge facilities put in place to finance the region’s extensive privatization programmes.
In a busy year for utilities and telecommunications sales, many local companies had financed acquisitions with bridge loans, the intention being to take out longer-term capital market funding six months down the line. But borrowers were not expecting the Russian collapse and the continuing lack of investor confidence in emerging markets. Now, refinancing those bridge loans may prove difficult.
One such financing worth $350 million for a Brazilian power company matures at the beginning of December. But a banker at the firm which provided the loan believes that this and much larger loans are not a cause for concern. “It’s not an accident waiting to happen,” insists the executive.
DeSalvo at BankBoston points out: “Loan portfolios haven’t caused any pain per se, there haven’t been any delinquencies. If the macro equation gets balanced sooner rather than later then the syndicated loan market may come back relatively quickly.”
To a large extent, that macro equation depends on Brazil. “Brazil is a liquidity issue,” observes one banker. “There is liquidity in the bank market, but it is rationed and selective. A crisis in Brazil would wipe out any hope of liquidity coming back to the public market, and it would make accessing liquidity in the bank market much more time-consuming.”
Of the deals that are in the pipeline, only the most pressing are reaching the market, and often with reduced tenor and smaller size than would otherwise be the case. Arrangers are also being more creative in the structures they’re using, looking to include provisions such as political risk insurance in order to tempt banks into the syndicate. NationsBank arranged such cover on two loans to Guatemalan electric utilities in late September.
Inevitably, price is another pressing issue. “Pricing has clearly gone up,” says Wilds at JP Morgan. “It has not yet closed the gap with bonds, but lenders are very much more aware of the gap with bond pricing and the inherent arbitrage there. Some people don’t think the gap will ever close. But others like ourselves believe that this will only become a really efficient market if the gap is closed completely.” James Rutter
