Latin American capital markets: Banks looking to open debt capital markets

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By:
Rob Dwyer
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FIG pipeline much healthier than Europe’s; Growing intra-regional investor demand

The international debt capital markets are open for Latin American financial institutions, with deals pricing well and a healthy pipeline ready to issue. The favourable market for senior unsecured and tier 2 debt persists, in stark contrast to the state of FIG issuance in Europe.

In July Banco Continental Paraguay priced a debut $200 million of 2017 notes (the Ba3/BB- priced at par with a 8.875 coupon) and Colombia’s Banco Davivienda’s debut dollar-denominated bond attracted a book of $3 billion for its $500 million 2022 (the Ba1/BB+ subordinated bond yielded 5.950 or T+437.5bp). Banco Continental Paraguay, Mexico’s BBVA Bancomer and Banco do Brasil also all closed tier 2 capital transactions in the past month, showing the market is open for credits in many Latin American markets. Colombia’s Banco GNB Sudameris was meeting international investors ahead of a possible debut dollar-denominated tier 2 transaction following its purchase of HSBC’s assets in Colombia, Uruguay, Peru and Paraguay for $400 million.

Chris Gilfond, Citi’s co-head of Latin America Credit Markets
Chris Gilfond, Citi’s co-head of Latin America Credit Markets 
"In the last couple of years we have seen really strong supply from Latin American financial institutions, largely driven by a rotation from correspondent bank lines in the developed world," says Chris Gilfond, Citi’s co-head of Latin America Credit Markets. "This theme will continue, so there is a healthy pipeline of issuance to come from the region, especially as the banks diversify their funding sources in the local markets."

Open market

Michael Schoen, Credit Suisse’s head of Latin America debt capital markets, says that investor confidence in the region and the individual credits is driving good issuance conditions. "For transactions from leading banks in those countries, the market is open for business and it probably is for other countries in Latin America," he says. "Most of these banks are in very good shape, with strong financials and leading positions in their countries. The Latin American sovereigns are, in general, doing well, quite different from the situation in Europe."

The past three years have offered a very positive ratings environment for Latin American banks. Last year the ratio of upgrades to downgrades by Fitch was 5:1. This year has been more stable, but with global financial uncertainty, the fact that the advances of recent years are not being eroded is in itself positive news.

"Latin American financial institutions are still able to issue senior unsecured debt at a time when issuance in Europe is fairly limited [and tends to be] secured corporate bonds," says Franklin Santarelli, Fitch’s managing director of the financial institutions group. "These deals are smaller in size compared with what they might be in Europe and the US, but in terms of the needs of the region, they have been sizeable and placed at a very attractive yield for the investor and an attractive cost for the issuer. For example, Santander Chile is now funding itself much more cheaply than its parent."

Demand for high-grade paper has been matching near-record supply across international DCM markets, and pricing conditions are so favourable that, depending on the timing of the transaction, banks can issue with no new-issue premium.

"Pricing is good," says Steve Aloupis, head of capital markets for the Americas at Standard Chartered, who points out that investor liquidity is strong. "Spreads are not as tight as they might have been, but given the lower treasury rates, the long-term funding perspective is attractive," he says.

Gilfond notes that growing intra-regional demand for financial institution paper is stabilizing investor demand. "Latin American investors are taking on a larger role buying intra-regionally. It’s the same phenomena that we’ve seen in Asia for many years, with Asian investors buying regional bank deals from other Asian countries, and it has allowed Asia to weather a lot of the storms in the global markets. This bodes well for Latin America’s ability to withstand external shocks in the future."

Parental guidance

Despite Santarelli’s example of Santander Chile’s financing costs being below its parent, the Latin American subsidiaries of the Spanish banks are not immune to investors’ concerns about their parents’ risk.

"If you have a Spanish parent, the spreads are different," says Aloupis. "Santander Brasil is ranked by Bloomberg as one of the 20 best banks in the world, but there is that name association that changes things."

However, he says investor appetite is still there for the Spanish banks, as it is for the stronger Brazilian mid-tier banks despite recent irregularities with some of these banks, most recently with Banco Cruzeiro do Sul: "The investors who are willing to do the credit analysis will see the strength of the well-managed mid-tier [Brazilian] banks; next comes market price, and does that price make sense from an issuer perspective?"

Schoen thinks that international funding for the mid-tier banks is still, to some extent, an open question. When asked about these banks’ ability to raise regulatory capital in the international markets, he replies: "It’s going to be interesting to see if there is a continued bifurcation between the larger banks and the smaller banks that have almost continual access to the international capital markets and those smaller credits that don’t."