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Latin America DCM: Local banks set to get the hybrid habit

There is plenty of interest, but not much action yet because the region has had a good crisis. There are country-specific regulations to negotiate too, as well as slowing economies. Perhaps banks will come to market to optimize their capital structures

Banks around the world have been issuing new Basle III-compliant tier 1 and 2 capital instruments, and a growing investor base has developed alongside this fast-growing asset class. Latin American banks, however, have largely remained interested observers. To date, the region has seen Basle III-compliant perpetual tier 1 (AT1) transactions only from Banco do Brasil. The state-owned bank’s transactions also pre-dated Brazil’s adoption of Basle III and so had to include areas of structural flexibility to enable post-pricing governance changes to comply with what has now been adopted.

Meanwhile, Santander’s banks in Mexico and Brazil are still the only issuers of Basle III-compliant T2 instruments, with the latter being offered only to existing shareholders. The Mexican unit of Santander sold just $300 million of its total $1.2 billion T2 trade in December 2013 to private investors (Santander’s Spanish bank bought the balance).

Despite the lack of issuance, bankers and rating agencies report strong interest from Mexican and Brazilian (the only two Latin American jurisdictions to have adopted Basle III) banks to issue such hybrid deals. Supply is there, they report, but country-specific regulatory idiosyncrasies, coupled with slowing economies and credit growth, have blunted requirements for fresh capital.

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