Investment banking fees generated by Latin American companies have plummeted in the first half of the year. When compared with 2014, banks generated $531 million in the year to June 26, compared to $885 million, according to data compiled by Dealogic.
|Brazil: special focus|
The main reason for the lower fee income is the poor performance of international capital market transactions out of Brazil. With a contracting economy, a falling currency, record lows for business confidence and contagion from the Petrobras corruption scandal, fee income has fallen by 52% to $188 million and the country now represents just 35.4% of the regional fee pool, compared with 44.4% in the same period in 2014.
Mexico has become the driver of Latin America’s investment banking fees. Year to date, Mexico generated $194 million in fees, down from $245 million in the same period in 2014, but increased its share of fees to 36.5% from 22.7%.
None of the main Latin America markets increased fees: Chile generated $40 million (down from $70 million between January 1 and June 26, 2014) and Colombia $24 million (down from $88 million). Only Argentina, with $36 million ($32 million) and Peru, with $15 million ($13 million) saw increased fee volumes this year and with their small size did little to help the collapse in the larger markets.
However, there is some better news: Mexico could increase further its share of total fees during the second half of the year. There are three Mexican IPOs in the pipeline after Nemak tapped equity investors at the end of June. Elementia plans an IPO in early July. Grupo Mexico is also planning to take advantage of investors’ apparent appetite for Mexican equity (after strong demand for transactions from Gicsa, Unifin and Fibra HD) with a sale of its railways unit. Grupo Alfa is also considering spinning off its Sigma subsidiary.
|I predict new issuance volumes of $100 billion in the international DCM market [from Latin America issuers]|
Head of DCM, US-based investment bank
The pipeline for Brazilian transactions is quieter – although the government does plan to sell the insurance unit of Caixa Econômica in a deal that the government hopes will raise up to R$10 billion ($3.2 billion). Some market observers are sceptical that the deal will materialize in 2015, as the economy continues to deteriorate, but the government is a motivated seller that desperately needs to raise one-off funds to meet its primary fiscal target.
Other insurance-industry equity transactions have performed well despite the tough macroeconomic environment. The deal also shows that Brazil still offers a supply of $1 billion-plus equity transactions, which no other Latin American market can get close to.
The outlook for DCM issuance is also unclear: on June 17, the Federal Reserve signalled that it was likely to leave interest rates unchanged at its September meeting, leading DCM bankers to predict an increase in issuance after the US summer vacation months of June and July.
AES Panama led by example, pricing a $300 million, seven-year bond the following day. The transaction was led by Banco General and Deutsche Bank, which priced the deal at par to yield 6%, tightening on the back of early price guidance of low-to-mid 6%.
However, increased volatility from Greek debt negotiations have weakened the bullish outlook for second-half issuance from the region. Bankers report that should Greece default and exit the euro there will be added volatility and that the implications for emerging market debt – and Latin America in particular – would be uncertain. Even with technical support for second-half issuance (with much higher levels of Latin American debt amortizing than fresh issuance) the market is expected to become choppier.
“I predict new issuance volumes of $100 billion in the international DCM market [from Latin America issuers],” says one head of DCM at a US-based investment bank. “That would be about 30% down on last year’s levels, and I still think that’s a realistic target as we enter the second half of the year. September will be crucial.”