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Hybrid capital: Latin issuance stays strong

Despite a downturn in emerging markets, Latin American companies are eager to tap the developing hybrid securities market to raise money to recapitalize their balance sheets without affecting their credit ratings or causing equity dilution.

Even if demand from Asian retail investors, hungry for the hybrid’s perpetual maturities, is likely to dip as buyers take stock of the slowdown, many bankers see the situation as more of a correction, at least in Latin America. The strong fundamentals of the Brazilian and Mexican economies, high commodity prices and surging local demand for consumer credit mean well-run companies will maintain their need to issue the hybrid mix of debt and equity while continuing to attract buyers, analysts say.

Indeed, Brazilian and Mexican companies ranging from steelmakers to banks are realizing the potential of hybrids. Some $3 billion of hybrid bonds have been sold from Latin America in the past year. Brazilian banks Unibanco, Banco do Brasil, Bradesco and Santander Banespa have all tapped the market in recent months, as investors from Hong Kong, Singapore, Zurich and London snap up the paper. Mexico’s fifth-largest home finance company, Metrofinanciera, has also gone to market. In two issues in April and May led by Dresdner Kleinwort, Metrofinanciera issued a total of $100 million with a mouthwatering 11.25% fixed-rate coupon until May 2016, with a step-up floating rate of three-month Libor plus 8.65% yield thereafter. Although expensive for companies in debt terms, hybrids are cheaper than raising equity capital.

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