This time last year the financial services industry in Latin America was in the middle of a golden period, and as the first few months of 2008 pass there are still glimmers of hope that the region will continue to shine despite storm clouds gathering over the US.
Strong balance sheets for banks and corporates; a commodities boom, albeit one probably entering its final stage; and improved fiscal accounts for many of the regions countries put Latin America in a strong position to cope with a US recession. But there is also cause for concern. Irrespective of whether one buys into the decoupling argument or not, one thing is certain as the US enters a downturn, Latin America will be affected.
Blue-chip companies in Brazil and Mexico are still positive about the regions prospects. Leading CFOs say that international banks are, on the whole, maintaining their coverage levels, and local financial institutions are offering more than generous credit lines to their corporates.
Despite this optimism there are problems emerging in the regions capital markets.
In February, Petrobras pulled its planned $500 million bond issue after it was unable to obtain the pricing it had sought. This was not what the market needed many bankers were hoping the deal would pave the way for other Latin American borrowers to launch deals. But this highlights an issue if marquee names such as Petrobras are unwilling to accept the new reality, that borrowing costs are not at last years levels, the market will struggle in the months ahead.
Thats not to say that no business is being done. New and innovative transactions are still taking place. Deutsche Bank is about to sell the first Mexican ABCP conduit. Last month, ABN Amro successfully priced the first CLO transaction referencing only Brazilian loans. In mid-February, Mexican mortgage lender Metrofinanciera finally opened the domestic RMBS market for the year with a Ps1 billion ($92.8 million) 25-year transaction.
These deals, however, are few and far between.
Then theres the gloom surrounding the equity markets. Last year, Brazil had a record 64 IPOs, raising $32 billion. In 2008, the Novo Mercado, the main Brazilian exchange, has yet to see a new name. The Bovespa Mais, an exchange established for smaller IPOs, finally managed to attract its first ever listing from Nutriplant for R$20 million but there is little sign of further deals. No other stock exchange in Latin America has recorded an IPO this year.
Bankers covering the region reckon this drought is a reflection of volatile global markets and not a sign that the fundamentals in Latin America itself are deteriorating, which is fair and accurate. They emphasize that there is a healthy pipeline waiting for a window of opportunity. The question is, when will that window appear?
The M&A market is the one area that is still relatively active. By mid-February, Latin American M&A volumes had already reached $4.3 billion year-to-date, up 14% on the same period in 2007, according to Dealogic. Much of this business has been driven by small transactions, largely involving Brazilian companies.
That will all change if Brazilian iron ore producer Vale succeeds with its bid to take over Anglo-Swiss copper firm Xstrata. It could be the shot in the arm the whole Latin capital market needs.