A flurry of international debt sales by Latin American financial institutions in the first quarter is unlikely to reverse the trend of declining volumes in FIG issuance from the region, according to rating analysts and bankers.
A recent report from Moody’s predicts that, as GDP growth falls in the region (in its latest forecast the Institute of International Finance predicted growth would fall to 2.1% in 2014, down from 2.4% in 2013 because of a slowdown in Brazil and stagflation in Argentina and Venezuela) banks will likely need less external financing as loan portfolio growth slows.
Banks issued record international debt in 2012, but volumes have slumped since. Last year total volumes fell 26.4% and a rebound isn’t expected in a context of slow growth and well-capitalized banks. Even in Mexico – which has the rosiest expectations for loan portfolio growth – there is little or no need for banks to tap the markets. Volumes are unlikely to be boosted this year by Basle III-compliant transactions. Only Brazil and Mexico have the regulations in place to be able to issue such structures and banks will not need to replace existing current tier 1 and tier 2 transactions for several years – although some bankers expect deals to come sooner.
Years away
Franklin Santarelli, analyst in the financial institutions group at Fitch, says he undertook a study that showed that, assuming loan portfolio growth of 10% and only a small deterioration in the industry’s aggregate liquidity position, Mexican banks wouldn’t need to access fresh capital for three to four years.
"Refinancing needs from LatAm banks this year are very low," says Santarelli. "Any kind of issuance will be more driven by seizing opportunities rather than filling a need." He expects a similar level of issuance in 2014 as last year, with a rebound unlikely as a result of either supply or demand: "There is still some negative investor sentiment about EM and until that changes there won’t be good enough market conditions to encourage the banks to come – there isn’t a refinancing pressure that necessitates them to do deals."
However, recent deals show that investor appetite is still strong – and not just for the top-tier credits. Banco Daycoval recently closed a $500 million, five-year bond that attracted $2.1 billion in orders. Bradesco, Itaú BBA, Safra Sarasin and Standard Chartered increased the size of the Brazilian bank’s deal from an initial $300 million and tightened pricing from initial guidance of low-to-mid 6% to price to yield 5.875%. The Baa2/BBB-/BBB bank attracted a lot of interest from private banking clients.
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According to one banker who worked on the deal it "shows that appetite is there for banks below the top tier, systemically important Brazilian banks" although he concedes that access to international markets for banks beyond the stronger mid-tier names such as Safra, Daycoval and ABC is questionable. "Daycoval enjoys strong ownership support and it is a niche bank with a consistent strategy, very good capitalization levels and it is very good at maintaining NPLs. Investors clearly differentiate." Orders from accounts in Switzerland were reportedly a strong part of the Daycoval book and there have also been some recent FIG transactions denominated in Swiss francs. Banco Safra issued SFr350 million ($395 million) of 2017s, which yielded 1.85%. The deal was rated Baa2/BBB and led by UBS. Banco de Chile issued a two-tranche deal worth a combined SFr275 million, which was rated Aa3/A+ and led by BNP Paribas and Deutsche Bank, which takes the Chilean bank’s total Swiss franc volumes to SFr1 billion within the last year.
Banco de Chile has also tapped the Hong Kong dollar and yen markets – another key trend in international Latin American FIG issuance. Although total volumes have fallen by 26% in 2013, compared with 2012, dollar-denominated issuance has fallen by 54%, while deals in local currencies grew by 37.9% and other global currency issues increased by 366.5%.
Banks are taking advantage of the increasing arbitrage that exists between the US and other markets – particularly at the short end of the curve – to do opportunistic trades. In March, Santander Chile did an A$125 million ($114 million) three-year deal that priced to yield 4.6%. Bank of America Merrill Lynch and Deutsche Bank led the transaction.
More activity
There has also been increased activity in syndicated and bilateral loans. David Costa, deputy general manager at Mizuho Bank, says that banks in Europe and Asia have liquidity for the region’s banks and he expects deal activity to remain strong.
He says: "The credit story for Latin America is positive and improving – except in Brazil – and spreads are continuing to come down." Costa says a typical top-tier Latin American bank can now get medium-term loans for spreads about 100 basis points lower than a few years ago. He says: "Bank loans can’t replace the debt markets for Latin American borrowers, but with the current competitive prices for loans borrowers can buy time until there are more favourable conditions in the debt markets – but eventually they will need to go back to the debt markets for tenor."
There has also been an increase in private placements, but Fitch’s Santarelli says these smaller deals don’t really affect the overall composition of bank’s funding sources, although he notes it is prudent strategy to diversify the investor base: "I haven’t seen a significant growth in non-deposit funding on the balance sheet of banks, which would include private transactions and bilateral loans," he says. "It can make a bit of noise because [volumes were] almost zero and now you have about 10 banks doing some deals but it doesn’t really move the needle."
