IFR: Pemex really rang in the New Year with a jumbo loan that was very widely syndicated, in a benchmark setting and set the tone for the rest of the year. Since then we’ve seen a lot of new developments, like the comeback of Argentina as a big borrower, and Venezuela also making something of a return. Brazil really took off in all sorts of directions while Chile and Mexico moved into a different league in a very tight market. But the margins are very tight in Mexico and Chile. Are they adequately matched to the risk? Is there a mismatch there? Are we hitting the bottom?
Katia Bouazza (HSBC): I think in Chile we may have seen some levelling off of margins. But then again a lot of supply came to the market last year and this year it has not materialised. So, it’s hard to tell with the lack of an active market where spreads could go. I think, though, they have levelled off some. We’re starting to see in Chile that the second tier, not the top three or four bars now have their spreads tightened up.
In Mexico it actually took longer. I think that in comparison with the run we saw in Chile last year, it took a while for Mexican spreads to start coming in at that speed. And I think what has happened in Mexico was bound to happen. I mean there’s tremendous liquidity across the markets – not just in syndicated loans, but you have very active peso markets on the bond side; you have global markets continuously improving; and credit fundamentals for the type of borrowers that you are seeing coming to market – Pemex, Cemex, Telmex – the ones that are coming with size – for these borrowers, yes, it is justifiable.
So I think it was bound to happen, and for this kind of name it is justifiable, given the backdrop, given the conditions globally, given the improvements in credit fundamentals. And I don’t necessarily think that it’s going to flip to the other side anytime soon.
Jaime Frontera (Barclays Capital): I think that there's a supply-demand imbalance in the high-grade market overall. There are more lenders than issuers in Latin America; most of these transactions are refinancings; it creates a lot of demand.
Most of the issues that we’re seeing are investment grade. So when you compare an investment grade [loan], you can compare with the counterparts in Europe and the United States. Compared to Europe, Latin America has pretty much the same yield. United States is a little higher. But the United States has always had a lot of discipline – more discipline than the rest of the world regarding the tenors that don't push beyond five years, and the pricing moves with the benchmark only slightly.
And so therefore the question of whether prices can go down depends on if the banks can absorb that. There’s a lot of banks out there that cannot do it anymore, a lot of banks for which it’s above their cost of funds. Therefore, these banks pretty much are just getting out of the market, and they will see the big banks just lead transactions.
Also they’re very relationship-driven transactions at the end of the day. So as in the core revolvers, if you’re in them, then there’s other business from that issuer for the institutions, there’s a need to participate in those.
Therese Rabieh (JPMorgan): Yes. If you see the number of banks that go into these deals, especially the Mexican investment-grade deals, they are mostly always the same banks. We are not seeing a lot of retail banks. Because they’re not necessarily relationship driven; because they don’t have other businesses that they can offer the issuers. You are stuck with the same universal banks that can always come into the same deal. Because, as Jaime said, they have other business with the company and it’s mostly relationship driven.
Jean-Philippe Adam (Calyon): I wouldn’t focus just on pricing. I think some of the banks around this table, including Calyon, sometimes we are forgetting the basics. In a transaction you have three simple variables – you have pricing, tenor and structure. We believe that we can go aggressive on pricing and on tenor as long as it has the right structure.
If we don’t have the right structure – because we have seen companies asking us, one, not to have financial covenants in Chile for a five-year bullet – that's unacceptable. Two, to have the same covenant package that’s on the bond, that’s a completely different market.
So as long as we keep the basics and have the right structure, I’m not that concerned on pricing and tenor.
Rabieh: But when can you get your way with the structure? If you don’t do it, there’s a lot of other banks that are doing it.
Adam: Anyway at some point we stop.
Rodrigo Gracia (Dresdner KW): There is more resistance from the banks coming into transactions. Each time there are more club deals, higher call levels, and less banks participating.
Marco Antonio Achon (BBVA): I don’t necessarily agree with that. I think there are very few assets and tonnes of money chasing them. And we can see that in the market. And we’ve seen prices for Brazilian companies before they were investment grade – obviously there's a very clear reference to one of the transactions led by one of the banks here – which was by all accounts very thinly priced.
However, it was a relationship play and it was an asset that was worth doing and was a complete success. Then you had another for a Brazilian bank, which was extremely thinly priced, and yet it was a success. That is not a one off – that seems to be, there’s very few assets and lots of money searching.
Now, the future, what is going to be? Basle II should have an impact on this because we’re obviously having a ratings impact, whatever lending you have, therefore investment grade would go towards the trend, that Jaime was mentioning here. But the fact is that we keep on doing deals, and obviously we’re very active players, all of us sitting at this table.
And there has not been one transaction I can remember that’s been a fiasco or a complete, you know, error. I mean it could have been more or less demanded, and with more or less banks, but that’s the situation we’re facing.
Now, what’s going forward what’s the situation going to be? I don’t know, but I’m missing here in the agenda a clear and present danger that we’re facing in Latin America, which is 10 countries in Latin America are having elections in the next 12 months, and there’s no reference whatsoever here. It could be a perfect storm or it could be a perfect conjunction of alignment of stars and therefore [the region] would have an amazing future.
The region seems to be growing, seems to be maturing. But yes, it does have an impact. Latin America has traditionally been a tremendously political region. And we have elections coming – what’s going to happen in Brazil and Mexico? And what’s going to be the reaction of banks? Are our lines going to dry up? And is Brazil going to appear in the papers every single day for the next two months and then credit committees are going to say stay away?
Rabieh: A lot of companies are already preparing for that. And a lot of companies already went to the market and they started financing their debt. And that’s why you have seen the increased activity in refinancing in Mexico or Brazil, or in Chile. Everybody’s preparing for this. So if it’s going to happen – most of the companies are refinanced for five and some of them even for seven years. So I think they probably will be insulated from this. The thing is that we are the banks who lend them money at this very attractive pricing. If something happened, like you said, we have a perfect storm, we’re going to be the one holding assets that are substantially priced below market.
Frontera: Another issue is a lack of event-driven deals in Latin America. Maybe you have the Techint deal which is one of them, and you have an acquisition there. But overall, there’s that lack of transactions. So the number of deals or the amount of deals – Mexico last year was US$10bn–$12bn, this year it’s going to be the same. Last year Chile was US$6bn. This year it’s not going to reach that amount. Maybe the difference is going to be substituted by Brazil reaching about between US$6bn and US$10bn overall.
But we don’t see the amount of event-driven deals that is needed overall to use the exposure and then to drive prices to a level that at least is required for the rates of those specific transactions. Not the core revolvers that we’re talking about.
Marcia Vorona (ABN AMRO): Also because, as you were mentioning, it’s been basically refinancing, especially for very top-tier corporates that can benefit from the very low prices and the very long tenors. We don’t see much Capex, much investment going on.
Adam: And don’t forget the bond market.
Mauricio Alazraki (Pemex):
Local markets have played a very important part in competing against the loan markets. You can get cheap funding in the local markets compared to the loan markets. Before, usually the loan market was the best financing for the company.
Adam: And we’ve seen companies go into the market with perpetuals. And that’s great.
Achon: Exactly. And companies that are not the highest of the standards for credit committees in terms of lending.
IFR: So pricing can go lower. Banks are still waiting to lend at such low spreads. If you want the yield, why don’t you go to Venezuela, Argentina?
Bouazza: Most credit committees have defined countries where you can and cannot do business. And within those countries defined names. So then you’re forced to – I’m generalising – but you’re forced to participate in the deal even if you really don’t like the price. Because if you’re already limited in country and in names, then – yeah, you can pick up spread going to the lower tier names, but a lot of banks are not doing that.
IFR: Because they can’t?
Alazraki: For all of these banks, I think it’s also a relationship matter. If they don't go into the facility they’ll probably be one of the few banks that is not, and obviously then it’s harder for them to look for other business.
IFR: Jaime mentioned that some banks were dropping out of the market. Pemex is well known in all markets for diversifying its bank group so it has many different options. In the syndicated loan market are you going to be left with few options – does that concern you?
Alazraki: We haven’t seen that yet, but I think that’s going to be a trend. Every time you see banks willing to go into the upper tiers, then it’s more difficult to get the banks probably in the lower tiers. Sometimes it’s easier to get a big commitment than to get the little commitments. But still I don’t think we’re at the point where we’re not seeing the retail banks. In the last syndication we had 40 banks, which I think it was a record, in the time I’ve been at Pemex. And we also were able to do a syndication in China with Taiwanese banks, and we had participation from eight banks.
Frontera: The oil and gas sector is booming. Banks are willing to go to that sector very comfortably, on a global basis; you know? So overall maybe there’s some other sectors in Latin America that might be experiencing more club deals or top-heavy transactions than I would say the oil and gas sector.
Luis Rodriguez (Pemex): The smaller players, they are not willing to participate in the foreign markets. We’ve seen that, for example, the German banks – they haven’t been participating in our deals and they used to participate three years ago.
Achon: But I think that’s an isolated situation because Germany was in quite heavy disarray, and especially with all the reform pending. The German banks and the falling away of the guarantees and obviously there’s significant structural deficiencies in the German banking market. Now I think that has impacted – because it’s not only been in Mexico, it’s been from the region. They’ve withdrawn from the region.
Rabieh: But it’s also tenor and pricing driven. Last year, when we spoke to you about doing a tranche for lower tenor, for maybe two-year and three-year – you saw them, they came back. I think if you structure something specifically for them, I think they will come back. They just cannot do seven years at 30bp. But if you give them maybe two years or three years . . .
Alazraki: As an issuer, I agree with that. And you might want to diversify. But if you can get your syndication at five and seven years . . .
Bouazza: The difference between 40 and 50 banks is not significant. We’re not talking about a syndication of five banks.
Alazraki: And you don’t want to pay the margin on . . .
Bouazza: The margin or the structure. Pemex has long-dated assets, so it does not make sense to go back to borrowing – unless it’s a small portion of their lending – at the one, two, three-year tenors.
Adam: Mauricio touched on a nice point, which is that it’s easier to get a lead arranger ticket with a high ticket than retail. If you want to be part of the Pemex banking world you have to have an important ticket just to justify them, to put pressure on them getting the FX business, the derivative business, etc., etc. What’s the benefit – because it’s a relationship-driven market – what’s the benefit of being retail at US$5m–$10m if you can’t have access to the same business?
Gerardo Mato (HSBC): But I think the different banks have different situations – that is very clear – different strategies to penetrate these markets. I think a different understanding of the market – the fact that you can have a large presence in the region, the fact that you can have ancillary business for the company.
You are shrinking the market or universe of participants in the syndicated loans when you are getting tight in terms of spreads. I mean sometimes you see economically it doesn’t make sense, and you have the shareholder value added, and basically you say, okay – I mean you’re going with the spread. How are you going to repay? Because you actually are owing me money.
And then you want to gain market share, some of them are focused on league tables. So the reality of each bank is completely different and how you approach a credit, what is your relationship with the company. And sometimes we have a very clear mind that we’re not making any money, we’re just there for the relationship. And that’s why you’re shrinking from 40 banks to five banks.
Even compared to the bond market – the bond market has been extremely wide. I think the best syndicate manager in the last couple of transactions was the management of the company just putting pressure directly or indirectly to the banks, saying, okay, if you’re not participating here you’re not going to be part of this case. And that’s why everybody’s trying to be in the picture.
Adam: Yeah, but that can happen once. You cannot have every year the same message. At some point ...
Mato: [Some banks are] offering UMS and even US domestic credits to issue in Chilean pesos and swap it back into dollars. Because it’s less expensive. And that is the fact of [there] being few assets that actually come into the Chilean market. There’s a lot of liquidity in the Chilean market. And for a lot of banks they’re actually rethinking the fact that should we be in this market or not? Does it pay off? Why are we here? And if you don’t have a presence I don’t think it pays you enough to be in Chile.
And in some way, it was funny because I was in one of the largest syndicated loans the other day from a telephone company, and people just go there for the name. They don’t even ask what the use of proceeds is.
Frontera: Prices in Latin America are higher than Europe for a similar issuer. There’s a lot of multinationals – we’re talking Telefonica, Cemex, Pemex, CVRD – that banks like to participate in on a global basis and fill out their lines. And regarding Chile, banks that sit out in Europe that don’t have a local presence, they feel very comfortable with that country because of the track record and the country risk and stuff like that.
So overall I think in terms of it as an asset for European banks, syndications make some sense to just diversify and go into Latin America.
Stefania Berla (IFC): The IFC has a slightly different point of view from all of you because we’re not competing and we’re certainly not doing a large Pemex or multibillion [dollar] transactions. Our experience over the last years and months has been either with top names trying to stretch maturities, or to look at second-tier names. And what we’re seeing is that this tremendous liquidity and compression on spreads is really very concentrated on the top names. And the interesting phenomenon is that most banks are willing to even, if you want, compromise credit standards for the very best names, rather than go for a much more structured deal in the second tier market, which is a slightly odd phenomenon from our point of view, because I think you can still get good assets, well structured, with higher yields if you go slightly more down market.
But what we’re observing is that the banks that are playing in this market really have their set of names, their target names, it’s where they want relationships, ancillary business. A few banks have been giving in to say, okay, enough, and let’s go down market looking for yield. But I’m not sure whether it’s the beginning of a trend in which now second-tier companies also increase their access to the market, or whether it’s still just a few players and the rest will stay concentrated in the top names.
Adam: I don’t know if I agree 100%. We’ve seen a lot of transactions with second tiers well structured – but those are less visible in the market. They are US$50m, US$75m, US$100m type of club deals. So they are not very...
Achon: Glamorous or sexy.
Berla: They’re happening. When we are syndicating those type of deals, we don’t have that kind of demand. The type of appetite in which you could sell the deal five times over and your only problem is to say no. We actually have banks saying no to these deals and saying we are not interested and the name is not our target. So you’re able to keep your spreads at a more realistic level, and you’re able to structure the deal properly, because there is nobody else that does your – I’ll do the deal with no security at 20bp or whatever. I agree with you they’re getting done, but it’s a much less deep market than at the top tier level.
Bouazza: It also has to do with where these deals are getting done. So, for example, when you’re trying to do something in Bolivia, then it falls off the radar screen for a lot of banks. And it’s much easier for me to go in and convince my committee to do something at a tighter spread for a safer name and a safer haven than to pick up the yield in Bolivia. Obviously there’s IFC involvement, so there are some exceptions. But these are two very different markets.
Berla: I agree. My comment was more in Brazil. Compare top tier with second tier. Bolivia is definitely – once you go to the more frontier countries – a different ballgame.
Mato: There are different banks for different situations – as we said before, it’s a different situation. For example in Pemex – we know that there are huge banks that treat Pemex as part of the Federal government so they lend the capital base, and they can go Libor plus two. And they’re bringing down the benchmark of what real syndication is. It’s just trying to position themselves to get league table. So they’re bringing down the other banks, and the other banks are forced to go at a loss. And I’m taking Pemex as an example.
That’s why different banks, different situations, different expertise – ABN has a large process in Brazil. They understand Brazil inside out, and they took advantage of the situation because they have the expertise. And for me it’s harder to convince people to – on the credit side – to participate in Brazil than probably for ABN. So there is competitive banking from one bank to another – and then everybody has to adapt and that’s a problem.
Vorona: And in Brazil, since of course by our presence it’s one of the countries that is definitely our main focus. And we are very active, not only to the top tier names, but we are also focusing on certain second tier names as well. That is something that is happening, and I know it is happening to a few banks as well in Brazil.
Rabieh: Most of the banks are starting to go into second tier. We don’t see these transactions because these companies are not as large as the Telmex or Votorantim or whatever. You don’t see – they don’t advertise those transactions. You see a lot of clubbish deals happening in Brazil between three or four banks going to . . . the mid-sector, which is like the upcoming sector in Brazil. And then giving them US$75m, US$50m. So they don’t advertise this, but there are definitely banks lending to the second sector.
Adam: The strategy of the bank has a lot to do with it. There’s banks that are aiming for – to participate in syndications or do syndications with the purpose of doing debt capital markets, derivatives and other types of products. And maybe that’s not the tier for that type of strategy. On the other hand, there’s banks that their main income is coming from the market and transactions, and marketing their assets. So therefore, that’s what they’re aiming at and that’s where they’re going to be.
Bouazza:: You have to think of all – I mean even within our banks we compete against bilaterals. And with the liquidity that exists in places like Brazil or Mexico, if it’s a US$100m deal, one bank can put it in by itself. So these smaller deals that Therese was talking about, they never surface sometimes because at most two banks just took it in and wanted to hold the asset. Especially if it has a slightly more attractive pricing than what they’re getting on the syndication. And in addition there’s the peso lending and the peso for loans, for bonds in Mexico.
Alazraki: You see it more on the local scale. Banks that have more local presence certainly go down the credit curve.
Adam: And let’s face it, due to the hot market – and correct me if I’m wrong, but customers prefer to have two or three banks, a club deal, as opposed to going to syndication, going through process, etc. – they just want a two-three bank club deal, that’s it.
IFR: So is that the way to go?
Frontera: It depends on the issuer too. There are some issuers that like to have a well-balanced transaction.
Rabieh: And the issuers are getting the best. They can get the tenor they want, the tax that they want. They don’t have anything setting them back. They can go to banks and say I want a seven-year tenor, you give me a seven-year tenor or I'll go to somebody else that is willing to give me the seven-year tenor or whatever. They don’t have a prepayment clause, they can – they’re refinancing as much as they can, or as much as they can get away with, right? And if the spreads continue dropping, you know, they refinance next year. At a certain point – there’s no prepayment penalty, so why not?
IFR: On the note of tenor, how long can you lend? Are you going to take on the role of the bond market?
Rabieh: I think that’s what we have been saying. It was seven years I think in certain countries. In Chile and Mexico, Brazil even for certain names you can go for seven years.
Achon: That is the thing that I think Stefania very correctly pointed out, that IFC brought additional value to the table by stretching tenors in Brazil, for some 10 years. There was kind of a landmark transaction that they led for Embraer. And I agree with Therese. I don’t think – when you start going into certain tenors, unless there is an underlying and very compelling reason, such as project finance – there is very, very little value that can be brought by a loan rather than a bond. Because it belongs to a different investor universe. It belongs to a different – it’s a fixed rate. It should be a different investor base, it should be marked to market. Rather than a loan, which is basically hold to maturity and scarcely traded.
But I think that the tenors are getting to a level that we're kind of almost competing with a different product. And I think that’s somehow – because it’s not only the tenor, it’s what’s underneath that. It’s that the asset is going to turn around much fewer times in the books of the bank, and therefore the bank is incurring a liability, not only a tenor liability – because you’re going beyond what you should be doing. It’s difficult for us to justify sometimes.
A different thing in Brazil, for example, is to go trade related or non-trade related. Working capital for – we’re getting – we’re seeing deals in Brazil, trade related, seven years. But we haven’t seen really working capital deals for five, six, seven years clean.
Berla: That’s what we do. That’s where see our role – for corporates . . . we can help them stretch.
Bouazza: There was a psychological barrier that got broken once we went over five years. And now that we have gone over the five-year first in Chile and then it came to Mexico, and we said we’re doing it in Chile. So you can do it.
Not every name can do it, but you can do it. Now it’s going to become – it has become more acceptable. We have seen smaller companies do the six years. We will see more seven years. The peso loans are at seven years and longer. So you have to also see which products you compete against.
It goes back to if there’s a market then you’re still focusing on top tier names. And that kind of market development is not helping the second tier. Because you’re providing all the top benefits to the top issuers, and it’s trickling down but very slowly. But I think we have broken the five-year sort of psychological barrier, and I think we will continue to see it for those names – the six to seven-year. I think one or two players may push it even beyond that. But it’s going to be very selective. You cannot describe it as a market – general market trend.
And then the IFC is going to have to do certainly 15 years and... [CHUCKLES] Why wasn’t longer than five-year used? Because companies use the bond market. However, the bond markets, surprisingly, have lagged behind the loan [market in terms of] pricing. So as an issuer, why am I going to pay 20bp more to go to the bond market on the seven year when I can easily get the loan done at a better price?
I can prepay with all the flexibility. So I think that you have a little bit of – I think until these dynamics change, you’re still going to see issuers asking us for the six or seven year tenors.
Achon: I think Katia brings up an excellent point, which is what is the alternative? What is the best alternative that the client has? The client has a wide array of products – has local bond/loan/securitisation and offshore product placement. And it seems that now the region has come through a stability that basically all products are available – obviously with certain differences. But those differences are to a certain point converging with some restrictions.
The fact is that never at this point in time were institutional investors so eager to pour money into the region. Private placement investors were willing to put money into the region. Local markets developed and with sufficient debt to attend the needs of big behemoths like Pemex, for example.
So the fact is that we are competing against other asset classes and never has it been so tight, the comparison. There are certain levels of liquidity, and let’s face it the only borrowers that have US$4bn, US$2bn, US$3bn are Chileans and Mexicans.
For Brazilians there’s never been a transaction over US$1.5bn in the loan market. So that’s the story. The story is why are we competing against – and it seems like – the fact is that there’s an increased development of the local markets and of investors looking for fewer assets. Therefore, prices are tightening across the product lines.
Rabieh: But I mean the volume has dropped substantially. In 2000 you had US$45m for volume.
Achon: But this year we’re going to be around – Therese, the first half was US$27bn...
Bouazza: Because of the mega-deals – the difference is that now the volume is made out of three very large transactions.
Achon: It’s decreasing, but that is also a showcase for what Jaime was saying – there’s a lack of event-driven deals because there’s very little M&A activity within the region. There’s SABMiller buying Bavaria, there’s CVRD buying Canadian assets, Votorantim buying Cemex plants in the US and Canada. I think the real sort of trigger for growth in the loan market is going to happen when Pemex buys something else across the ocean, or Telmex buys – Telmex has been doing this. It’s amazing. In three months they bought Chile, they bought Peru. So exactly the same thing. That’s going to be the trigger for M&A activity across the ocean, north, south – that’s going to be the trigger. Unless we see that there’s going to be stability or a plateau.
Frontera: There's been a lack of project finance also, in the last couple of years.
Rabieh: Unless Brazil or one of the major countries starts growing and starts the infrastructure projects, I think we are kind of stuck with the refinancing.
IFR: As you mentioned, refinancing, that keeps coming up. You do all the work and a lot of these deals don’t make it anywhere near maturity. How do you budget for that? Because it must be somewhat difficult, if you get knocked out of the deal 10bp cheaper in a years time.
Alazraki: I guess the good thing is that banks get paid fees again. I don’t know exactly how they compute the fee based against the spread based, no – but they will get fees paid again.
IFR: Should there be prepayment penalties or restrictions?
Achon: In difficult times there have. We had some Brazilian assets done in 2002, when nobody wanted to see Brazil, not even hear bossa nova on the radio, and we had non- call features that originally made it more attractive. And we still have in our books some of those assets. So usually they’re yielding three times the amount that other comparables are now in the market. But again, we lent at a time where nobody wanted to lend. So if times get rough, these features will come again.
Gracia: You will need also to learn how to price a prepayment clause. What value to subtract from the regional spread of a loan. What’s the measure of the value of that clause?
Alazraki: That’s done by the bond market – it’s very standard.
Bouazza: Don’t give us ideas. We’ve done a number of refinancings, and even though the banks complain and we complain, at the end of the day, in addition to the fees that – there are small fees that are earned again – the answer seems to be that the banks would rather stay with the asset than not only lose part of the margin, but also lose the asset completely and have to go out. Especially if it’s a large transaction with a fair amount of exposure to it. And it seems that most of them prefer to renew after complaining for a long time, rather than lose the asset completely. It doesn’t meant that some of them do not drop out. It seems to be a dynamic net-net to where most refinancing has been done “successfully,” quote-unquote.
Mato: Now the bond market and the loan market are competing with each other very, very closely, but it was not the case.
Before, it was mainly trying to use the syndicated loan or the syndicated financing in the bad times and try to keep the lines open. But now the difference – the gap between loans and bonds is much bigger than it used to be. And I think for everything that we have discussed.
So what will happen, my question is, if the markets shut down and you have a crisis, and Pemex wants to go to the syndicated market, and everybody says I’m up to the limit? And probably we're sacrificing today 15bp–20bp to go to the syndicated loan market, while historically we are having low yields. And I’m not talking of Pemex because Pemex is very diversified, is going to the capital markets, but there are a lot of companies that are mainly focused on the syndicated loans just to save 10bp.
Berla: I don’t know that anybody’s hit their limit yet. Because the liquidity is such a global situation right now. I mean it’s not any one market. It’s not Latin America, it’s not the bad market versus... I mean everywhere. We find kind of – like all of you, we are a global institution, and it’s the same phenomenon wherever you look. And not only that, but now you have, for example, significant Asian money chasing Latin American assets. So everybody around this table is competing not just with a limited group of investors, a tradition having invested in Latin America. A Brazilian corporation recently came back from a road show in Asia, where a single Taiwanese investor offered to buy the entire US$600m issue. So, when you are in that kind of situation I don’t know whether really there is a concern about the loan markets, the banks.
Mato: Remember that the equity market is closed. And that’s one of the reasons there’s so much liquidity out there. And that can change one year to the other. And usually you are up to a limit and you’re asking for exceptions. So you’re always working out those cues when the market – when you have a complicated political situation in Brazil or Mexico. So, we grew a company from zero exposure last year to have over US$1bn exposure. So I mean I'm sure a lot of banks are in the same situation.
Adam: I’m a little bit surprised when we say that one product is competing against the other. I truly believe that this roundtable a year from now will be called Capital Markets Roundtable as opposed to Syndicated Loans.
It makes more sense for our borrowers and even for us. Because when we have a request for proposal, to think about which is the best range of products we can offer. Maybe different tranches, one domestic, one bond, and one syndicated or a mix of them.
Bouazza: That is happening already. We’re part of capital markets.
Adam: It’s not that we are competing one against the other.
Bouazza: No, we’re not competing as such . . .
Achon: Products are mutually exclusive unless you do – but what sense does it have to make a US$50m bond? Practically no sense. Ultimately, when you have a debt product usually it’s either one way or the other or a mixture of both, but there’s very little sense in having – like the example we said before.
The client is always going to decide. Maybe they like the prepayable feature, maybe they like the fact that they’re going into a growth period or an expansion, and they might need to refinance that sooner rather than later. So at the end you have different clients, different investors. But I agree with you, that the client ultimately is going to call the shots and say,
I’m going to take this route rather than . . .
Alazraki: Fifteen years ago, the only market for companies like Pemex was a syndicated market or the bilateral loans. Right now we have an array of products that we’ve never seen before, and a range of markets that we can go to: Asia or sterling or dollars, or local markets, syndicated loans. Certainly you’re competing against a much broader mixture of products. And obviously as a company you want to diversify the use of this array, and that’s why probably you see prices go down, not only in the loan market but in most markets.
Frontera: The only issue with the loan market is that the secondary market liquidity, at least this year, it hasn’t been there, it hasn’t been that efficient. And prices in that market have been definitely below par. So people suddenly have to take somewhat of a loss. So contrary to prior years in which there was a lot of liquidity and a lot of volume and a lot of trading...
Adam: A lack of assets.
Frontera: Yeah, maybe lack of assets in terms of the supplier. But also the other issue is that the secondary market investors require some level of return that these type of transactions on a par basis do not meet. Therefore, they need to have some type of substance into it. And therefore they’re going to have to take a loss. So the liquidity of the market in the secondary has been limited this year. So overall people are getting fuller and fuller with these assets that we’re talking about.
IFR: Is that a desirable thing, liquidity for investors and borrowers? And what can you do to deepen that market?
Frontera: Also the CDS market is above the loan market, so it’s very hard to hedge these type of assets too. So I don’t know what people do.
Achon: But to have liquidity you need to have a sufficient supply, which right now is questionable. You have to have a decent size for each transaction. And the only transactions that have a decent size for this kind of – is the US$4bn, US$2bn, US$1bn. It’s very hard to give liquidity to US$150m transaction or a US$200m transaction. Who’s going to be the market maker on those? Very few people are willing to give a price.
Rabieh: But historically in the bank market, banks – you know, mostly book the asset and keep them to maturity. You are talking about the large banks now holding a lot of these assets. And they have to get rid of them or sell them. You have to pay substantial discount, because the spreads are very low. And sometimes what you have to pay is not compensated by the fee that you receive on the loan, because the fees are much lower than what you have to pay to produce that exposure.
Frontera: And tenors right now are 7.5 and seven years...
Rabieh: And tenors, exactly. When you put that on the discount – the discount becomes huge. You give five basis points and you have to pay 35bp upfront, which is a lot of money to pay. Unless you’re really desperate and you think maybe you can do maybe a derivatives transaction and mix up money so you can sell it. Otherwise there’s no incentive for you to sell that and lose all that money. In the past – I mean I’ve been doing this like Jaime for many years – we used to book Petrobras at Libor plus two or whatever. You can wait six months and sell it at Libor plus 75bp. You have spread, you can make money and then at the same time sell the asset. There’s no asset today that meets this characteristic. They’re all thinly priced and longer term.
Alazraki: That’s a real problem that issuers face. And we’re aware of that. What I think the way to go there is really to try to diversify and try to find new markets, either if it’s a different product or not, but really to diversify the base. No, you don’t want to keep going every time to the same banks. So we use a lot of ECA finance, that really takes away a lot of pressure from the banks.
Adam: It’s expensive.
Alazraki: It’s not expensive because they just, in the case of Mexico, they just lowered the premium. So it’s now probably compared with the loan market.
IFR: Do you push your banks to distribute as widely as possible?
Alazraki: Yes, we certainly try to get as most banks as we can. But, again, you’re seeing this phenomenon that it’s now very difficult to get the retail banks.
Mato: In the past you have done different tranches.
Alazraki: We have done different tranches just to accommodate different banks.
Bouazza: I think – I mean not because Pemex is sitting here – but it is one of the more conscious issuers in the sense that they do.
Alazraki: We are very big.
Bouazza: They do diversify and they don’t go after the last cent. So, yes, it is tied to price, but they’re not trying to squeeze the last cent. As opposed to – there are other issuers that actually – they tell you upfront, I really don’t care how many banks, I don’t care how you do it, I don’t care which market, and I don’t care – just take it all and stay with it. I want the tightest possible price, period. So if my banks come in or don’t come in, I don’t care. And that mentality can start – if you go through a crisis then you’re going to see a shift in that kind of thinking.
IFR: And the smaller players seem to be getting shut out. Is there still room in this market for a specialised, LatAm syndications shop, or do you have to be a full service provider? Do you have to provide local bonds and all sorts of other options?
Bouazza: A lot of banks got out of Latin America, period. So it’s not so much that they’ve been around and they just have not had a role. A lot of shops just closed, and a lot of banks just got out of – even Mexico. Some of them are trying to come back more specifically to Mexico. So the pie shrunk a long time ago. And what you’re seeing now you’re is the big players that have stayed.
Rabieh: Or came back.
Bouazza: So it’s not something that just happened.
IFR: Are they still relevant – the dedicated, specialised, long term syndicators?
Rabieh: The small players don’t have syndication. We have lenders that do everything.
IFR: There are participants who don’t offer significant capital markets expertise or local markets. Are they going to get shut out?
Rabieh: Well, they have other businesses – I mean – usually with the companies. Not necessarily that they do the bond. Maybe they work with the parent company, I don’t know, in Italy or in Germany.
Adam: And they have the benefit of having a lower expense level, so they can justify...
Frontera: They have access to all the products that we’re discussing right now, you know? So a loan is not the only product that they have access to.
Achon: Those banks will stay to the extent that there’s sufficient future flow business with the companies, and not necessarily additional product lines. But if they can justify through two to three years that they generate income, financial margins, some fees. It’s different profiles for bankers. Maybe they have extremely profitable retail activity from other areas of the bank in other regions, but they still want to diversify and put some money in Latin America. So I don’t see those banks going away.
Adam: It’s black and white. Either you have a platform with a full range of products or you just have an office and you lend from Europe or from Asia.
Bouazza: They’ll be marginal, you know – we’d like them to stay and we’d like this to remain a syndication market. Even though it has shrunk. But if they don’t stay, will it affect the pricing of the next Pemex loan? I don’t think so. The business a couple of years ago switched with the large issuers – frequent issuers issuing in size and aggressive tenors, aggressive pricing. It became more of a muscle type of business, and you need the big players to push it through. So yes, we would still like a syndication of 20, 30, 40 banks. But for the most part they’re not going to make or break the trend.
Alazraki: The difference for a small player is that the loan has to be economically viable. For some large players, they might be looking for other ancillary business when they commit to a syndication.
Berla: A few years ago there was a major process of consolidation amongst the European banks, which resulted in fewer players. We’ve now just seen UniCredito bought HVB... So the question is, is there a second wave of further consolidation that’s going to take place amongst the European banks? And if that is the case, what would be the effect in our markets? Because ultimately they are these banks that are the smaller players I think that you’re referring to. HVB has been a relatively active player, not a major player – but it has participated in all of our deals.
I have a question mark [against them] now that they’re merging with UniCredito: will they continue to be a player in Latin America or will they completely retrench to Europe, which is really their backyard? I’d be interested to hear what you all think. Is there going to be another change or not?
Alazraki: When two banks merge: one and one doesn’t make two. Then they come out and they sometimes bring more money than the previous two banks together. One example, probably, is Calyon; we’ve seen that with Mizuho. At the beginning [Mizuho] stayed out of the markets, they consolidated. And when they’re back they’re back in full force.
Gracia: Another example is Bank of Tokyo-Mitsubishi. But then you have the other side. Not in Mexico, but in Latin America you have Bank of America and Bank Boston. Before they operated separately, you could see both players. And now together they’re basically – except for the local businesses they have in South America – they are out of it.
Bouazza: But they decided to exit. Bank of America remained in Mexico, but they exited the rest of Latin America. Bank Boston we see from time to time in Chile and Brazil. [If] consolidation leads to strategic decisions to exit the region, then we’re going to have more consequences.
Berla: Because of who the acquirer is. And if you have more and more banks that are going to start becoming much more regional, then that will have an impact on Bank of America.
IFR: Good question. Probably one that we need to have a whole new roundtable on...
Berla: I think you need to just monitor it. I think it’s too early to probably see whether it’s just a one-off or the beginning of a trend.
IFR: Let’s go back to what we came up with at the beginning of the session. Marco Antonio, your question of the politics. It seems to me from what you’re saying, that things are going to continue as they are until there’s a blowup. We’ve only seen one really failed syndication so far this year. It doesn’t look like anything else is going to go wrong. What lies ahead? What are the main roadblocks and possible blowups that you’re looking at?
Achon: If Asia stopped buying US treasuries and sending up the yields under longer tenors. Right now you see why there’s so much liquidity. One of the main reasons is because – or the main effects, rather, it’s that the yield curve is absolutely flat. There’s 65bp–70bp between the six-month Libor and the 10-year treasury. And that’s an anomaly, that’s certainly a conundrum. And why is that – one of the reasons why Asia is pouring money down the drain and buying US treasuries? If that starts to happen – if China revalues more strongly and we see some geopolitical also risks of wars, etc – that’s going to affect the markets.
The most inelastic of the products is the loan. The loan will stay there no matter what. And will obviously include some features, like we were saying before – the non call, etc. Nevertheless, there are significant risks ahead for a very political region like Latin America. And if somebody crazy wins in Brazil, or somebody – if Evo Morales, who’s the head of the polls in Bolivia, wins in Bolivia, is it the end of the world?
No, but it’s a significant deterioration of the regional atmosphere in Bolivia and in the rest. If he gets together with some other radicals in the region, that would certainly create additional noise and would... It’s not going to be day and night, but it’s going to be a gradual process of deterioration that could affect Peru – if Alan Garcia wins again ...
So you have a series of – it’s not necessarily a one-off event, it’s going to be a series of events that’s going to take place in the next year. And I’m not going to say that it’s troubling or it’s preventing sleep. But is it somehow worsened? Yes, it is.
Frontera: Nevertheless, the DCM market is issuing at an unprecedented level and investors are aware of all the facts that Marco mentioned and they’re buying. We mentioned the Brazilian issue yesterday, we talk about Colombia, pending a number of countries, a number of companies. And overall, everybody’s aware of those issues but they keep on coming in. So we can be talking about this for all day long, but so far there’s no effect.
Rabieh: And what we have seen in the last year, especially in Latin America – a crisis in one country has not affected the other countries. And when we had the election in Brazil, I don’t think it affected Mexican issuers because people went for the quality and went to Mexico. So it is not necessarily true that if you have a crisis in one country in Latin America it will affect all of Latin America. It has to be maybe a crisis of major proportions that affects the whole economy, whereby – as you can see from previous crises – liquidity dries up [from] one day to the other. You can take the institutional investors having to dump those bonds ... and you have a major problem.
The only we know is that banks usually are much more resilient and usually tend to stay there and go with relationships, and come back I would think faster. If you see what happened early this year in Argentina: some transactions were done in the market before Argentina finalised the restructuring of their debt. There were some banks that were willing to go there and lend to the prime companies that proved resilient and continued to service their debt even during the crisis.
Adam: One very good example is Brazil. Despite the crisis we see a country that’s starting to be mature enough to disassociate the political from the market. So you can have political turmoil without affecting the capital markets.
Vorona: Yes, we were in the market with Telemar and that was a very special deal because it was a different structure with the book building, which was using part of what we do normally for local debentures in Brazil. You would see the Dutch modified action in the structure for Telemar. And in the middle of the crisis with all the corruption and all the scandal coming in, there was no effect whatsoever at Telemar.
Rabieh: I think it affected the bond market, but not the loan market.
Vorona: It was an incredible response.
Gracia: And that’s one of the problems with the loan market. That it's the slowest one in terms of reaction versus the other markets that you have. It takes more time to react, and by the time it reacts or it should react, probably the turmoil has calmed.
Achon: I don’t think that’s a problem, that’s a benefit. Because it’s a much more relationship driven... It’s the nature of the activity.
IFR: So in the worst case scenario nothing happens to margins in Latin America?
Adam: You adjust the structure.
Berla: And without wanting to sound, to forecast doom. Because hopefully it will not happen. And this is a personal view, it is not an IFC view. My concern is – it’s a commodity crisis because throughout Latin America all the major corporates are commodity-based. And we have lived with the last few years a very, very benign environment with commodity prices going higher and higher. You know, how much longer is this sustainable? It’s easy to be profitable when commodity prices are high, but if China crashes and commodity prices go way down, there would be significant investment helping people. What’s going to happen with all this new capacity coming onstream if prices crash? The petro-chemical industry in Brazil, what’s going to happen?
Adam: They have done their homework – companies, they have plenty of cash, they have refinanced all the maturities, so they are ready. They are much more ready than before.
Berla: Yes, but it will lead, I would assume, to all of us taking another look and adjusting prices. Hopefully it will not lead to a series of bankruptcies, but it will lead to a readjustment in spreads.
I was talking to a major bank yesterday about Venezuela. And this person was saying that everybody’s saying, "Oh, yeah, Venezuela, the moment at which oil prices go down Venezuela will come down crashing". But why should oil prices go down? With all this new demand coming on stream and middle classes in China and India increasing consumption, maybe the new plateau is US$60 per barrel.
Alazraki: We’re certainly on a different plateau than we were five years ago with WTI at US$25. Right now you can think of WTI between US$40 and US$50 on the low side. Right now it’s almost US$70. And certainly Venezuela, Pemex, most of the oil producers, they’re still very profitable at the lower part of that range. I would guess that oil would have to go down below US$15 per barrel before some companies start having trouble.
IFR: To sum up – it seems like everyone’s in good shape and there are no problems ahead – it’s all good news. Am I missing something?
Alazraki: Generally in Latin America you see countries where institutions are now much more stronger. Now they have independent central banks, you have a balance in power between the presidents and the Congress. And that’s helped stability in the region – or at least in certain countries like Chile, Brazil, Mexico.
Frontera: Just look at the loan market evolution for the last seven years from issuers. The lenders stay there – most of them – and it increases and increases. We’ve seen that. And that’s what going to happen in a worse case scenario here.
Mato: Another issue we need to discuss is what is the impact of the rating agencies in the loan market vis-à-vis the bond market. Because it’s not the same thing. People rely more on the rating on the bond side, but on the syndicated loan everybody does their own homework.
Someone mentioned the perpetual in terms of Brazil. But I think these credits are already discounted as investment grade in the wrong neighbourhood. We saw, for example, CVRD becoming investment grade. I know the change in spread was 20bp. So with these historical low yields people prefer to go and get the money out there for perpetuals, and that way become investment grade in a year or two when probably the yields are going to be 100bp over. Investors are starting to segregate and identify those kind of investment grade profiles in the wrong neighbourhood. And that’s why they’re coming so deep into the sovereign curve. And that also reflects in the loan market. There’s a lagging of the agencies in response to what the market is seeing ahead of time. And that’s also related to Argentina, where they had 16 corporates investment grade the day Argentina defaulted. So now they’ve become more conservative, so they went from one extreme to the other. But in the syndicated loan market, everybody does their own homework and analyses the credit on a standalone basis.
IFR: One question that came up is Basel II. What impact will that have on pricing?
Berla: Everybody’s in denial. [Laughs.]
Achon: The homework has not been done, but there could be significant impact. The fact is that the whole banking sector is – is in diapers. For us businesspeople or the frontline people, we know it’s going to have an impact and we believe it’s going to be significant. However, there’s no clear message or marching orders on that. Till that comes, we’re going to try to keep on doing our business as best we can.
IFR: You’ve tackled some very interesting themes. I hope there’ll be more ongoing discussions along all these threads you’ve picked up.