It was the best of times and the worst of times for the Latin American syndicated loans market in 2006. Borrowers, especially at the top tier, got ever tighter pricing while lenders were forced to fall on the relationship sword.
Mexican oil giant Pemex set the tone with a US$5.5bn blowout in January that heralded the year of the megaloan in the region. The refinancing wave continued at ever decreasing margins, while the definition of large was changed by an extension of the regional M&A trend that spawned CVRD's US$18bn bridge.
As Brazilian pricing converged towards high grade LatAm, Mexican borrowers like Bancomext, Carso and Pemex proved that new lows were there to be struck. And Tenaris showed how an Argentina-based entity can swiftly raise US$2.7bn to buy a US-based firm.
Flexes down for Pemex wrong-footed the market while a flex up for Embraer suggested resistance was near, but the liquidity machine rumbled on regardless. Telmex managed to place US$3bn in a three-tranche refinancing with zero resistance and America Movil, meanwhile, wheeled out a bookbuilding to help shave off a few basis points.
Another interesting development was the first LatAm Term Loan B in recent memory, from VTR. Its dual-currency issue is expected to spur the development of a true leveraged loan market in the region.
As the market split into a handful of blue chip multinational credits and the rest, it was uncertain whether prices had hit resistance. For certain names in some sectors, they may still have a way to go, and this means continued top heavy syndications, club deals or bilaterals.
Meanwhile, tenors continue to extend beyond what is being done in the US market. And structures are getting looser, driven by continued excess liquidity.
However, even though they complain about a lack of assets and too tight margins, banks seem unwilling to do the credit work necessary to sustain a second tier, where the returns would be. Nor are they especially keen to venture beyond the stalwarts of Mexico, Chile and Brazil, unless it is for a multinational.
The smaller firms are finding ample resources from bilateral loans and local currency. But all corporates, big and small, need to think about whether they are saturating the bank market. They must start planning for a downturn and open up other avenues of funding, like bonds, to avoid being caught out.
An astonishing US$31.5bn in commitments for CVRD – a Brazil-based firm buying Canada's Inco – in wholesale syndication demonstrated the depth of the market. But there are still severe limitations, like a lack of secondary liquidity and no real ability to hedge.
The short term outlook implies further pain for lenders, some of whom are losing money on deals just to maintain a presence. Those with no ancillary business to gain from this are starting to walk in greater numbers as the risk-reward equation falls short.
Besides this, the region is seeing greater political instability and the commodity cycle suggests nearby pain. And an end to the global glut of liquidity may be near, implying a change in tone for LatAm bank market borrowers.
