IFR: 2006 has been the year of the megaloan, the ever-bigger transaction. There was a wave of refinancings at increasingly tight spreads. And then we had CVRD, which kind of came out of the blue and I think surprised everyone with the response. Pricing continues to compress globally and Latin America seems to be going faster than anywhere else and the deals are getting bigger. What's the next phase for this market and how low can prices go?
Juan Martin (ABN AMRO): Prices have compressed but I'm not sure they will continue to compress, or at least drastically. We have all managed to reduce them quite a lot and because of new, different transactions, we're being able to see sustainable pricing that is working for everybody.
Whether it's going to skyrocket again, I don't think so. I think it will remain low. But I don't think there is a lot of room for continuing to decrease the price.
Now, the other side of the coin is that if you look at some of the Latin American investment grade credits are improving their rating as well, so that gives room for the decreased price. [But] I don't think that there is a lot of room to continue decreasing pricing.
And as you mentioned, there have been some deals that have seen price resistance. They're still getting done, but I think banks are becoming a little bit more conscious of where they want to put their capital.
So is the pricing going to go up? I don't know, I don't think so. Is it going to go further down? Maybe a bit, but I don't think too much more.
Bill Donovan (Santander Investments): I agree with Juan. In Chile a year and a half, two years ago, spreads really came to their tightest levels and basically stayed there and they maybe widened. I don't even think they’ve widened out that much and I don't think that the spreads will widen out.
I think we've seen that in Mexico and I think it's going to be limited without any more decrease pricing there.
For a couple of deals we've done recently, we had to have a real effort on the part of the company itself to really get these deals done. So I think we'll see more and more of that happening.
And banks are reluctant to put their money to work. It's not a question of the country situation or the particular credit, it's really economics. We hear more and more people talk about that.
Ricardo Rubio (JPMorgan): What we are hearing from banks when we go out there with tight pricing is that now they are more conscious in terms of comparing what we're showing them with transactions in the US for similar ratings and size. That's something that people are now realising, you know: why should I do X in Mexico or Chile when I can do Y in the US without the country risks.
I think banks are not biting the idea of the relationship play. Companies have to really show banks something in return when they agree to pay.
Donovan: Yes, that there will be additional business. And that's very elusive: the additional businesses.
Rubio: Not just a promise, right. They want to see something tangible.
Jaime Frontera (Barclays Capital): All these are market-driven terms and conditions. There is an improvement in the rating of the countries and the companies in Latin America. So to a certain extent the cost of funds and the ancillary business have to be taken into consideration, as well as the depth of demand from the middle market for these transactions.
Fernando Aftalion (Rabobank): If you start looking in Latin America as a whole, we see first a political environment that is much better than years ago. We had elections in Mexico, Chile, now Brazil. But the whole thing is pretty stable. That was always a crucial thing. Another point is the fiscal responsibility and almost all countries are looking much better than years ago.
Probably given this scenario, what we are seeing and we will see next year is higher leverage instead of lower margins, as well as looser covenants. On margin, no one can resist more pressure on that side, from the credit point of view. Given the higher ratings and better performance, banks are ready to accept weaker structures.
Michael Jakob (BayernLB): I represent the retail investor side and I think where the prices have come to right now, we have exited some relationships where we've been in for a long time because it just does not make sense any more. So if there is a drive of supply and demand, further downward pressure, I think you'll see more of the retail banks like us exiting.
There's always the myth about ancillary business. And I purposely call it a myth because a retail bank or a smaller bank like us [in Latin America], I mean, there is no ancillary business. It's was hard enough I remember, even when I was at a bigger shop, you know, to even then cash in on the ancillary business. But it's very hard to prove so if there were even more pressure, I think the retail, which seemed to be a bit on the spring back, will disappear more and more.
Also let me just maybe briefly comment on Latin America being more stable, I beg to differ. I think we're all lulling ourselves. In Mexico, it has yet to be seen whether it's really stable. There is some political uncertainty, no doubt. We're all ignoring it right now, but I think the last word might not be spoken yet and it can still have an impact. But it's not reflected in prices at this point in time.
Rodrigo Gracia (Calyon): In Mexico and Brazil the markets have matured enough to distinguish the political situations from the economic situations and not have volatility in the prices as we used to have.
But going back to the price compression, I think this year we have experienced something we hadn't experienced in a long time, which is the flexing of deals.
And how do you define a successful syndication. Before it was defined as achieving 10% of your final hold. Now it's what, 20% or 25%, in some deals.
We've seen bookrunners stay with more than 10% of the deal. So do you still call that still a successful syndication because you were able to bring four or five banks into a deal?
Alonso Molina (BBVA Securities): It's very linked to what Mike was saying about the ancillary business. The investment-grade companies in Latin America right now are playing the game of the big companies in the US and Europe, squeezing the prices and trying to get the main banks together and kicking out the small banks.
If the big banks that are in Mexico and Brazil get that ancillary business and we look at it as an all-in, not a portfolio investment, we will see that. It's what we see in the US and Europe.
Rubio: The definition of a syndication is a group of banks. So if that's the case maybe we should create another tier in the league tables for club deals. When you see six to eight banks completing a loan, I really don't perceive it as a successful syndication.
Martin: A successful syndication can be seen in different contexts. One is, what do you consider for the market is a successful syndication because you see many banks joining the deal or where do you have your expectations when you pitch it.
If you're a bank who has a lot of capital and ancillary business and you need to build your portfolio and you're happy putting 20% of your capital in the deal, and then you raise money in the market and you only need five banks, I guess it's a successful deal.
Sometimes it's even the clients pushing on not to have too many banks. In many cases, the borrowers have said no, I don't want a big group because it's actually difficult to handle them afterwards and I'd rather have a smaller group of banks. So they really want only want very close relationships and they only want this list of 10 banks invited.
And you actually see what I've been calling a reverse syndication, which is counter-intuitive. You have people sending you US$100m checks saying I don't want to be reduced. Please don't reduce me. I want US$100m, I'm underwriting a hundred, I don't want to be reduced. And in some deals, you don't have enough money to give away, not in terms of fees, but in terms of final allocation.
Donovan: That's actually what's happening with these – I hate to say the word smaller but, you know, deals at four or five hundred [million dollars]. We've seen this in Chile, we've seen some in Mexico. They're really club deals because the company's demanding very tight pricing, tight structure, or a loose structure I should say for them.
And they really can only sell that to their relationship banks as we've seen with Colbun in Chile and a number of other transactions. By the nature of these bigger transactions, Tenaris is a good example, they are widely syndicated.
[Tenaris] was a super deal. But the size of that deal, you needed retail in there and you needed wide distribution. And deals like that will have to get done that way.
Martin: Thanks to these new kinds of deal, which are more market-oriented, we're being able to see more fair pricing across the board. I'm not saying super-generous pricing, but just a fair pricing that is clearing everybody's models.
Donovan: Yeah, fair prices, meaning that banks are not asking, "Why would I do that for economics?"
Martin: The other important thing, sort of related to this, is what we in fact started seeing, which is a reverse flex. We've only started seeing it in LatAm, but I understand that in the US market it's something which is very common. People want the asset, they want to keep their capital there, they don't want to be reduced and they will just say fine, I'll take the hit.
Frontera: Reverse flex or upward flex is a tool of the syndication business. So at the end of the day, it's there. But investors have the option of pulling out of a transaction.
Donovan: It's actually surprising you don't have more of that.
Katia Bouazza (HSBC): It's a healthy tool, if you think about it. Rather than going into the market with a non-realistic price, you can do something that you think maybe is a little aggressive but not the most aggressive, and actually let the market decide. As with Pemex, which had a US$9bn commitment on the books, for the most part very solid banks and a large group, you know, over 40 banks participating.
Rubio: I guess it depends a lot on the borrower. Everybody knows Pemex, everybody wants to have the asset on their book so if they flex it, I guess they can get away with it. But if you have a new borrower first time to market, I'm not sure they will do this.
Aftalion: We're all talking about syndications as a product but I think it's more referring to the blue chip or the investment-grade world. Because in that scenario, you get a lot of banks, big transactions and you can have the option to flex down.
But when you talk about what I would call the second tier with market leverage, that's a completely different world. I mean, you don't have so many banks. Usually those are more local banks that can have higher holds and you don't have so much margin. If you have 20% oversubscription, it is hard to flex down because probably that 20%, it's one bank.
Frontera: Yes but the flex up option in that market is very viable an alternative.
Aftalion: You mean flex up or down?
Frontera: Flex up. If you didn't sell it and flex down, if it's oversold.
Martin: There is a bigger problem there. In general, banks complain that the blue chips are reducing pricing and it doesn't make any sense and the deals are multibillion-dollar deals and they're still getting done. When you move to the second level or the mid-market and you come up with a deal which is a little bit more creative, it has a bigger credit risk obviously but it's also compensating the credit risk by higher spreads, banks don't want to look at it because it's not what they like, it's not what they are used to, it's not their profile.
We're not used to doing thorough analysis any more I think in general. Where is the balance between, OK we all want to make money and book assets which make sense and are profitable, but when you show these assets, it's too risky.
When are we going to break that barrier of going between these multibillion-dollar league table-driven financings to another kind of deal. And I'm not saying that acquisition or leveraged necessarily, but those deals which are the second tier.
Aftalion: We really need to go to the second tier. Many banks have been saying the same for years.
However, when you start showing something that is even a good name, a smaller company in a probably not that sexy sector, they start raising credit issues. They're not trying to look at different transactions with different structures, collateral issues, etc.
So we show those transactions to a different group of banks in Europe or even the US or in Latin America. But at the end, they are all the same players all of the time.
Michael Lopez (BBVA Securities): CVRD affirms the distinction or the classification of the largest companies in Latin America as global investment-grade. So what you're seeing now is people have to adjust to that reality. I don't see that the margins would go back up unless there's catastrophic events that would impact all the global investment-grade companies.
So what you're seeing is everyone who has their franchise, no matter how big or small, needs to start to rationalise the actual infrastructure, about whether it does make sense to participate because you're not going to get the ancillary business or because the returns aren't attractive.
Does it make sense to hire analysts in order to look at the more complicated credits or the more complicated structures in order to justify what you want to do in that region, much like it was done maybe in '97 or '96 when people started to really start to build out and more players started to play in the markets?
With the CVRD, the asteroid has landed so now it's what is everybody going to do with the fact that there's this huge crater where you have all of these investment-grade companies that command what they command, either from a concentrated list of institutions or from anybody trying to do anything with them in whatever they may be doing – which I think is part of the reason CVRD is also so attractive.
There's just so much US$6bn that they're going to be spending in capex that everybody's so hungry and salivating for. Everybody at this table, whether we do it or our executives do it, needs to start to think about does it make sense for me to own a bank in Latin America. Does it make sense for me to have four guys doing deals with Latin America?
Bouazza: One of the things we're not taking into account with the banks that are present in size locally is that we do a huge amount of lending on a bilateral basis through these second and third tiers. The flip side of it has been that we need to see more activity in terms of size picking up in the region, so those second tier firms need a billion dollars in order to put a syndication together.
Otherwise they call you and they have their deal and actually it's at pretty attractive levels and we have appetite to hold a lot of size, especially also if it is in local currency. So that there is a whole market going on that's competing with our market in a way.
Aftalion: But that wouldn't be a second tier if you're talking about a billion or a hundred million.
Bouazza: I'm just saying we need to go to a billion, we need to go to higher amounts in order for them to want to do more than a bilateral.
Martin: In order to create the volume, I agree with you. But my point is whenever you bring one of these US$100m–$200m deals to market, sometimes it doesn't really work because many people will not get into it. I know maybe the local banks will be happy to support it, but then you start looking at other retail investors and they will just not be ready to go to work and the size of the company is not what they like, the Ebitda is not big enough, it's a risk.
Bouazza: The comfort level that the local bankers that are doing the bilaterals have is not translating into a larger group when these deals are kind of moving into what you're calling a larger syndication stage.
I think in part it goes back also to are we very comfortable with the region, are we comfortable that where we go to credit and argue, everyone's going to argue that no matter what happens to Brazil, CVRD will survive.
Will we argue the same for the second tier? If you're not very familiar with the company . . . what kind of comfort level can we give them about the companies that we may be familiar with.
Jakob: You see almost a bifurcation of the market. You've got multinational companies out of the region, they're almost detached from Latin America: it's the CVRDs, it's the Cemexes, it's the Tenaris's – global players in the field. And you can justify, despite the famous ZIP code risk, looking at them as investment grade.
For those names, if you sort of get comfortable with that global strategy, you can also accept that they are priced, like other international investment grade credits.
Now, you move into the second tier and there the problem we're facing – again, I'm looking at it these days from an investor's point of view – they are priced often inside US comparable deals but they still have country risk.
They are usually local currency earners and while we all feel very comfortable with a region despite all the variations of the countries, there is residual risk. And to justify then going into one of these local currencies or smaller deals, the risk-reward relationship is out of whack.
If you have a US$200m deal and you end up with a US$5m piece, I think just from a total cost point of view let alone risk adjustment, you just don't make enough money to really justify going into it. The few times when actually priced properly, I would say for instance Megacable, it's a local currency earner, but at least it had an appropriate sort of pricing on it from investor point of view. Then the deals get done.
Frontera: That market is just starting to build up now in Latin America, as a number of investors cannot participate in high-grade transactions because of the high cost of funds. We're also seeing a consolidation in the different sectors in the US and Europe and it's happening in Latin America. So that leveraged market or a middle market or a third-tier market or whatever you want to call it, is a market that is up and coming, it's part of the evolution of a region and it's happening there right now.
Donovan: That second tier . . . their financing needs are being satisfied locally, be it bi-lateral or by the depth of the local market, in the bond market or the loan market. But we're losing out quite a bit in Chile and in Brazil.
And that's all I think very extremely positive for the region. That's why the economies are doing so well, because now you have real deep financial markets that can absorb. So if a problem does develop, their only access is not just the international market.
That hurts us all in the room because we're not seeing that business, but they are our major competitor for those type of companies. I've seen that quite a bit in Chile.
Molina: I think as activity picks up a little bit in Latin America, we're going to see more of those deals because the local market cannot absorb that much.
Donovan: No, there's a limit to what they can absorb.
Molina: There's a limit, but it's very important what Juan said. We were created as an emerging market and not investment-grade and now we are looking at those transactions.
We need to do our homework from the bank side to start looking at these [lower tier] transactions and really make them successful because there is ancillary business there and because the pricing could be right.
Rubio: There were more than a couple of deals, you know, US$200m in size this year, new borrowers that were very successful. That's old-fashioned, you know, do a great analysis and banks – at the right price, right structure and the right selling point – definitely look at you.
Jakob: I think it's very important to say, you know, right price, right structure. And then you can even think about if you get compensated for the risk, the incremental risk you're taking for that being a smaller company, more of a niche player in a local currency earner, then it might make, you know, then it makes sense. If I look at a company where the credit stats are even by, say, US or European standards and whatever in Double B land and I get paid as if they were, you know, investment grade, why bother.
I think it's not so much the laziness as they say gee, how do I
realistically justify risk-reward relationships, particularly if it's then also combined with all manner of loose covenants and weak documentation.
Eugenia Wilds (Deutsche Bank): But if you take the different trends that people are talking about – more leverage, more to be paid for risk, some markets are difficult to deal in – why did VTR struggle so much? That was properly priced.
Donovan: I don't think it struggled.
Wilds: The local tranche did extremely well. The dollar tranche struggled.
Donovan: I wouldn't call it struggling. It wasn't a blow-out success, but it got done. In the Term Loan B market we walked away with no final hold. The local tranche, I was very surprised at how well that went, that was our main concern.
Wilds: That went beautifully.
Donovan: Because there's again a new development in the market – I think it's a new development – leveraging up a quality credit. That's never been done to my knowledge in Latin America. You're taking a company that was basically less than two times leveraged and leveraging it up to four times. The money's being taken out to go back to pay dividends.
Wilds: The classic leverage situation.
Donovan: It's done all the time in the US and I believe in Europe also. But it has not been done in Latin America. It was hard for the Chileans to deal with that but it was oversubscribed down there, it did quite well. The surprising thing, I think: the US institutions are just not prepared to fully dive into a Latin credit.
Wilds: But why didn't more banks that are active in the region just dive into the Term Loan B?
Donovan: They did. They came in right away, the banks in the region and that was very successful, the banking side. But the institutional side was not what we thought it would be and what I heard it was supposed to be. It took a lot of hand-holding and going with the institutions in particular because they haven't dealt in Latin America.
Wilds: So from the bank side, do you think the issue was tenor?
Donovan: I believe so.
Wilds: Because then I see it as kind of a model, from what I'm hearing people are saying, [for] the kind of business they want to see going forward.
Rubio: Aside from tenor, don't you think that use of proceeds for some of the banks in the region was kind of another issue?
Donovan: They thought about it but again, with the Chilean banks in particular, you'd think that would be a big concern because of how conservative they are, but it was not.
Rubio: That's the interesting part of this exercise. I would call it something like a collage. Because as you said, it was geared to US investors and they took some time to digest the idea of a Chilean company with a vehicle in the US and so on. That's one part. And also it was not geared to banks because we were concerned about tenor, we were concerned about the use of proceeds. But you know, I guess this was in the middle, right?
Frontera: Besides that there has been a couple of other deal in Mexico that are leveraged finance deals and they have worked out very well. So I think that market is developing pretty quickly, at least with the main countries.
Martin: Isn't there still some sort of flavor of a turnaround story, that it was a different company maybe three or four years ago? It went from a very leveraged company with a different operational profile.
And then the owners decided well, this is now an amazing company. We can lever it up and sell in the Term Loan B markets.
When you have sort of a turnaround story and you have to believe in what the company is doing and where it's going to get, I think that's where everybody struggles. People are not ready to believe in the turnaround stories unless they have been proven for two or three years and then people will take a risk.
In this one, it's a smaller credit which hasn't been a blue-chip for the past 10 years and then you are levering it up and go into eight years. I think it's, on top of what has been said, I think that might have to do something with it.
Donovan: It was also timing. It took longer because of the Chilean regulations. We had to make sure every T was crossed, the legal aspects there, the US institutions dealing because of withholding and whatnot. So it took a lot longer to bring it to market and when we priced it up, it was probably February-March. We had some flex in there, but we used that pretty quickly.
And the market had changed, the Term Loan B market had drifted higher. So I believe if it was at the higher spread, it would have been a lot quicker getting it done. And it was just circumstances, something we didn't foresee, or maybe we should have, we as a collection of banks, that it took longer to bring it to market and that was, to me, the timing hurt us a little bit.
IFR: That highlights the issue of tenor in this market. How long are people willing to lend? Is 10 years in Brazil the next stage?
Donovan: It would have to have some security to it, you know, or multilateral-type coverage.
IFR: And is that the same throughout the region? Is there a push for longer tenors?
Bouazza: I hope not. But yes, we're seeing longer tenors. Again, the seven-year last year was still not the norm. They were still one-offs and now it's being offered to the next level.
But again, I mean, looking at what, who we're dealing with, the local markets are doing seven years, and actually in the peso market on the loan side, they're doing 10 years.
Frontera: The improvement in the fundamentals of each country is reflected in the tenor and duration – in the bond market and the loan market simultaneously. So you see it in the high-grade side of bond market extending all the way to 30 years and on the loan side, all the way to probably seven, maybe more. And in the second and third tier, moving up from one year to three, three to five.
So I think unless something happens in the region, that's the evolution that we're going to see.
Martin: Why are we doing seven years in the LatAm markets and longer and the US we only go to five years? And if it's more than five years, it becomes a bond issue.
Frontera: If you look at Latin America, 65% of investors are European. And in Europe, there's a number of countries and a number of arrangers that have different parameters in different countries – Spain, France and whatever. So therefore, the seven years is going to get accepted.
In the US market Citi, Bank of America and JPMorgan control over 80%, in which they have established some type of discipline, there's the five years there, maybe a 5 + 1 + 1 as a seven-year, but it's pretty much an option after year one. So there's a stronger discipline in the US market than in Europe and Latin America and the latter reflects the prices and structures of Europe.
Aftalion: But talking of Chile, it's the most attractive country. And in the last years, tenors have been pushing but no further than seven years except for project finance. So I think you'll still find a lot of resistance in going further than seven years. Five as a rule and seven the exception.
Lopez: Multilaterals are out there starving for assets and they're willing to extend the tenors.
Donovan: In my experience, the multilaterals I have met recently have all found that they were losing out, the business was passing them by and No. 1, they’ve tightened their pricing criteria. They’ve also streamlined their process.
Lopez: So that's just another factor that may raise the competitive landscape for longer tenors. I don't think there's the liquidity of the longer tenors.
Wilds: Well, that's the point, I mean, you're not going to do 10 years unless there's somebody to buy it. And if there are banks out there who want 10-year long line assets, great.
IFR: What's the retail view in 10 years?
Jakob: If I don't go beyond five years in the US, why on earth should I do it in Latin America, particularly if I'm priced inside of a comparable credit of the US or Europe. It just doesn't make sense. It's very hard to justify putting capital behind that, particularly if you combine it with what I call the ancillary business myth.
Frontera: And as the Basle II accord starts being implemented in the majority of institutions, over five-years in tenor, the usage of capital kind of doubles.
Donovan: As you go out seven, 10 years, I don't care what country it is, it could be Mexico, Chile, Brazil, you lose a lot of your marketability.
Bouazza: I think it's short-sighted on the part of some companies not to consider the bond market when they start getting to the 10-year and longer. It's true that we've seen price differentiation, especially in the seven years. But I think at the 10 years, the only thing that is more attractive in the loan, and the thing that is giving these companies the most flexibility are the prepayments.
Donovan: The free option.
Bouazza: So this is what's driving the demand for more loans rather than bonds. But I think it's short-sighted.
We're operating in very favorable conditions. We haven't seen a credit crunch, we haven't seen a downturn due to political unrest or anything happening. [Borrowers are] using up the liquidity that they could have on very short notice when they really need it for a very large acquisition.
Gracia: Clients don't want to pay for that extra premium because they don't need the tenor right now. So why pay for it if I can get it shorter term and have better conditions and better price.
Bouazza: It's prepayable. That option is pretty much the best option we know.
Molina: If you see the companies that we mentioned that can access on a bilateral basis 10 years, they really don't need the money. There are companies that, you know, they're just using the leverage with the banks and getting the money for free because they can prepay.
Wilds: There's disintermediation from the bilateral market, where banks with very strong local balance sheets will do 10 years at [US Treasuries] plus 50bp – local currency, but that's what it works out to. And you can't get that in the bond market. And with the large amount of bilateral lending and the growth of local markets, both of which are very healthy, people don't worry about using up the capacity at the cross-border banks to do a long-dated deal because they have optionality at the short end.
Martin: First they don't need the money. Secondly, they are doing deals – this is my own contribution – because we're telling them they should do a deal so they can take advantage of the the competitive market conditions. And finally when the time comes and they really need more money, they can either issue the bond or replace this bank debt with a bond and then reborrow in the bank market and they will still have their availability on top of the other options they have.
Rubio: And they will reborrow at a lower spread.
IFR: Is the refinancing wave over now or is there more to do?
Donovan: There's always more to do, but I think the bulk of that has been done. And going back to what we said initially is how much tighter can you get now without something further happening to region, to the markets, global markets. I think we're probably at that tight spread as it's going to get. So yes, I think it's over. You'll see here and there something come out, but most of them have gotten it done so far.
Martin: I think 2004 we refinanced all Chile, 2005 we refinanced all Mexico. We haven't refinanced Brazil because for many years there was nothing going on in Brazil.
Gracia: This year it's been more of the acquisition side, given the stronger fundamentals within the companies, the countries and also the liquidity in the market.
IFR: America Movil came out with quite an interesting bookbuilding this year. What do you think of this kind of transaction and does it work for other issuers in Latin America.
Martin: In terms of what the client was looking for, it was a very successful deal because they got what they wanted, which was a US$2bn deal in a single tranche, five years, at the most competitive pricing. And at the time it was done, it was the most competitive pricing in the Mexican market for a five-year bullet.
Frontera: How comfortable are middle-market and lower-market banks with that type of structure?
Martin: I think in general, it generates an initial shock because bankers are not used to working like that. We like things to be clear and not dependent on us, which is actually an interesting concept. If we relate it to the flex up or flex down, this is the absence of flex where you let the banks set the price and it should come out to be a fair pricing.
We didn't struggle so much. When we did it with Telemar [in 2005] that was a shock and everybody was like what is this, how do we deal with it, how does it work? When we did it with America Movil, it was not such a struggle and I don't really know why. I don't know if it's because it was a precedent or because it was a simpler deal in a way. Or because the company was an investment-grade company and maybe the people dealing with it were more used to investment-grade.
At the mid-market, obviously the pricing was aggressive. The reaction was more to the pricing than to the exercise, I would think.
IFR: We did hear some criticism, that it was unnecessarily complicated for an issuer that could have gone out at what they did price at and just done the deal, without the auction.
Donovan: It was presented as an auction, but it really wasn't an auction.
Martin: Once it worked out, it's easy to say we could have done it the other way around. When you are about to launch it, you don't know whether you're going to clear the market price or not and then it's better to let the banks do it.
Gracia: Issuers like America Movil, Pemex, Telmex, they have an additional investor group which is the investment banks. Obviously you can always work out with them to try to give a ticket, given the potential side business that can be generated. And for that reason, you come with an additional extra capacity.
Jakob: I wouldn't actually say they have an alternative investor base. When you really look at the America Movil syndicate, there aren't too many of the smaller retail banks in there because again, it just doesn't make sense. You can never make up on the loss that you have on the asset. So I wouldn't say it's an incremental, it's really a different investor base. Maybe we all of a sudden see the I-banks coming in in an America Movil with a hundred million bucks, you know, there must be key expectations of capital markets business.
Martin: I think you're right, but America Movil is a quite unique, one because you see so many investment banks that join the deal as compared to even Telmex. The reason for that is not only the expectation, it's the banks who have been doing business with the company ever since it was spun off from Telmex. That's where the business has been and that is where the relationship banks of the company are.
Molina: Pemex . . . want a larger group of banks, they pay a little bit more probably in fees. But in America Movil, they go for the last dollar and they say well, you know, I have these relationship banks, I have these investment banks and I'm going to put them together and go for the tightest price.
And it works for America Movil, but I also I think it works for Pemex because the relationship is different. It's different in each one of the companies.
Bouazza: The size of their funding needs every year is very different. I mean, America Movil this year had more because it had an acquisition. But an ongoing basis, you cannot compare the two, the capexes and the need of Pemex to come back to the market and know that the market is there in size, year after year.
IFR: So are we going to see more bookbuilding exercises for other issuers?
Lopez: I think you may see some more issuer-led syndications, especially if it's a refinance. I mean, we're seeing that already in some Chilean corporates, so that may happen.
Frontera: Ideally, a bookbuilding exercise should take place when there's no benchmark and it's a new type of transaction. But overall, I think there are benchmarks in the main countries in Latin America right now so I'm not sure we're going to see too many of those.
IFR: What about hedging of loan portfolios via credit derivatives in Latin America. Is this an active market? Is it viable, does it offer any competitive advantage for lenders?
Martin: If you look at a Pemex five year loan, it's around 30bp to 40bp, and the CDS market for Pemex for five years is between 60bp and 80bp.
The CDS market is a very market-driven type of instrument there that is definitely good to see in Latin America and it has brought a lot of liquidity to the market. But I think for the high grade, I'm not sure it is working out.
Martin: But for the lower grades, there is none.
Rubio: We've been looking at this very closely. There are CDSs for Pemex, CVRD, Braskem, Codelco, the ones that are liquid in terms of the bonds. Apparently – and I am not an expert in CDS – in the US, you can include now loans as part of the basket of deliverables.
They are talking of adding loans in the baskets of high-yield transactions and also in Latin America. So from the lender perspective, yes, you want to hedge.
But you will have to pay substantially more of what your asset is yielding and then OK, you might put your loan in that basket. But if you have to deliver, what are you going to do? You don't have a loan because it was prepaid, for example, and where are you going to get all these loans from.
So I think CDS, maybe I'm wrong, but I don't think they are the solution in terms of hedging loan portfolios.
Gracia: Or to justify bigger holds.
Donovan: The prepayment option is the deterrent. What are you going to deliver?
Rubio: You have protection for five years, they pre-pay after a year loan lasts a year and you have to pay for four years.
Gracia: Unfortunately the secondary market is still not mature enough although last year everybody was expecting that the market would be more mature this year. In the US you get to see paper trading above par. In Latin America, you never see that, or there's a slight chance you might get to see it within fees. But most of the time, it's trading at a discount so obviously you have the banks that like to go to a secondary to look for bargains and build up the portfolio. And then you have the banks that have large holds, and need to get rid of that paper and will never sell them below par.
Aftalion: But you always find exceptions.
Jakob: We get a lot of calls from people actually trying to sell below par. There have been a few occasions where we then actually by buying in the secondary market actually got to return levels. It's not a vibrant market, but at times, from the retail investor's point of view, it becomes attractive if you're getting some sort of discount.
Frontera: What we see in the primary markets is relationship driven prices. Supply and demand in the secondary market reflects the mark to market, the real value of that asset at the end of the day. So it's not that they're asking for very cheap prices below par. What they're asking for is the return expected for that type of risk.
IFR: So until pricing changes, there won't be a viable secondary?
Wilds: We don't have the transparency in the market that you have in the US market. The US market is extraordinarily disciplined. More than 50% of that market is institutional money. That money needs to mark to market either daily or weekly and they need to generate a return that's benchmarked. And that's why you see the pricing discipline.
The banks that take the rollovers . . . have call protection, which is why assets pay over par. Because you're not going to be bought out at par if you pay above par, which is the problem in the Latin market.
[There are] people who make secondary markets with more public-market characteristics. We don't have anything like those characteristics in the Latin market. So until the tools are there to allow people to feel that there is a real market as opposed to their buying and holding assets, so it's just a question of buying in the primary or in the secondary, you're not going to see an active market.
IFR: So what needs to happen and how long would it take, do you think, for LatAm to catch up?
Rubio: You need to have market makers.
Jakob: It's a matter of liquidity. There is not enough volume. The total market is US$34bn a year of new issuance. When you consider total outstandings in, say, dollar loans, and you have the universe of banks that like to hold assets. There is just not enough meat in it to see anything develop in size. It's a buy-and-hold kind of universe and unless there are extraordinary external events, there is no incentive to sell.
Donovan: The last flurry of activity we saw in the secondary market was Argentina and that was an extraordinary event. That was when the vulture funds basically came in to take 10 cents on the dollar.
That's why we don't have a market. You can't have a group dedicated to doing that if you're just waiting for that disaster to happen.
Rubio: But with the new BIS standards, I guess that you would see some banks doing a mark to market and therefore, instead of hedging, doing it the old-fashioned way.
IFR: So the market needs to get much bigger to get a secondary?
Bouazza: I think bigger, and also pricing will have to have more discipline, with less relationship-oriented pricing and more in line with the market.
Frontera: I don't think it's going to happen with the top-tier names, because at the end of the day the banks are looking for ancillary business. However, if the second and third-tier market develops in Latin America, there's a possibility of that.
Martin: But that is a contradiction. What you said is the price has to be market-driven and I think most of the secondary we see happening is for the blue chips. You don't see a secondary for the second tier. The blue chips are priced, relationship driven, and traditionally the secondary market what you play with is with the fees. You sell at a discount, which covers your fees and maybe a little bit more of the other fees. I mean, you do a deal and you sell in the secondary.
With the pricing you mentioned including the fees, you have nothing to play with. So you have nothing to offer in the secondary or if you offer you're going to lose money no matter what. So that also doesn't promote a secondary market.
IFR: How important are league tables and to what extent do they drive your decision to get into a big deal?
Frontera: I think it depends on the strategy of the institution at the end of the day.
IFR: Is that distorting the market?
Donovan: I don't think it means chasing deals just to put it in the league table. But I think that is part of the equation.
Frontera: The majority of people around this table are definitely league table driven, it's a big push.
Bouazza: The ancillary business is a huge factor. We work on return on equity. For us, the loan business is just part of the overall debt business.
More banks are moving to that formula because on a stand-alone basis, aside from having a huge balance sheet and tremendous liquidity, there are a lot of banks that want to hold onto these assets, but everything has a limit. The ancillary business is not a myth for us.
Jakob: I want to be very clear. I say myth for the retail investor.
Donovan: At Santander, they do look at things like cash management.
Martin: The argument, or the myth has been there for seven years or more.
Bouazza: Every bank has to determine how their model works. But I think banks are conscious of the fact that the return on the loans is low and it's been in a downward trend and there has been a need to make sure that ancillary business is not a myth, whether it's on the capital market side or on the corporate banking side. But it's very much alive and that's how we operate.
Donovan: It keeps the razor-thin spreads we're looking at.
Wilds: But isn't that part of the issue, that a lot of what's being said is that the loan as a stand-alone asset class is not self-sufficient and is that going to continue? Is that going to change?
Molina: Probably for the investment grades, the top names in each one of the countries, yes. A stand-alone as an asset probably will make sense for many banks and then it goes into the ancillary business. I don't see it changing.
Wilds: If I were a member of senior management and I were looking at capital allocation, it's difficult to justify the allocation of expensive capital to an asset class that doesn't pay for itself. With all the goodwill in the world about cross-sell, are we kind of self-destructing?
Lopez: At this point of the cycle, you can sort of see some doomsday scenarios. But again, these things come and go. So where are we going to be five years from now when there's another Mexican election or another Brazilian election. There's a lot of things that obviously at some point can swing back around and all of a sudden these loans will pay for themselves again.
Aftalion: I think there's a segmentation, pure investment banks don't want to have any loan in their books after six months. And on just the opposite side, you have the pure commercial banks and although they say I want to have some cross-selling of other products, they really love having that loan in their books and they can live with it, although they say they don't. And that will stay for a while.
Martin: I think part of the argument has been if you have the capital, what are you going to do with it? You'd rather put it in an asset which you know will never default and get some return on the capital rather than having it sitting on your balance sheet without using it. Liquidity has been driving this capital to be used in a less inefficient way, which is putting it in these blue chips who will never create a problem for you and give you a slight return.
IFR: Moving on to Real and peso lending, what happened to it? Did bilaterals take over? Will we see a return of local currency syndication?
Martin: I think that in pesos, there are a lot of bilaterals going on and companies that need a bigger volume have access to a US dollar market at very aggressive pricing. Also if you look at the number of banks in Mexico which are lending pesos, it's not such a big universe of banks and even if it is, the legal lending limit for each one of them is not huge.
Donovan: It's the same thing in Chile.
Frontera: And the local debt capital market is very well developed, too, so that's a substitute for the syndicated loans market.
Martin: However, the borrowers who have access to that market are the ones who are also blue chips, or who do an enhanced structure which allows them to more efficiently borrow in those markets.
The other issue in many cases is that for some of the foreign banks, the cost of funds for the peso borrowings, or the cost of funds for the bank in Mexico is sometimes more expensive than the cost of funds that the borrower could get. So that's why sometimes it doesn't work to do it in pesos.
Rubio: It depends how you price it. You're talking about perhaps [companies like] Telmex. But for companies that are not in that spectrum, there I guess there is a good potential for syndicated loans in pesos.
Martin: But then the question is why haven't we seen more?
Rubio: Maybe because we haven't marketed them more.
Martin: Or maybe because given the size of those potential deals, they end up being bilaterals.
Rubio: A hundred million dollars is a pretty decent size.
Martin: No, I agree with you, you can do a syndicated loan for a hundred million dollars, absolutely. But the reality is that banks that have a local presence are willing to lend them a hundred million on a bilateral basis in pesos.
Rubio: But from the borrower's perspective, it's better because you have again more discipline in one document than having five different documents.
Martin: What I'm saying is that the option is you give a US$100m syndicated loan with 10 banks or a local bank says we'll give you the hundred million in a single check. Why go to the trouble of syndicating at all when you get the same terms and conditions and you just have to deal with one bank.
Molina: That's why we don't see more transactions from the middle tier.
Donovan: That's happening in Chile. We did Falabella two years ago. They repaid that, the next time they came they looked at the international market and locally, and they decided to do it locally. And we're seeing more of that. And you can actually see in a list of the local syndicated loans done in Chile, for quite a few the tenor is extending and it's more efficient for them.
Gracia: Then you have Brazil, which is a different culture. They prefer bi-laterals because they don't want to deal with too many banks. They get looser the structures, they get no covenants . . .
Martin: There it is a debenture market.
Donovan: It’s a cross between the two.
Martin: Syndicated loans have a very heavy withholding tax and the way to go around that is with the local debentures, which are actually – well, it's changing but they were actually bought by the banks themselves.
Aftalion: One of the reasons why they structure a syndicated deal for this type of company is because they are looking to bring in banks. Because on a stand-alone basis it's not that easy for them just to bring any bank.
Rubio: It depends on the borrower. Maybe it is on the path of growth. You want to form a bank group, so in the future when you really need the big bucks you have the relationships.
Gracia: A client on the path of growth, because it's already filling the capacity of the one or two banks they work with, they need additional capacity.
Martin: I don't disagree with everything which has been said and I actually use those arguments when I'm selling a deal. But I also heard on the same table that people are giving bilaterals for huge amounts because they have the peso capacity. So that's why I'm saying it hasn't developed.
Rubio: You have all the tools right in the table. You have the peso lending capacity, you have the companies that are willing to buy a huge amount of pesos and I guess it's up to us to develop and create a syndicated loan market at least in Mexico.
Bouazza: It's been a process of having more banks lend in pesos and have peso capacity other than your usual suspects of five banks, you need more players in order for us to look like we're adding value.
Rubio: You have 12 players that can lend in pesos. It's more than certain deals that have closed here for high-yield investment.
You see, for example, banks with local presence in Mexico that have their own syndications teams down there which you never got to see before. For example, Scotia has local syndications people, dedicated people.
Donovan: The same thing's happening in Chile.
Gracia: In Brazil we've seen it with some of the local banks and they're trying to develop that. So probably that's a new trend for probably next year.
Donovan: I think the development to watch particularly in Chile, what we're looking at is the depth of the swap market down there. It's gotten very, very deep and very efficient and for a company that needs pesos but the capacity is there for size, you swap that to dollars. It's something I hope, another avenue I think that could help us out.
IFR: So what else is on the radar screen?
Gracia: There was one topic mentioned last year which was expected for this year and I think nothing has happened as expected by the banks, Argentina. I think everybody's expectations this year for Argentina were that it was going to be a very active market, a lot of volume.
Rubio: I guess locally it is very active from what I hear. There's a lot of local, even syndicated loans in local currency. Banks are flooded with cash and they don't need to come to market.
Bouazza: Very short maturities and very small amounts.
IFR: Is that going to change in 2007? Will we see more?
Bouazza: As we've seen in the case of the Techint group, it's based on certain names and we go back to the blue chips. I don't see it being very different for Argentina.
Aftalion: Argentina is on a lower base, but there are still some discussions about large groups that are looking for other companies [to buy] in the region or outside. And if that happens, I mean, with the right structure and pricing, I mean, it shouldn't be an issue in selling that risk.
Tenaris was a good example. The first time in a long while after the crisis, a huge amount with the right structure it went well. So I think it's just a matter of having that opportunity. But given the business environment in the country and lack of strong investment, I don't see much activity.
IFR: So what are the risks? Is there anything that rings alarm bells in the syndicated loans market at the moment?
Martin: The commodities cycle.
Frontera: Default rates are very low, credit committees are very relaxed, the structures are not tight.
Donovan: In Brazil, the elections – I mean, Brazil is a different country today, it's improved quite a bit, the economy, again the depth of the markets. So you're not looking at the same situation we were three, four years ago. And Mexico the same way, where a number of years back you'd have a lot of upheaval in the market and now they're talking about a parallel government and all this garbage. But it's withstood that.
So we've had a lot of elections that have come and gone. Chile was a non-event, it just shows the maturity of the region, the maturity of democracies down there. Now, on the other hand you have Venezuela, which God only knows what's going to happen there. That's a wild card.
Frontera: But still a very stable region at the end of the day.
Donovan: It's improved quite a bit.
Wilds: The de-correlation that's taken place is extraordinary and so Venezuela and Argentina may be correlated because Venezuela is funding so much of Argentina. But other than that, there's very little regional correlation. So you can have an upset like Bolivia and the radars didn't blip.
Jakob: I think when you talk in the context of this market, or Latin America, let's be clear, we're only really talking about three countries and not about the entire region: Mexico, Brazil and Chile. I think the other more peripheral countries have no influence on pricing, or market politics, but they're also not – at least as far as the international bond markets are concerned – actively banked.
Lopez: But that's a function of one, better local market development – Peru, Colombia – and then two, what is still an unappetising credit profile for a lot of those companies. Now, considering we're all sick and tired of these other pricings and we're looking for yield, there could be something that happens in these other countries. However, I don't know how it's going to look. We've been talking about that for a long period of time.
Bouazza: Yes, we've been talking about Central America.
Lopez: Exactly.
Bouazza: It would be interesting to see development. I think we're going to see more activity from Colombia and some other Central America countries. We have to, because if we're calling this a mature market, that means we're ready to develop other countries, otherwise where do you take a mature market to.
So I think there's still a lot more to be done in Brazil and I think Brazil maybe is maturing now but last year, it was pretty much the first year that the syndicated loan market became active again. So there's a lot more to be done and more names to be done.
Martin: It's easier for a bank to go and approve a credit in Brazil despite the country limits, than to approve a credit in some Central American countries because there you don't have country lines. So they have to approve the credit and they have to get the country line, so it's a bigger struggle. And it's a chicken-and-egg situation.
Frontera: We have a Colombian deal right now.
Martin: Colombia is different. Colombia has, I would say, a more reduced number of banks that are lending to Colombia and they have some country lines with or without provision. Banks are in general more used to seeing every now and then some Colombian deal, but we never see a deal in Nicaragua. I mean, nobody has lines for Nicaragua.
And Peru is the same. It used to be a much more active market in the late '90s and then we didn't see anything in the early 2000s and now we're seeing the Antamina deal which is a very nice surprise. Not that many people have lines for Peru and I think it goes back to what Mike said, which is the Colombian and the Peruvian local markets are very well-developed and very sophisticated and banks and companies, because of the size of the borrowings, they haven't necessarily had the need to go outside and borrow dollars on a larger scale.
Jakob: I think it's also countries that for people who don't have offices on the ground are much more difficult to follow. I mean, it's difficult enough if you don't have offices in Mexico, Brazil or Chile, but you still have significant information flow. But then you start looking at some of the countries you mentioned – Nicaragua, Peru – I mean, to get people comfortable with just the information base over there is not the same.
And if you're not on the ground, it's just very hard to convince anybody that's the right kind of place to put money into. And I also think those countries are more affected, like events in Bolivia, you know, you're probably more scared of a smaller country that something similar could happen like in Bolivia.
IFR: Does anyone have anything to add to that? We're running out of time, so I just really wanted to draw it to a close. But are there any outstanding, is there anything we didn't address that people want to get out?
Lopez: I think that the one thing that going into '06 at least, you know, from the conversations I always had, was everybody was talking about this big election cycle. There was an interesting election cycle, a sort of populist movement as people are enjoying all of their cash. But I think it's amazing that it did happen, this distinction, this breaking of two camps or of investment-grade or non-Latin American entities into more of a multinational during an election cycle. I think that that's pretty interesting and it may be as good as it gets.