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DEALS OF THE YEAR: Best Loan House

Jan 1, 2013

Citi

The bad news for the LatAm syndicated loan market is that the halcyon pre-crisis days seem a distant memory: lenders today are weighed down by onerous capital requirements while overall loan volumes remain thin. The good news is that the markets appeared to flicker back to life towards the end of 2012, as acquisitions drove deals while regional and Asian banks began to fill the void left by retreating European players.

Banks are restructuring their balance sheets based on currency preferences, local banks are growing in size, and local currencies are growing in importance as a transaction medium, says Mario Espinosa, managing director at Citi and co-head of LatAm debt. This explains the shift away from the previous focus on New York-centric deals.

Citi has played a role in most of the significant transactions this year. But as Espinosa points out: "It’s a very different loan transaction market when you compare it to two years ago."

He says his approach to loan syndication has changed in that he must structure deals that are both competitive for clients while responsive to the changing banking sector.

Mexican paint maker Comex hooked banks in to a rare peso-denominated loan, many participating for the first time in such a facility. The deal included a five-year 5.36 billion peso amortizing term loan and a three-year 700 million peso revolver for debt refinancing led by HSBC, Citi and BBVA Bancomer, with 11 banks participating. The transaction was oversubscribed and Mexican as well as non-Mexican banks participated.

Ternium’s $700 million, five-year amortizing senior unsecured term loan facility brought in banks from around the world, with US, Mexico, Chile, Brazil, Spain, the UK, France and Japan all involved. Citi was a global coordinator with Crédit Agricole, HSBC and JPMorgan. The steelmaker raised the funds to help cover its portion of the purchase of a 27.7% stake in Usinas Siderúrgicas de Minas Gerais (Usiminas).

The deal attracted a group of eight additional banks, participating at a time when the European sovereign crisis dominated the market mood.

These transactions also stand out because the borrowers chose not to take their business to the booming – and still historically cheap – bond market. Many borrowers are taking their core financing to the bond market as opposed to participating in floating rate transactions. That means that although there’s still space for banks, lending is likely to shift to become more specialized.

Espinosa expects, for example, more bridge loans in the future, as buyers need the money upfront and can refinance in the bond market.

Banco de Bogotá, which closed a $500 million three-year bullet facility in December 2011 with 12 banks, later used a take-out for a bridge to finance its acquisition of Central America-based BAC-Credomatic.

This is the kind of model the market will see for future deals, says Espinosa. Citi managed the bond issue with HSBC and JPMorgan.

Banks that provide bridge loans have to be especially savvy and have a strong sense of how the capital markets and take-outs work. The recipe isn’t the same for all companies, he says, the best takeout strategy for some companies could be bonds, others equity and others syndicated loans.

"Bankers are going to have to have a good sense of all these markets to know what the takeout market is in any given situation," Espinosa says.

He says the number of deals in the Caribbean and Central America are picking up, with many companies doing their first financings, and local and regional transactions taking place.

Low interest rates next year should encourage the bond market, with loans likely to be more acquisition-driven. "As the economy improves and there’s less volatility, then it’s more likely that companies will take the strategic step of making a large acquisition, and that’s what’s going to generate more activity in the acquisition finance market," Espinosa says.

Banks must also be conscious of the Basel III limits. These regulations introduce a big shift in banking parameters, creating a new banking landscape.

A stronger focus on regional capital and understanding of the role of local and international banks with respect to Basel III, especially as it relates to potential issuers, is at the forefront of conversations today, says Espinosa.

Still, even with Basel III, there’s a liquid environment for finding funds. "For 2013, the bank markets will be open for a variety of issuers, so long as the exposures are consistent with the new Basel III requirements," he says.

Banks are expected to shorten their tenors, with terms of seven or more years likely to be few and far between.

Espinosa points to single B and BB minus companies that have launched transactions. These companies will need to watch the market to evaluate their best liabilities structure.

"Banks have to be much more conscious today of risk-weighted assets and returns on those assets," Espinosa says. "And as a result, there’s a tighter focus on tenor, on risk, and that trend will continue as more and more banks continue implementing Basel III standards for their balance sheets."

Banks will still do lower-rated transactions but they will be fewer in number so they can be consistent with Basel III capital ratios. There will be less a tendency to load up balance sheets with lower-rated deals. LF



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