Investors with active imaginations have long wondered when covered bonds would be used in Latin America. Several countries in the region have had active mortgage markets, some even tied to dollars, with mortgage-backed bonds and for many years had been thought of as ripe for a covered issuance.
DEAL OF THE YEAR: Structured Financing
Global Bank $200m 4.750% 2017
Bringing the first deal was not easy, and in the end the pioneer was not one of the region’s giants, or even the largest lender in its own country. But Panama’s Global Bank has laid the framework for others to follow, and its $200 million sale was the first covered bond anywhere in the emerging markets beyond Korea.
“It’s more than a covered bond,” says Carlos Mendoza, co-head of LatAm DCM at Deutsche Bank, which managed the sale with HSBC. “It was a solution for the client. Without it, Global Bank couldn’t raise $200 million.”
Global initially pitched investors in May but waited until better market conditions in September, after adding a second bookrunner.
“A lot of countries in Europe have special covered bond regulations, and we don’t have that in Latin America,” says Jorge Vallarino, senior vice president of finance at Global Bank. “But Panama has all of the legal tools in place to do the structure.”
The 2017 transaction had a Baa3/BBB minus rating, above Global’s Ba1/BB+ senior rating, and below the ratings of covered bonds in the US, most of which are AAA. Nevertheless, the bank generated $500 million of orders from 70 accounts.
The notes, backed by a cover pool of Panamanian residential mortgages denominated in dollars, priced at 98.906 with a 4.75% coupon to yield 5.0%. The nearly 4,000 mortgages were primarily sourced from low and middle-income Panamanians, with an aggregate principal balance of $241 million and average principal balance of $61,450, according to Standard & Poor’s. It includes a two-month reserve account to cover any potential interest shortfalls.
Covered bonds give investors a preferential claim in the event of a default, allowing issuers to get a tighter pricing versus senior unsecured debt.
He says the issuer had previously relied on domestic debt funding. Vallarino says about 75% of participation came from the US, and the remainder from Europe and Latin America. About 70% of the buyers were fund managers.
“Most of these buyers had never bought a covered bond before,” Vallarino says, noting that many of the European investors that understood the asset class were unavailable to participate due to the crisis in Europe.
While difficult to find comparables, the deal offered investors an attractive pickup to the Panama sovereign. A more liquid size might have encouraged more investors to participate, but the issuer opted for a smaller size to achieve the desired pricing – ideally aiming it to perform well in the secondary and set the tone for future issuance in the asset class. The bank also needed to have enough mortgages to back a deal.
“It makes sense for Panama to be the first,” Mendoza says, given the dollarized economy and developed banking sector. He says lenders in other countries – Brazil, Mexico and Chile – are interested in bringing new deals. Mid-sized banks such as Global are likely to be the first to open the sector, with larger lenders waiting until the market develops. LF