In 1988, then state-owned lender Banamex needed capital.
Sourcing it cheaply was not easy. So the Mexican bank
structured a new type of bond that swapped $200 million of
interbank deposits into a 20-year subordinated liability. The
depositors were already somewhat resigned to leaving their cash
in the bank, having had it already rolled over at three-year
intervals since the sovereign defaulted in 1982. Banamex paid
just 75 basis points over Libor, sweetening the deal for
creditors by backing the notes with zero-coupon US Treasury
The transaction was an early example of a Latin bank looking
creatively at a problem. While the financing squeezes for the
region's largest banks have, by and large, improved over the
last quarter century, they are still finding reason to think
laterally about their liabilities.
A covered bond sold by Panama's Global Bank in 2012 is a
more recent example of innovation, if driven less by a problem
than a desire to tighten funding costs. The lender adopted the
dual recourse structure used frequently by European banks to
finance a pool of mortgages at tight spreads.
Yet for the bulk of Latin banks, for most of the past
quarter century, the funding model has been simple. Bank
lending in Latin America grew from 31% of GDP in 2004, to 38.5%
seven years later, according to IMF statistics. Much of that
stemmed from increasing consumer and household lending,
although construction loans also grew rapidly.
The expansion in lending came in tandem with a rise in
deposits. Across Latin America, bank deposits stood at 38.1% of
GDP at the end of 2011, up from 32.3% in 2004. That means
deposits still account for a large portion of banks' funding -
slightly over three quarters, according to IMF statistics.
Nevertheless, banks are turning in greater numbers to capital
markets to finance their growing lending. Some of that new
access is a function of stronger economies and banking
"Latin American banks in general are very well funded," says
Marcelo Delmar, head of Latin American DCM at BNP Paribas.
"They have a growing deposit base. And the growth in the size
and frequency of issuance is linked to the growth of these
Banco do Brasil, for example, tapped the euro market in
"We accessed the markets with a euro transaction that was a
great, €700 million ($930 million) deal and with the
lowest coupon in our history," says Ivan Monteiro, the bank's
chief financial officer. "We were able to do that because we're
now a triple-B bank, and we are able to access the European
market and the US market. We use that as an alternative to
diversify funding sources for Banco do Brasil."
A growing number of banks are also said to be looking at
issuing bonds for the first time to finance their lending.
"Five to eight years ago, banks weren't the easiest sector
to sell," says Stanley Louie, head of the new products group at
Citi. "The top, largest banks, the state-owned banks, were a
good proxy for sovereign credit. But generally in EM the
investors are more of a corporate buyer base - there's not the
dedicated financial institution buyer base like there is for
investment grade banks."
As the number of issuers and senior unsecured paper in
circulation increases, investors will devote more resources to
the asset class.
"In EM the roots of the market are more heavily skewed
towards corporate and sovereign activity," adds Louie. "That is
taking time to come into its own, and it is happening as there
is more bank paper to look at. If we had an index that tracked
banks that came to market, it would be rising. Initially it was
just the biggest and second biggest banks in each country. Now
we're seeing the fifth, sixth and seventh largest coming."
Stabilizing the system
When it comes to regulatory capital, the picture is
similarly evolving as the banks themselves adapt to changing
conditions. Latin America's banks have largely straightforward
capital structures, with common equity making up the bulk of
A layer of subordinated, tier two capital is common among
the larger institutions. Just a few make use of hybrid capital
securities - deeply subordinated instruments that count towards
tier one capital but which are much cheaper than equity as they
are accounted for as tax-deductible debt securities.
Mexico's Banorte proved the point in July. Needing to raise
capital to fill a gap depleted by acquisitions, the lender
turned to the equity market. Conditions were not great, and it
trimmed the size of the deal slightly. But still the bank
raised nearly 32 billion pesos ($2.55 billion).
But, in recent years, banks have increasingly looked at
capital instruments used abroad to strengthen their balance
sheets while keeping costs down. Banco do Brasil grabbed
attention in January 2012 with its radical hybrid tier one
instrument, structured before the country cemented its rules
under the incoming, global bank standards known as Basel
To increase the chances of the security counting as tier one
capital under the new rules, the bank incorporated clauses
allowing it to change the structure of the note, depending on
the final shake-out of how Brazil implemented Basel
It was not the first time a Latin bank had looked creatively
at the instruments it could use in its capital structure.
Brazil's Bradesco stands out. In 2002, it sold a ¥17.5
billion ($145 million) 10-year subordinated bond, picking yen
because of a favorable swap. Wrapped with political risk
insurance, covering the possibility that Bradesco would not be
able to transfer funds or convert reais into yen to
meet interest payments, the deal was priced 200 basis points
inside the government curve.
Three years later, the bank was the first sub-investment
grade borrower in LatAm to sell a perpetual note, a $300
million non-call five-year tier two.
Meanwhile, in 2007 BBVA Bancomer tapped euro investors for
capital in a dual tranche deal that was another Latin first.
The Mexican lender raised €600 million of tier two capital
and $500 million of tier one paper.
The pace of subordinated debt issuance has picked up in
recent years as Basel III rules on regulatory capital have
developed. That bought lenders them some time to come to terms
with new rules for bank capital - and now means there is likely
to be a lull in the market.
"You saw quite a lot of Latin American banks, especially in
Brazil, selling a lot of tier two bonds in the international
markets," says Vikram Gandhi, senior capital structurer at BNP
Paribas. "In Brazil there was a lot of tier two loading done as
the provisional Basel rules came out. At the time when growth
was strong, an efficient way to build up the capital structure
was to issue tier two." LF