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LatAm banks cheered in cross-border markets, but refi risks loom

Jun 6, 2014

Financial institutions are poised to take advantage of funding opportunities in foreign currencies — but they must beware of refinancing risks, say experts

Banco do Brasil sold a euro-denominated
bond earlier this year. Source: Fotos GOVBA
Lenders from across Latin America are finding investors receptive to bonds in dollars and other foreign currencies, but caution is needed over the longer term risks, experts said this week.

Brazil's largest banks have sold cross-border bonds this year, and others may see an opportunity in the second half, said Miguel Barrios, vice president at BNY Mellon. Banco do Brasil, for example,  sold a euro-denominated bond in March and is understood to be meeting investors for a dollar-denominated instrument

"The big Brazilian banks, some of the Chilean, Colombian banks seem to be out there, trying to get to the market," he said.

"We've also seen in the last six months some of the smaller economies coming to market with their financial institutions … We expect from some of the market noise that we've heard to see maybe some other Central American countries coming, maybe some Costa Rican financial institutions … We're hoping that after the World Cup that we start seeing a bit more of the mid-tier [Brazilian] banks coming back."

Guatemala's Banco de los Trabajadores (BanTrab) is one that is looking at returning to the cross-border debt market, its chief financial officer told LatinFinance this week. 

Euro and sterling markets are open to Latin American borrowers, especially as ultra-loose monetary policy continues in Europe, Aureliano Fernández, head of capital markets funding at CAF, said. The multilateral development bank sold a €750m 2021 bond last month.

"The traditional European investor is looking to diversify, getting more balance in the investment portfolio … And the cross currency swap now is in favor," Fernández said.

"I would say also, because of the lack of supply, GBP is a big opportunity. We recently saw a transaction from UMS, from Mexico, for a 100-year tenor. There's opportunity, there's a market that's looking to invest."

Yet a surge in cross-border issuance by Latin banks, taking advantage of high liquidity world-wide, increases the refinancing risks when the global interest rate cycle changes, cautioned René Medrano, senior director at Fitch Ratings.

"If we move four years ahead, there are going to be some banks that need tap the market again in order to refinance their debt. That definitely is a risk, because we don't how the market sentiment will be by that point."

All spoke at LatinFinance's Bank Finance LatAm conference held on June 3 in New York. LF



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“The crisis has been a setback for reserve diversification."

Jan Dehn, Ashmore Investment Management