LatAm borrowers hunt for liquidity

LatAm borrowers hunt for liquidity

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Questions about how much time it will take to contain the outbreak of the coronavirus and return to business as usual is driving corporate borrowers from Latin America to seek liquidity where they can find it, sources told LatinFinance.
"Many corporates are preemptively withdrawing their revolvers to make sure they get their hand on their money without delays," said a loans banker in New York.
Other companies are inquiring about new lines of credit, or have approached lenders about requesting payment extensions, according to multiple sources.
The increased demand for liquidity by corporate borrowers comes as capital markets witness huge selloffs across the region, putting pressure on many balance sheets. But the borrowers with the strongest balance sheets and enough cash in hand are expected to best weather the storm.
"The big companies are figuring it out and should be able to limit the damage. There have been situations of healthy companies buying back their bonds since their price has gone down, but on the other hand many small companies could face tough situations," said another banker in New York.

Commercial banks across Latin America seem able to deal with the demand for liquidity at the moment, but things could change from one day to another, industry sources say.

"Interbank lending markets in the region are still liquid are the moment. The issue is that we still have no idea how long the crisis will last," the second banker said.

If those sources run dry, multilateral lenders, such as the Inter-American Development Bank (IDB) and the South American development bank CAF, will have to take on an increased role. Many governments in Latin America, however, do not have enough fiscal space to significantly help local lenders, another source said.

While the ultimate financial impact of the coronavirus outbreak remains unknown, supply chain disruptions and a downturn in global demand are already being factored into many industries.

In Latin America, most countries have imposed travel restrictions and limited social and academic gatherings, but they have allowed vital sectors of the economy to continue to operate. It remains to be seen whether there will be more restrictions on factories and businesses.

"Hotels, the airline industry and non-basic consumer goods will all face a lot of pressure. The oil and gas industry is also going through tough times with the price war, while the impact on other commodities is not yet entirely clear," said a third banker in New York.
The utility and infrastructure sectors are still viewed as safe industries, given the guaranteed cash flows under contract from operating projects. But the development of new projects is being hit by disruptions in the supply chain and uncertainties surrounding cost overruns, said Nathan Galer, a project finance and development partner at the law firm Mayer Brown.
"Some projects that source equipment from China are being delayed, for example in solar energy. These delays affect financial models that were made under different base-case scenarios," he said.
In general, developers and project finance lenders seem unsure how the infrastructure sector will fare, but they are already in search of a better understanding of the force majeure clauses in many contracts, Galer added.
"Every project in Latin America has a force majeure clause. Many do reference scenarios related to disease outbreaks, but may not explicitly define its application. Some projects may reference the term of quarantine, while others only reference disease or pandemic. There is also a dispute as to what constitutes a quarantine. Does it need to be declared by the WHO [World Health Organization] or a national body?" he said.