Loan market struggles to shake off coronavirus effects

Loan market struggles to shake off coronavirus effects

Loans Debt Coronavirus Latin America Brazil Mexico Europe

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The loan market in Latin America and the Caribbean is reeling from the effects of the COVID-19 pandemic as borrowers put off investments and focus on maintaining adequate liquidity, sources told LatinFinance.

In the three months that ended on May 31, loan volumes in the region plunged 85.5% to $3.37 billion from 12 transactions, compared to 44 deals valued at $23.4 billion in the same period last year, according to data provider Dealogic.

"There's been a number of bilateral loans, though the pure syndicated loan market has been very quiet and primarily short term," said Willem Sutherland, head of wholesale banking for Latin America at Dutch lender ING.

Eddy Lacayo, head of corporate lending for Latin America at Spanish bank BBVA, said the drop in loan activity derives from delayed or reduced investments and a focus on liquidity by prospective borrowers.

Faced with shortfalls in cash flow, companies have drawn down on revolving credit lines and sought short-term loans. They have also asked for an extension of payment terms and looked for ways to refinance debt, sources said.

"If you go to the client side, compared to many years ago, larger blue chip LatAm names have committed revolvers, which was not common in the past, and they started drawing on them," Sutherland said.

"First we saw it in the US market. Something similar followed suit in LatAm. Most of the big names had a large percentage of revolvers drawn, around 90% of them, and keep the liquidity on the balance sheet," he added.

Mexico's Grupo Bimbo, for one, drew $720 million from a $2 billion revolver in late March to add to its cash holdings and refinance $200 million in bonds due in June. It paid back $400 million from the revolver earlier this month. Televisa, the mass media company based in Mexico City, withdrew MXN14.8 billion ($650 million) from a peso-denominated revolver in late March, and the real estate developer Corporación Inmobiliaria Vesta took $85 million from a three-year, $125 million revolver.

Elsewhere, Brazilian miner Vale said it would withdraw $2 billion from the five-year revolver it signed in 2017 and $3 billion from the five-year loan it got in December, while Brazil's state-owned oil company Petrobras said in March it would receive BRL3.5 billion ($652 million) from two credit lines following a withdrawal for $8 billion.

Banks, in the meantime, are focusing on loan covenants and taking a closer look at their core client base. As a result, borrowing costs have increased as markets risks have also increased, according to sources.

Borrowers, in turn, may rely more on revolvers and mezzanine financing to raise the funds they need during and after the COVID-19 pandemic, said Mikel Peña, head of project finance in the Americas for BBVA.

"In certain sectors, it has been more challenging to raise debt, so we might see the emergence of more mezzanine financing, some bonds and subordinated debt for companies that are highly distressed. There is often a gap in price between banks and mezzanine in Latin America, which makes it very punitive," Peña said.