Alive and Innovating

Syndicated lending is alive, well and innovating. Lending is still below the “banner year” of 1997, but the market is holding up well despite the difficulties in Argentina. Banks and corporates have been able to raise new money as well as carrying out re-financings, while a number of imaginative deals have captured attention. In all, syndicated lending this year should reach last year’s levels. The year began, says Marcos Camargo, director in the capital markets group at BankBoston in Brazil, with hopes of an outstanding performance. However, the onset of problems in Argentina and Turkey changed the mood abruptly. Yet, he insists that, “The market didn’t stop at all. Banks were more cautious and the credit processes a little slower, but we did not see general price increases across the board.” There were, he says, only a few specific instances of re-pricing.

Even in Argentina, the syndicated lending market was very much open for business. “Deals have been particularly easy to arrange for blue chip corporates in Argentina,” says Emma Throndsen, vice president for syndicated loan finance at Wachovia Securities in Atlanta.

She cites the deal for Argentine gas transporter Transportadora del Gas del Sur (TGS) as proof of demand for Argentine business. She says this deal was originally sized at $150 million but, “was oversubscribed by $50 million and was easily placed with no problem over repricing.”

Taking No Cover
She says that although cover from the US government’s Overseas Private Insurance Corporation was available, “A couple of investors came in and took it without OPIC cover. They wanted the country risk.” Wachovia was also mandated as arranger for Metrogas, the Buenos Aires gas distributor part-owned by British Gas International, which is looking to raise around $130 million in a deal due to be launched shortly. Throndsen says, “We don’t anticipate any setbacks on that.”

She says these signs show that “funds will always be available for true and tried clients that have been in the market many times.” This attitude – based on what she calls a “religious following” for high quality credits – applies even at times of caution when “a lot of banks are filled up with Argentine risk.”

That may be so, but other bankers detect a widening out of pricing on Argentina in light of the country’s dire economic situation. And, says Mario Espinosa, head of syndicated lending in Latin America for Citibank/Salomon Smith Barney, “All the recent transactions we have seen have been to refinance maturing obligations.”

Others are skeptical of the nature of deals such as TGS. Armanee Bowler, head of loan sales in the Americas for WestLB in New York, characterizes TGS as a “club deal” involving only a small number of banks that does not deserve to be classified as a true syndication. But even for the purist, there are opportunities in Argentina. Bowler is working on a number of deals that will produce structures for Argentine borrowers in which payments will be generated and securitized offshore.

Overall, says Michael Jakob, a director at Deutsche Bank’s New York-based senior debt capital markets group with responsibility for Latin America, there is a greater sophistication on the part of lenders and, with it, a greater degree of differentiation between countries in the region. As a result, he argues, there has been less contagion from Argentina in, for instance, Mexico. And, he says, Chilean borrowers have come back into the market since the fourth quarter of 2000, helped by the fact that margins have come down.

The impact of events in Turkey on Latin America has, says one member of the J.P. Morgan syndicated lending team, been “zero.” And, he says, the spillover effect from Argentina on the Brazilian lending market has been much less than in the past.

Brazil has been, without any doubt, the most active market in the region so far this year. In all, predicts Camargo, around $12 billion to $14 billion of syndication business is likely to get done in Brazil this year. This is likely to be similar to last year’s level. Of this year’s total, $2.5 billion is heading down the pipeline in the next eight to 12 weeks. Even on the more highly structured side where WestLB is operating, Brazil is the most promising market and Bowler is involved in the preliminary stages of a number of deals involving power companies.

Bankers at J.P. Morgan say there could be more activity throughout Latin America in the second quarter. This is expected to include acquisition financing and also build-out financings in the telecom sector. The five-year $265 million syndication that J.P. Morgan arranged for Mexican cell phone operator Grupo Iusacell – despite the problems in the telecom sector – showed that deals can get done even in challenging circumstances.

Financial institutions have been a big part of what is happening in Brazil. Eric Velastegui, group head of Latin syndication at Bank of America, has seen “a fair number” of new money deals for Brazilian financial institutions. Bank of America has topped the table of arrangers with a 16% market share in the first quarter of this year. Bankers are surprised by the strength of demand for financial institution borrowers, which continue to secure better terms than strong corporate names.

New Structure
Camargo sees three drivers behind the growth of lending in Brazil: re-financings, capital expenditure and closure of the international bond market. And he has seen growing evidence of a new structure this year: the three year bullet deal in place of more traditional amortizing structures over three or five years. The Brazilian banks – including the government’s BNDES development bank, and the two leading private sector banks Banco Bradesco and Banco Itaú – have used this structure for their borrowings. It reflects, says Camargo, a greater confidence in Brazil’s outlook over the next three years and a pool of capital that is comfortable with this horizon. Lending over five years – usually with country risk cover – draws on a different pool of capital. It is possible to borrow over three years without political risk cover, saving the 1.5% to 2% cost of cover.

This positive view translates into price compression on the three-year deals. And, says Camargo, “Now the private sector is saying ‘if the banks can do it, so can we.’” A syndication for Rio de Janeiro utility Light – led by Citibank/Salomon Smith Barney – closed in mid-April with $190 million raised in a three-year bullet deal. As the first to use the three-year bullet structure with no political insurance enhancement, it is an important deal that is likely to set the tone for other transactions. Espinosa sees signs of increasing activity outside the financial institutions sector and Citibank has won the mandate for steel company Usiminas as well as for Brazil’s Globopar, the financial arm of the Globo media empire.

So far this year, most deals for corporates in Brazil have been re-financings. But now at least another four corporates are looking at doing something similar to Light in the mid-sized range of $150 million to $200 million.

It is, says Camargo, “a new market that is a natural development for an economy that is becoming a more stable environment.” And, according to Throndsen, “Transactions that are not trade-related are slowly but surely becoming more common in Brazil.”

Economic stability should help Brazil if lenders are actually becoming more discriminating. The shocks Brazil has suffered recently have been more external than internal: a weakening US economy and crisis in Argentina. As a result, Velastegui has seen pricing come down in Brazil on shorter-term deals in comparison to Mexico, where there has been a levelling off in pricing. Pricing became a bit too aggressive in Mexico last year following Moody’s decision in March to raise the sovereign to investment grade. There was some “flexing” and re-pricing of deals. Since then, arrangers have been somewhat less ambitious and have been content to see pricing stabilize rather than seeking to push it down.

Closure of the international bond market in the wake of Argentina’s difficulties has certainly been an important factor bolstering the syndicated loan market. As Throndsen says, “It makes syndicated lending the next best option.” Although Espinosa sees the bond and syndication markets as tending to track one another, he has seen “situations in which we have seen syndications to re-finance maturing bonds because of a lack of appetite in the bond market.”

Strong Alternative
While there can be a substitution effect between international bond markets and syndication, Jakob sees another alternative. “When you look at volumes in the loan market, why haven’t Mexico and Brazil come back despite the improvement in their economic position? It’s because a lot of the top Brazilian and Mexican names have been using the local capital markets.” He sees these markets as, increasingly, a “very strong alternative” to the loan market and another factor sharpening competition among the arrangers.

There has certainly been no let up in competition among the banks. Jakob sees good liquidity in the market as “People are willing to put money in play again and that is pushing margins down.” US money center banks and European banks are active and local players have also been competing for deals. In Brazil, says Camargo, “You have a tremendous amount of competition up to three years, with as many as seven or eight banks bidding. The result is that you have to be aggressive on price. For important relationships, banks will scramble to get business.”

The competition has, says Throndsen at Wachovia Securities, been accentuated by the tendency of some banks to hold a large portion of any deal, rather than pricing it to distribute in the market. “The desire and ability of banks to hold large amounts of transactions makes the market more irrational than the US,” she says. But, says Espinosa at Citibank, “as banks reach exposure limits, we will soon see the end of a few banks taking larger positions. Pricing will have to increase to attract a broader spectrum of lenders or, alternatively, greater availability from the bond market will reduce reliance on floating rate debt, thereby reducing the pressure on bank exposure limits.”

As Jakob says, “Depending on the hold strategies of institutions, the outcome will be slightly different. Banks that are willing to hold can typically price differently because they don’t have to price the last marginal dollar.”

Who is doing this is not so clear. One banker suggests off the record that Wachovia has more capacity to hold substantial portions of a deal and says that some banks may be willing to take up to 30% of a deal. Throndsen, however, insists that, “We’re in the business of syndicating -holding is an entirely different transaction.” She says the bank has set parameters to limit its exposures.

Fatter Margins
Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) is also said to be willing to hold a greater portion of deals and emerged as the second-largest arranger in the first quarter of the year. But, according to Manuel Sánchez at BBVA’s New York office, the bank is “Very much in line with market practice.” He says the bank is “not more aggressive” than its competitors. It will hold, he says, “normal” percentages of a deal, by which he means about 10% to 20%. BankBoston’s Camargo sees that some banks with a “major” credit appetite may look for larger hold positions to begin with but, “with the large number of deals coming down the pipe, they want to be able to open up to absorb part of that.”

In a competitive environment, banks are also designing more innovative deals that bring fatter margins. Mario Espinosa at Citibank sees the $250 million loan for the Republic of Colombia arranged at the end of last year as one landmark. “It’s rare for sovereigns to play well in the syndicated lending market,” he says. The deal was structured with a rolling guarantee from Corporación Andina de Fomento (CAF), the Andean development agency, for $100 million, under which the guarantee rolled onto the next portion of the deal every time the Republic made a principal repayment. Espinosa says the deal was a precursor to April’s $750 million Colombian bond, partially guaranteed by the World Bank.

CAF Steps In
Under its AB loan program, CAF also supported $200 million of the $500 million loan raised to finance the acquisition by Venezuela’s Polar Group of the country’s largest food and beverage conglomerate, Mavesa. The Polar deal was arranged by Citibank and, for CAF, it represented a big step up in the scale of its financing.

While there has been relatively little demand for syndicated finance in acquisitions in Brazil except for one or two consolidations in the energy sector, it has played a role in other markets. Jakob says an outstanding example of this was Deutsche’s $400 million one-year loan for AES, the US power group, to finance the unsolicited takeover of Chile’s second largest generator, Gener. Secured by shares in the target company, the deal drew a lot of attention and attracted a syndicate of 23 local and international banks.

As lead arranger, Deutsche alone underwrote and pre-funded the loan that was linked to a tender offer and then brought in Bank Boston, Bayerische Landesbank, Crédit Lyonnais and Bank of America as arrangers. Proceeds from asset sales will then be used to cover the loan. Syndication also played a role in the $2.9 billion Cemex purchase of Southdown in 2000, in which a $1.4 billion US facility was arranged initially by Deutsche, Chase and Citibank Salomon Smith Barney with BBVA and Bank of America subsequently joining as arrangers.

Jakob is also excited by a small but interesting deal in the final stages of syndication to support the international consortium running the concession for Costa Rica’s main airport. The B-loan component is only $86 million but Jakob says, “Costa Rica has never come to the international loan market for this kind of sum before and this deal demonstrates that it can access the market.”