Bonds & Loans: The loan markets in Latin America have really taken off in the first quarter of 2019. In your view, what are some of the primary drivers in play?
Sara Pirzada: There has been a fair amount of supply. During much of the first quarter, the pipeline was dominated by large Brazilian corporates, and that was to some extent a shift that was likely to take place following the past few years, which saw a broad-based anti-corruption effort in the country that in a sense also weighed on supply. While liquidity has consistently been strong, and continues to be so, there is also much more optimism about the direction of the economy following last year’s election.
We started to see this trend accelerate last year, particularly after Petrobras came to the market with its upsized USD4.35bn revolving credit facility in March. That was the first top-tier entity in the country to put forward a large-scale transaction that was attractively priced for the client and attracted significantly more liquidity than was originally sought. But more importantly, the company went to great lengths to show the investment community that it is committed to improving its corporate governance and boosting its credit rating. This was followed closely by Suzano, which closed a series of very successful transactions totalling more than USD9bn related to its merger with Fibria.
These transactions together were a significant anchor that inspired more borrowers, like Klabin and Haizen more recently, to come to market and bolstered investor confidence in Brazil’s political and economic direction. Borrowers are feeling more comfortable that they are able to secure liquidity at a fair value from the loan market, and cut through some of the headline or political noise.
Finally, another key driver to touch on is liquidity, which remains very robust for companies with strong business models.
Bonds & Loans: Revolving credit facilities seem to be picking up in the region as well. Is this a sign that Latin American corporates are strategically positioning themselves for growth and new investment? Is this growing preference for RCFs being driven by other macro factors?
David Costa: One of the main factors to consider in Brazil, for instance, is the low interest rate environment. In that market, over the past two years, rates have moved from just over 14% to 6.5%, where they are today, which has pushed more borrowers to seek a broader range of funding mechanisms that are more attractive from a rates and flexibility perspective.
If negative carry becomes an acute pain-point with other funding instruments, then revolving credit facilities will become an attractive and effective way of managing an organisation’s liquidity. That is one of the reasons why this product has taken off in recent months.
Bonds & Loans: One of the more interesting developments in the Americas in the early months of 2019 seems to be a reversal of sentiment in Brazil and Mexico. Simply put, CFOs in Mexico seem much more cautious, and in some cases quite bearish, compared with those in Brazil – who seem to be much more optimistic about the funding outlook. What are some of the factors driving this shift in sentiment? Have you noticed these trends playing out in the transaction pipeline?
David Costa: In Mexico, from an investor point of view, I don’t see too much negativity. Yes, to some extent, investors and borrowers appear more up-beat in Brazil. In Mexico, I get the sense that investors and borrowers are shifting into ‘wait-and-see’ mode. So far, we haven’t seen much change on the ground, and in terms of the country’s fundamentals, we don’t anticipate a shift that would be significant enough to justify a narrowing of the pricing gap between Brazil and Mexico. From a ratings and economic perspective, Mexico is still more sound on a fundamentals basis than Brazil.
Mark Tuttle: In Mexico, there is certainly caution. In the capital markets, outside of the caution and potential concern around the new administration and its policies, primarily those that would impact PEMEX, CFE and companies operating in value chains linked to those organisations, there is not a lot of concern in the private sector. Investors are quite comfortable with Mexico. We haven’t seen private sector bond yields increase significantly. The lack of private sector issuance through much of last year and into this year wasn’t necessarily a reflection of borrower or investor sentiment, but more the fact that borrowers have termed out their maturities really well.
Mexico and Brazil are the two ‘alphas’ in the region, and over the past few years, certainly in the first year or two following Lava Jato in Brazil, you’ve seen Mexico go positive and Brazil go negative; I think what’s happening now – where you have PEMEX bonds trading wider to Petrobras, for example – is an overshoot on negative sentiment in Mexico, whereas in Brazil, you have positives priced in – largely focused on the government’s ability to push through its ambitious pension reforms. In any event, fund flows to Mexico continue to be strong, and concerns around borrowers there seem, for the time being, to be restricted to the energy sector.
Mauricio Voorduin: I think it’s also important to look through the noise. Corporates in Mexico are still very strong, and it’s important to look at the fundamentals; we are still seeing borrowers in Mexico refinancing past transactions this year with better terms, lighter covenants, and better pricing. Access to funding and liquidity is very much still there.
Bonds & Loans: Infrastructure still presents a huge opportunity for developers, lenders and investors across Latin America. If we distinguish between larger projects like metros, airports, railways, and toll-roads, and smaller projects in the energy and mining sectors, what does the funding pipeline look like for projects in the region?
Sara Pirzada: Supply for the larger projects tends to be lumpier by nature – we will often see a bunch of deals at once across the region or in tandem with a country’s PPP-related tendering stage, then spend the next year or two seeing just one or two transactions. Currently, we are seeing an upswing, with discussions around new metro and rail projects moving at an accelerated pace and creating new opportunities from Panama to Peru and a number of countries in-between.
There are regional or country-level nuances to that. In Colombia, for instance, expectations were extremely high for the country’s 4G toll road programme, and the strong momentum initially seen there has tapered off to some extent; part of that is related to the strong local currency funding requirement for many of those projects, which was a deterrent for international banks and investors. But the irrevocable government guarantee certificate system implemented by the Colombian authorities in the 4G programme was successfully replicated elsewhere in the region. In Peru and Panama, those risk mitigants have been instrumental at times when investors have been more cautious about which borrowers they lend to, and have led to a healthy supply of projects emerging.
On the energy and mining front, we are also seeing an upswing. For years, commodity prices – particularly copper and oil – were in the doldrums, which meant that most companies operating in these sectors had to scale back CAPEX. Now we are seeing a reversal of that, which has led to a great deal of focus on how to monetise large cashflow-generating assets and secure liquidity at a time of record low funding costs, particularly for international project developers based in Europe. I would expect for the next 12-24 months, we’re going to see that positive upswing continue.
Bonds & Loans: Where do you see the biggest opportunity for infrastructure in the Americas? And how can these projects be sufficiently funded in an environment where countries in the region increase their prioritisation of local-currency funding?
Sara Pirzada: In terms of the next big infrastructure opportunity – both in terms of larger transport or logistics-related projects as well as the energy sector – all eyes are on Brazil. Because so many of those projects have historically been financed by state-owned development bank BNDES, and the lender is now taking a step back.
The big challenge there is that the majority of infrastructure-related funding is denominated in local currency. Cheap local funding from BNDES, coupled with strong appetite from local banks, has helped cement this over the decades. But if the country wants to achieve critical mass and tap into international appetite to secure its infrastructure investment ambitions, it will have little choice but to shift into hard currency markets. I don’t think this will happen overnight, nor does it need to, but we will likely see some kind of shift that encourages a blend of local and hard-currency funding. The Transportadora Associada de Gás (TAG) pipeline sale in Brazil is a good example of what we might start to see, with the consortium formed by Engie and Caisse de dépôt et placement du Québec (CDPQ) looking to raise a blend of hard and local-currency funding to finance the acquisition of that asset from Petrobras.
Projects like ports and airports are ideal candidates for hard currency funding because the receivables or income are often denominated in dollars. Road infrastructure and to a lesser extent rail are also great candidates for blended local and hard-currency funding. So, things could change, particularly as dollar liquidity is so strong, and as the quantum of funding increases