Despite a recovery in the offing, Chile’s economy has slowed down considerably over the past year; what are you hearing from clients on the ground in terms of how this has influenced their funding strategy?
There has been a drop-off in capital expenditure, which indeed means slower growth, but this has also led to an excess of liquidity in the banking system, as well as an excess of liquidity among other entities that provide funding. Corporates are looking for new opportunities to consolidate their balance sheets through liability management exercises, rather than financing new expenditure. If you look at average spreads over the past few months, it is clear that they have tightened – in large part because of this excess in liquidity in the banking system – so the borrowing environment has become more favourable for our clients. The bulk of large corporate names in Chile have already exploited new opportunities to refinance their existing liabilities and smooth out their maturity profiles.
Has the slowdown influenced the bank’s outlook on, and strategy in, the country? How is the bank differentiating from other lenders?
We have seen a slowdown in projects and their execution, fewer new deals, and more pressure on our clients to execute refinance their existing liabilities. At the end of the day, this also means a reduction in revenues for banks operating in the country so they now need to be more cautious in lending or to change their approach.
HSBC has been more focused on servicing the needs of our core clients in Chile – getting closer to them, gaining a better understanding of the structure of their balance sheets, and looking at ways to help them optimise their funding strategies. We think this is the strategy we need right now.
What sectors do you see driving deal flow in Chile in the coming months?
We continue to see a range of corporates focusing on growing abroad in Chile, particularly in the pulp & paper and retail sectors – which would be a driver of deal flow. We also see energy making up a big portion of the deal pipeline in the coming months, large mega-projects like cross-country transmission projects but mainly smaller-scale production plants and similar initiatives that continue to remain attractive from a banking perspective. Chile is seeing the development of a range of new energy transmission projects that will greatly enhance the feed-in capability for new projects. The country is also quickly becoming a leader in the renewable energy sector, which will also be one of the main drivers of deal flow; the last government bidding process that took place were very successful and saw some of the lowest tariffs ever achieved.
Mining, which is one of the strongest sectors in the Chilean economy, will also play an important role in the deal pipeline. At the current price of copper, which has stayed in average the same range for the past six months, mining companies will be looking to execute new investments and expand their operations.
Finally, one of the major sectors to drive deal flow is the banking sector, which is already a fairly active demographic in the country’s capital markets. The new banking law currently being considered could be an important catalyst for consolidation in the sector because there are a range of small, universal banks that would likely struggle under the new regulatory environment. What we will likely see is one or two of the larger banks in the country make a move to acquire one of the smaller lenders, or if the economy picks up pace, a large international lender that wants to expand in Chile. Banks operating in Chile will have two to four years to accommodate their balance sheets to the new regulations and it is probable that with implementation of the new capital rules many small and medium-sized lenders could be faced with a decision on whether to focus on inorganic growth through acquisition or leave the country; it is certainly a very interesting time for the banking sector in Chile, and could present huge opportunities for the right candidates.
Last year we saw more deals structured in a way that combined both US dollar and peso tranches, but with interest rates trending upwards in the US and dollar liquidity tightening abroad, are we likely to see a departure from that? Or perhaps further diversification into other currencies?
I think it’s important to look at the two distinctly. Whether to issue bonds or borrow in Chilean pesos or US dollars (or currencies different than Chilean pesos) or a mix depends on interest rates to a limited extent, but it also largely depends on how liquid swaps are at the time of issuing, and the amount of liquidity available in the banking sector.
Ultimately, if the swap curve is inside the issuer’s local borrowing curve, then it makes sense to execute an arbitrage. Interestingly, we have seen some broad reversals in traditional funding patterns among Chilean entities, where a range of companies that typically raise money outside of Chile are increasingly moving into the local market because of the excess liquidity and favourable borrowing rates available to them. We have also seen a reverse – where a number of companies that previously have only looked to local markets for liquidity move abroad to borrow in new currencies and diversify their funding sources. A range of investors in Europe and Japan are currently investing at negative interest rates and looking for win-win opportunities outside of their market, which is where a growing number of Chilean entities are focusing their fundraising opportunities.
All of this is to say that there is unlikely to be a departure from what we’ve seen in terms of multi-currency uptake, and in fact, we will likely see greater efforts among Chilean corporates to diversify their funding sources due to excess liquidity in a number of geographies.