Nineteen ninety seven was a bumper year for Latin America’s syndicated loan market with volumes reaching close to $59 billion. That’s an impressive figure considering it even topped
new Latin bond issuance last year. Indeed, not since before the debt debacle of the 1980s has the region seen such frenzied enthusiasm for commercial bank lending. Much of last year’s activity was fueled by several factors: Large amounts of capital sloshing around the globe, a need to find a home for that money, and the fierce competition among international financial institutions, both commercial and investment banks, to gain a slice of the Latin American pie. Today, however, many of those financial institutions which enthusiastically rode out last year’s lending spree are quite literally paying the price for their exuberance-not because of defaults 1980s style, but because of last year’s bargain basement pricing and a secondary market that is drier than Chile’s Atacama desert. Now that spreads on Latin loans have widened in the wake of the Asian turmoil, banks that eagerly signed on to low-priced deals in 1997 find themselves sitting on mounds of low-yielding loans that they can’t afford to trade off their books. Meanwhile, those institutions that were desperate enough to unload such debt, namely Asian banks, have taken serious losses, according to industry observers. “If you’re asking whether these (Asian) banks had to take a loss, the answer is yes,” said one US banker active in the Latin American syndicated loan market. While large US banks such as Chase and Citibank may be able to afford the luxury of holding on to Latin loans rather than dumping them at a loss, others were not so fortunate. Korean banks and second-tier Japanese banks, which had only just begun to participate in Latin America’s commercial loan market, took the worst hit last year when they were forced to unwind Latin loan portfolios as the Asian crisis worsened. Since the crisis, pricing on loans has rebounded from what some bankers viewed as absurd levels. Last October, for example, Colombia managed to garner $225 million of five-year money at a wafer thin Libor plus 65 basis points. By March, the republic was paying a heftier Libor plus 112.5 basis points on a three-year, $200 million syndicated loan, pricing that is closer to the Libor plus 125 bps banks were asking from Colombia back in 1995.

Relationship Banking
Intense competition in the international banking community over the last year or so not only led to shrinking spreads, but also to what some observers might describe as less-than-sensible banking practices. Take a Chase-led syndicated loan to Codelco, a Chilean state mining company, signed in late 1996 and priced at just 22 basis points above Libor. One official at Industrial Bank of Japan-which participated in the Codelco loan as well as the two Colombia deals mentioned above-told LatinFinance that while it still holds the Codelco debt, the bank knew it was entering an underpriced deal, but signed on any way for relationship purposes. Said one emerging markets syndicate director at a major US bank about last year’s syndicated loan market: “Everybody knew the (pre-crisis) pricing was so thin that these banks were going to get stuck.” Meanwhile, another source close to the Codelco deal even claimed that both Chase and the Chilean government had been twisting the arms of participating banks, hinting that unless they committed on this one, they wouldn’t participate in more lucrative deals down the road.These days, many bankers are welcoming the post-crisis adjustment with open arms. “Pricing needs to be re-examined in the new issue market,” said Allison Taylor, senior vice president at ING Barings. “Relationship lending dominates pricing. If banks want to increase liquidity and reduce risk, loans should be priced much closer to the bonds.”

Illiquid Market
Nevertheless, wider spreads in the primary loan market have also presented a temporary obstacle to jump-starting the secondary market. A lot of US and European banks are simply sitting on their pre-crisis Latin loans, under no real pressure to sell them. That, say some bankers, is quite normal. “Why should you sell them? Loans are a long-term investment. You hold on to them,” said one official at a major US bank. For other bankers like Sit Sei Wei, managing director for emerging market debt syndications at BankBoston, such tactics are not necessarily the norm. “American banks need to turn the assets,” he said. That’s probably especially true for investment banks, which are getting more and more involved in loan syndications. Because investment banks lack the balance sheets of their commercial counterparts, they often need to turn a deal around as quickly as possible and sell it on what these days is an illiquid secondary loan market.A clogged secondary market is also stifling enthusiasm among issuers.”It is sometimes difficult to convince institutions that their paper is liquid and that traders like Citicorp will make a price,” said Nancy Broadbent, Citicorp Securities, Inc., vice president in global loan distributions. “But without the trading component, you lose the funds, and without the funds, the market becomes a very finite size.”For now at least this is a small secondary market without a lot of non-bank participation. Today’s market is defined by what one banker calls “cherry pickers”-a small universe of bank participants who are being increasingly selective.

New Players
Loan trading could receive a boost, however, thanks to a new group investors entering the market. Insurance companies and their subsidiaries are increasingly eyeing Latin loans, as traditional investment instruments like bonds are being sold more and more in the public markets, explained Mary Pech, assistant vice president in private placements at AEGON USA Investment Management. “We would like to see more primary and secondary loan paper,” she said. “We have a heightened appetite for floaters, and the bank loan market is a natural place to look.”That’s clearly good news for both commercial and investment banks which would like to broaden their distribution capabilities for a market that still has substantial capital needs. “The capital requirements in Latin America are large and extend well beyond the capacity of the international bank market,” said Richard Noritake, vice president for Latin American loan structurings at Citicorp. “A larger investor base will benefit both the issuers and the banks.” But the appetite of insurance companies means nothing if Latin loans can’t leap the industry’s rigid ratings hurdle. AEGON, like other US insurance investors, can participate only in deals which the National Association of Insurance Commissioners (NAIC) deems investment grade. And while a deal rated investment grade by one of the recognized agencies stands a good chance of receiving insurance regulators’ approval, the NAIC reserves the right to make independent decisions, say industry observers. Despite the current drought in the market, bankers say nourishing rain clouds are on the way and should hit loan trading soon. Why? For bankers such as Citicorp’s Noritake, the answer lies in the primary market, where demand, particularly among those companies participating in the region’s ongoing privatization process, is expected to continue. “Banks have made loans more attractive to borrowers by lengthening the tenors and reducing the costs, at least up until the Asian currency crisis,” he said. “Provided that stability returns to the market, we can expect volumes to exceed last year’s record level.”Another positive trend for secondary market liquidity, say bankers, is the convergence of Latin America’s loan and bond sectors. As spreads on high-yield bonds shrink, institutional investors are making the cross over into the loan market. “You then aren’t sacrificing so much coupon to get this extra feature of the loan, which is the security,” said James Roche, associate director at Fitch IBCA, Inc.The inauguration of the Latin American Markets Committee of the Loan Syndications and Trading Association in New York will also promote growth of the Latin secondary market through coordinating efforts in documentation standardization. Chaired by Claudio Phillips, head of emerging markets loan trading at Citicorp Securities, the committee will undertake a wide variety of activities to promote the voluntary self-regulation of a fair, efficient and liquid trading industry for the Latin American market. That includes development of an established trading network and identifying accepted market practices regionwide.”The market’s growing,” confirmed Taylor of ING Barings, “it’s just taking a while.”