The boom times for borrowers look set to continue for the foreseeable future, according to borrowers, investors and bankers at the Latin American Borrowers and Investors Forum (Labif), the LatinFinance/Euromoney conference in New York. Representatives from Pemex, Peru’s Banco de Credito, CVRD, Calyon and Credit Suisse all said they expect May 2008 will still be a borrowers’ market.

This coincides with the general bullish tone of the conference, held in early May. Asked about their attitude to the region over the next five years, 58% of the delegates said they were mostly positive, and 17% very positive, while only 1% described themselves as “gloomy”. A US recession is what will most likely cause a meltdown, according to the poll, followed by a collapse in commodities.

Delegates say that politics is the main factor holding the region back (60%), followed by corruption (26%). Most (46%) do not expect a Brazil upgrade this year, but 14% say it is likely. Some 41% of respondents say Colombia could make investment grade by the end of 2008, while 34% say it will not.

Poor Research
Investor thirst for yield is driving an explosion in second tier corporate debt from Latin America, which has overtaken sovereign issuance over the last year. But incisive credit analysis is lacking at many sell side shops and investment houses, said Labif panelists. Pablo Venturino, head of LatAm fixed income markets at ABN AMRO notes that blue chips are tapping the syndicated loan market for a variety of flexible structures in the more cost efficient loan market, while second tier corporates are issuing $50-$100 million bonds. “We see 56% of the total corporate bond market as new issuers and of that total, 80% are high yield companies,” says Venturino.

And investors are much more willing to look at a wider array of debt structures, including holding company financing and PIK notes in their search for yield. That has led to a much more complex layering of credit analysis, says Jean Dominique Butikofer, head of EM at Swiss fund UBP Asset Management.

However, investors say Wall Street credit research on Latin American corporates is sorely lacking, despite the fact that corporate issuance is soaring. Butikofer says, “Most investment banks don’t actively cover these issuers and can’t match the pace of these corporate issues with research. The resources are limited and they are relying on a system of high-yield analysts.”
And investment banks generally have a way to go to fully satisfy some of their Latin American issuer clients. Alfredo Ergas, CFO of Enersis, based in Chile, calls for a bank that can give a full range of services. “We need a holistic bank that can provide advice on taxes, local markets and a number of other things,” he says. He adds that he’s happy to pay the fees if a bank can bring him something he cannot find on his own.

Richard Lark, CFO of Brazilian airline Gol, says there is not a bank in Brazil that can provide everything his company wants. “We haven’t been able to find all of the executions we want to do at one bank, and have had to work with two or three banks,” he says. Lark adds that the challenge for Brazilian banks will be to develop a new generation of seasoned advisors.
Rating agencies are not spared criticism either. While 49% of the Labif survey group say ratings agencies are quite important to investment decisions, 68% say they are behind the curve.

Loans Converging with Local Markets
The ever liquid Latin bank market is converging with local capital markets, according to Calyon. After a boom year in 2006, LatAm got off to a slow 2007, with just $10.7 billion raised in the first quarter. While longer tenors, larger sizes, the presence of institutional investors, loose covenants and tight spreads would suggest convergence with cross-border bonds, there are clear differences. The Latin bank market has no secondary liquidity and there is no price discipline, says Calyon.

However, local markets are a much closer competitor, particularly for M&A, says Calyon. It cites a long list of dual currency financings with domestic tranches, including Esse Bio, ASM, VTR, Milano, Megacable, Axtel, Dine and SCRIBE. “In both Mexico and Chile local market financings, credit metrics are becoming more aggressive,” says the shop. It adds that leverage under five times is clearing the market for acquisition financings, tenor is being extended to up to seven years and that the increasing use of revolvers demonstrates the low level of event risk locally.

Of issuers polled at Labif, 69% say they will increase the proportion of locally denominated issuance in 2007 versus 2006.

Local Derivatives Concerns
Meanwhile, local regulators are slow to effect changes to foster growth in onshore derivatives markets because many still view these financial instruments with suspicion. “Certain countries see derivatives as investment instruments and others view them as a large potential liabilities,” says Nuno Bessa Correia, head of EM derivatives for ABN AMRO.

“Regulators really don’t understand them well. In countries like Colombia they simply forbid them and only banks can sell credit protection, which are the agents that are usually in other markets to buy protection,” says Luis Miraglia, executive director for derivatives at Morgan Stanley. “It is very difficult to see demand coming that you would see from real buyers of credit exposure, like mutual funds, insurance companies,” adds Miraglia.

Ricardo Rivera, treasurer of LatAm wireless operator América Móvil, urges local regulators in LatAm debt markets to follow Peru and Mexico’s example and allow domestic investors to buy the debt of foreign companies invested in their countries. Rivera told panelists at Labif, “We have seen a lot of [local] investors that want to hold paper of other Latin American names and for regulatory reasons often can’t.”

As companies pan out across the region, they are increasingly motivated to fund themselves in the currency of the countries where they have operations, says Rivera. “As an investor in other countries, issuing debt is another natural hedge for your investment and very attractive for corporates like us as a source of funding,” he adds. América Móvil has issued at attractive rates in Mexico, Peru and Colombia, but was frustrated by an attempt in Chile. “We found that between the different regulatory entities for pension funds, the Central Bank and the Ministry of Finance, there was not much coordination, which is fundamental for any kind of development to be done.” Rivera notes that Mexico’s corporate debt market has grown exponentially since allowing foreign companies to issue debt.

On the local buyside, pension fund reforms in Argentina and Mexico are designed to promote more diversification in local investor portfolios to boost long term returns. But workers must be better informed about the net returns on their portfolio and encouraged to save more through higher contributions and tax incentives, concluded a panel on local pension funds.

Moises Schwartz, the president of Mexico’s pension fund regulator Consar says reforms in Mexico include raising the threshold for foreign investments to 20%, allowing investors to buy structured notes and offering savers five different types of accounts according to their investment horizon. Schwartz notes that Consar allows savers to switch to another Afore based on its net return rather than lower management fees in a bid to align worker savings with fund performance.

Other interesting findings of the Labif poll are that most respondents find it “very unlikely in the foreseeable future” that LatAm will match Asia’s growth. Some 53% of survey respondents give this view, with just 34% saying it was possible this decade. Investors said that improving the regulatory environment was the number one thing governments needed to do to encourage more capital flow. This was followed by stimulating secondary liquidity, and developing derivatives markets. And 69% of issuers said they would be raising the proportion of local currency debt they issue in 2007 versus 2006. The survey polled issuers, investors rating agencies, analysts, bankers. LF