MARKET TALK-Q4 2022 OUTLOOK: LOANS

With the bond market getting more expensive, companies are turning to the banks for funds. Yet rising interest rates are making banks more selective in their lending.

Loans activity in Latin America is expected to rise in the fourth quarter of this year after a quiet third quarter, as more corporates search for cheaper fundraising alternatives.

“The pipeline we are looking at suggests there is going to be a natural pickup,” says Robert Danziger, managing director of syndicated loans for the Americas at MUFG Securities in New York. “We have some clients that are just on a refinancing window where they are likely to come between October and November.”

Image: Robert Danziger

Instead, more borrowers have turned to banks for loans. The volume of loans in Latin America and the Caribbean totaled $41.1 billion in the first eight months of this year, according to Refinitiv. While that was down 6.6% from the $44 billion in the year-earlier period, it was nearly double the $21.8 billion in the same period of 2020, the data shows.

There were expectations that loans activity would increase by more, led by both the rising costs of selling bonds and the ample liquidity in the banks. Instead, many companies have worked on solidifying or bolstering their own liquidity to ensure they had short-, medium- and long-term financing sources and mechanisms in place, Danziger says.

“They’ve become more sophisticated at layering in different types of capital into their capital structure so that it’s not all reliant on one particular market,” he adds.

But as the bond market going isn’t expected to get better in the fourth quarter, this opens up opportunities for lenders, according to Danziger.

“At some point, clients that have established and layered in alternative liquidity are going to need to tap the market,” he says. “If the bond market is not there for some of the recessionary trends that people are projecting to creep in, there may be clients that need to bolster their liquidity in other places, and so they might avail themselves to the bank market to address the fact that the cost of goods have gone up if they’re dealing with inflationary pressures within their business.”

AMPLE LIQUIDITY

Banks in the region built up cash reserves during the COVID-19 pandemic, while there was a decline in lending activity. This has left them in a good position to meet demand, according to Danziger.

“In terms of balance sheets, funding capacities and general overall liquidity, it’s still pretty healthy,” Danziger says. 

Companies from Brazil, Chile and Mexico will probably lead the potential pickup in bank borrowing in the fourth quarter, he adds.

On a sector basis, most of the deals will come from paper and forest products, metals, mining and oil and natural gas, trailed by consumer products and retail, he adds.

GOING GREEN

The demand for loans may come with a disadvantage for some lenders: rising interest rates are putting pressure on their ability to lend. This will make them pickier when it comes to lending – and more expensive for borrowers. 

“To get that liquidity, there has to be some prioritization where it should go and premiums applied if necessary to justify the usage,” Danziger says. “We have seen a greater selectivity, predominantly from the European banks, on lending to industries that are viewed as less sustainable. For instance, there are aspects of mining where European banks will say that unless there are some sustainability endeavors built into this, a sustainability linked financing mechanism or it’s a green financing, they’re restricted from lending to some of those less clean industries or the ones that are perceived as being less clean.” LF