It's been a familiar story across all debt markets over the last two years - amid heavy bank consolidation and a global economic slowdown, bankers have had to adjust their resources accordingly and prioritize where they look for mandates. Nowhere has this been truer than in the Latin American structured markets.
In 2001 there were fewer large investment banks with their toes dipped in the LatAm securitization markets than ever before, sources say. Moreover, the number of human resources allocated to the sector within each bank diminished considerably compared to three years ago. "Basically, in times where they have to eliminate jobs, Latin American structured finance is not a core area of business," said one rating agency analyst.
In particular, this past year has witnessed the fallout from massive consolidations, a fluctuating pattern of issuance from the region and a transformed economic climate, providing the impetus for bankers to steel themselves against the temptation to respond to just any inquiry that comes their way. The result? Some lower-margin businesses have fallen by the wayside, and several banks' participation south of the border has dwindled.
For instance, in previous years Credit Suisse First Boston, Morgan Stanley and Goldman Sachs were among the ranks of heavy hitters eager to concentrate on the emerging Latin markets. Between 1997 and 1999, CSFB completed transactions for Southern Peru Copper Corp. (SPCC) and Argentina's oil, chemical and gas company, Repsol YPF; the bank also completed a transaction for Peru's gold mining company Yanacocha and a Venezuelan deal for PDVSA called Petrozuata.
Last year, CSFB's activity in Latin America fell to one transaction. MSF Funding, a deal also known as DVI, was an equipment-lease transaction out of Brazil with a MIGA policy. Despite the fact that it was CSFB's sole effort in Latin America, many market participants commonly referred to the transaction as a deal of the year.
Similarly, Morgan Stanley, a firm that placed several large Pemex and PDVSA securitizations between 1998 and 2000, has not completed one transaction in Latin American structured finance this year. "Unlike commercial banks - which have done structured financing, remittances, receivables and export financing, which is really the body of what commercial banks do - Morgan Stanley, an investment bank, has really shunned away from these because they tend to be low-margin businesses that we avoid," said Sadek Wahba, vice president of Latin American debt capital markets at Morgan Stanley. "The things that Morgan Stanley has concentrated in are the transactions where we bring high value-added expertise; they are structurally complicated and require a lot of involvement, such as the Pemex Finance transactions."
For CSFB, the pullback from the sector is less a function of low margins and more a result of the natural ebb and flow of the Latin American unsecured markets. "[Structured LatAm deals] are still a focus for us, but it's just not all that active on a relative scale," said Joe Donovan, managing director and group co-head of asset-backed finance at CSFB. "It's been picking up within the last six months; we are probably seeing more inquiries than we were a year ago. But let's keep it in perspective - those numbers are tiny.
"I think the reality is that country credits decline, limiting access to the unsecured market and making the asset-backed market more viable. The market is always swung on the ability of the issuers to access the unsecured market." In 2001 CSFB only participated in one transaction, the recent $500 million PDVSA deal, which was also co-led by Goldman Sachs. The offering was the only one that Goldman participated in for the year as well.
According to Donovan, CSFB is currently working on transactions in the pipeline; however, based on the dubious economic situation in Argentina and elsewhere, the firm is likely to approach the market with caution. "CSFB has been less active than Citibank, Merrill or Bank of America recently," the analyst at the rating agency noted.
There are currently six main banks with a presence in the Latin American structured finance arena, including JPMorgan, Merrill Lynch, Bank of America, Barclays Capital, UBS Warburg and Citibank Salomon Smith Barney. JPMorgan, Merrill and UBS are expected to be the most active this year with regard to number of deals, sources said.
But even within each bank's respective securitization groups, the number of specialists dedicated to Latin American structured finance is said to have shrunk considerably over the last several years. Of course, this is largely due to the overwhelming bank consolidation that has recently tainted the market, beginning with Bank of America and Nations Bank back in 1998 and followed by the union of Citibank and Salomon Smith Barney, also in 1998, and then JP Morgan and Chase in 2000.
"Before there was a large team at Citibank and a large team at Salomon Smith Barney; now they are one team and all combined, there are fewer people than what they had before," said the analyst. In fact, when mergers inevitably brought about job cuts, one of the first areas hit was said to be the Latin American structured finance divisions, the source asserted.
Barclays, an exception?
Perhaps this apparent retreat from the LatAm markets has something to do with the fact that issuance volume within the region has fluctuated dramatically over the past three years. According to S&P, Latin American structured issuance volume fell to $2.6 billion in 2000 from $6.4 billion the prior year. However, there is a glimmer of hope: despite the unpredictability of supply, volume issuance for 2001 is expected to jump to $6.6 billion.
That means there may still be a window of opportunity for banks that feel they can compete with the handful of large consolidated entities that still wield power in Latin American asset finance. While some companies are backing out of their businesses in the region, Barclays Capital is a newcomer to the market.
Barclays recently set up a new division that is dedicated to Latin American structured finance. The group is made up of four people: Michael Morcom, John Gonzalez, Ryan Donohew and Valerie Lane. "We are leveraging off of the strong client relationships that we have had in that region for quite sometime," said Lane, a managing director. All four members of the group were previously at Barclays in other structured finance areas.
"We are focusing on future-flow securitizations in the emerging markets; looking at opportunities with respect to financial future flows in addition to export receivables," Lane said. She also noted that the company is optimistic about a good deal flow in 2002.
Barclays is currently working on three mandates - although not confirmed by Barclays, one of the mandates is for El Salvador's Banco Agricola's MT100 deal (see ASR 11/05/01).
With a global slowdown possibly pushing more deals to the surface in a market that seems to be shrinking, competition is running rampant. "In spite of consolidation in the industry, the group of banks bidding for structured finance mandates in the region provides tough competition," Lane said. "The banks we typically compete against include Citibank, Merrill Lynch and JPMorgan Chase."
But according to Morgan Stanley's Wahba, prior to the bank consolidations, the market was over-banked, and is still over-banked. "There have been too many banks involved in the region willing to do things that weren't necessarily economically justifiable from the point of view of the lender, and distorting the true cost of capital for the clients," Wahba said. "I think the consolidation of banks is very good from this perspective because it will force greater discipline on the lenders and the borrowers. It will force the lenders to think more about what it is that they want to offer to clients and how it fits with their client's strategy, rather than just trying to sell a product."
As a result, Wahba said that the market competition is more focused. There is a convergence between the objectives of commercial banks and the objectives of investment banks in Latin American structured finance. "It's an adjustment that means that you need fewer people to do the work, but on the other hand, you have greater need for technical skills and a greater need to understand the strategic issues the clients face," Wahba said.
Market sources also maintain that bank consolidation should not affect liquidity in the market. "Liquidity is going to be impacted more by investors' appetite and by the appetite of guarantors than by the reduced number of active underwriters in the market," said Rosario Buendia, of the Latin American structured finance division of Standard and Poor's.
The PDVSA transaction that recently sold entered the market with $1.5 billion. However, according to market sources, only about $500 million sold. One possibility is that investors hold many PDVSA bonds, as this is the fourth time PDVSA has sold paper into the market. "Investors already have $3 billion in PDVSA bonds, so there was not much liquidity for more PDVSA paper," Buendia noted. "It will be interesting to see now with Ambev (see ASR 12/03/01) and all these upcoming deals if the reason why investors didn't buy PDVSA bonds is because they already have too many or because they don't want to buy emerging markets."
According to Gerome Booth, a head of research with Ashmore Investment Management, the impact of the reduced capacity of the investment banks to provide product has not led to a reduction in liquidity. "It's really the other way around - in part, it's the lack of demand that has actually driven for greater liquidity on the underlying assets," Booth said. "There is mostly reduced demand because there are fewer clients, but, it's not like there is less volume in assets under management or any less activity overall. There has been reduced demand for transactions and that's been in part because of the change in investor base."
According to Booth, emerging-market debt in the late 90s was seen as a very high-risk, high-return area. However, speculative investors lost a substantial amount of money in 1998 and as a result, they never returned to the market. "And, that's been a blessing in disguise for the emerging debt market because without those sort of investors, volatility has come down, and the proportion of the investor base which are institutional investors has increased dramatically," Booth said.