Credit activity evolves in Latin America | White & Case LLP
Loan issuance in Latin America has felt the effects of the COVID-19 disruptions, but lenders have remained open to business as borrowers turn to bilateral revolving credit facilities for liquidity.
Loan markets in Latin America (including the Caribbean) fell sharply in the first half of 2020 as the COVID-19 outbreak caused the region’s economies and stock markets to fall.
The IMF is forecasting a 9.4% GDP contraction in the region and the S&P Latin America 40, the stock index that tracks its largest companies, has lost just under a third of its value this year.
Credit activity has clearly felt the impact of these headwinds. Loan issuance with and without leverage for Latin America (including the Caribbean) fell 88% from 34.1 billion US dollars in the first half of 2019 at only US $ 4 billion in the first half of 2020.
Show of 1.6 billion US dollar in the first quarter and US $ 2.5 billion in Q2 represent the two weakest consecutive quarters for loan issuance in the region over the past five years.
Credit activity in Latin America was affected, in large part, by a decline in M&A activity (including global and domestic bidders), which fell 70% from 37 billion US dollars in the first half of 2019 to 10.8 billion USD in the first half of 2020.
These deals have traditionally been the primary driver of loan issuance in the syndicated market in Latin America, but with COVID-19 causing uncertainty over earnings and valuations of target companies, traders have put deals on hold. and focused on holding cash.
Banks turn to bilateral lending
Despite this marked decline in transaction activity and syndicated loan issuance, many Latin American banks have remained open in providing funding on a bilateral basis.
These bilateral loans may not be making the headlines, but borrowers have turned to these facilities in large numbers to ensure they have enough liquidity to emerge from the crisis. This part of the market remained busy throughout the first half of 2020, as companies decided to quickly secure their funding, in case their sources of capital dried up and began to shut down later in the year.
Banks, on the other hand, have focused on core customer relationships and have been willing to fund existing credits in the absence of activity from mergers and acquisitions.
Banks have also explored other possibilities to retain commission income and interest payments. Brazil’s payday lending industry, for example, which provides loans to public sector employees reimbursed directly from payroll, has become a key industry for the country’s banks. . According to Statista, the six major banks in the Brazilian payroll market have combined payroll portfolios worth US $ 68.5 billion.
Blue Chips exploit existing credit lines
Another notable feature of the market is the use of revolving credit facilities by large multinationals in Latin America. Many top names would not have turned to guns in previous downturns, but with these facilities now in place, these companies were able to get cash without going to the market.
Mexican blue chips also operated revolving credit facilities. Real estate developer Corporación Inmobiliaria Vesta, for example, fired. A resilient period of negotiation by multinational bakery company Grupo Bimbo, meanwhile, saw it repay $ 400 million of its revolving credit facility after drawing $ 720 million in March in anticipation of the COVID-19 disruption. .
The availability of revolving credit facilities and the banks’ appetite to lend on a bilateral basis have provided a buffer for many Latin American companies against the sharp decline in syndicated loan issuance.
But there are still challenges to be overcome. COVID-19 has hit Latin America after Asia and Europe. The number of cases continues to rise rapidly and the pandemic has yet to peak in the region, even as second waves occur elsewhere in the world.
With the spread of the virus still on the rise, Latin America’s financial markets and liquidity remain subject to uncertainty and volatility. M&A volumes, which predict syndicated credit activity, are unlikely to rebound before the pandemic recedes and there is better visibility of target firm’s performance and valuation.
Distress is also beginning to show itself in the market, with the region’s airline industry particularly hard hit. LATAM, Avianca and Aeromexico, three of Latin America’s largest operators, have filed for Chapter 11 bankruptcy protection in the United States, while reports indicate that the auditors of Brazilian Gol Linhas Aereas Inteligentes should include a warning in the company’s accounts regarding its future viability. Panama’s Copa, meanwhile, has been entrenched since March (although its liquidity profile was significantly improved with a convertible bond offering in April), and Azul brought in restructuring advisers.
Other sectors affected by lockdowns and travel restrictions are also under pressure. Statista, for example, predicts that more than 10 million jobs in the region’s leisure sector could be at risk in a worst-case scenario.
Despite these challenges, however, Latin American loan markets have shown resilience in the past and are likely to continue to do so. Banks remain willing to lend, even as M&A activity has plummeted, and have taken a long-term view that a recovery will occur.