Staking their claim

04/04/2006 | Maria Ahmed

With all the hype about the performance of local Latin markets, is private capital now king or are the multilaterals still relevant?

By Maria Ahmed 

With all the hype about the performance of local Latin markets, is private capital now king or are the multilaterals still relevant? 
Latin America’s local capital markets stepped towards the mainstream last year, while bankers proclaimed the dawn of a new era. Yet far from having been muscled out by the private sector’s new-found appetite for local debt, the multilaterals – long-standing pioneers of these markets – are set to continue playing a pivotal role in nurturing domestic markets.

Though on a much smaller scale than the big-ticket sovereign offerings in Latin America last year, development banks  still made their mark on local markets. The IDB, among other things, helped Mexican pension funds buy foreign-issued securities for the first time when it placed its Mex$1 billion, 10-year Eurobond. The IFC completed the first securitization of non-performing assets in the region with its $22 million mortgage-backed security issue to Titulizadora Colombiana. Caribbean development bank CABEI recently issued a $200 million, 10-year bond in the domestic Colombian markets.

According to Nina Shapiro, vice-president of finance and treasurer of the IFC, “We have to be profitable but we’re not profit maximizing”, and this compromise enables the multilaterals to bring resources to emerging financial markets that would not materialize if left to the private sector alone. Eloy Garcia, treasurer of the IDB concurs: “We do not subsidize local currency operations ... we have to be cost-effective,” he says. “But we’re very satisfied that as a by-product of our operations we contribute to the development of local markets.”

The added emphasis for institutions such as the IFC and IDB is on structured finance for the private sector. The IFC and IDB have together provided $736.2 million in local currency financing to Latin America between 2000 and mid-2005, using structured finance and derivatives-based products. The derivatives market is where the multilaterals swap the local currency from their loans for US dollars, and where they hedge currency risk. Structured finance includes partial credit guarantees, securitization credit enhancements and risk-sharing to enhance domestic issuers’ ratings, enabling them to access, or indeed jumpstart, local markets.

Local derivatives markets in Mexico and Brazil are liquid, but markets for longer-dated instruments are still underdeveloped. Using partial credit guarantees, the multilaterals have taken the lead in matching growing pension fund industries in countries like Chile with local currency bonds. The IDB issued its first local currency bond, worth $224.8 million, in Mexico last year.

Stepping forward/ stepping back

Among the IFC’s more innovative deals was its $6.9 million partial credit guarantee to securitize future tuition earnings from Universidad Diego Portales in Chile. “We’re not creating permanent advantage for ourselves. The idea is to help them to open up then to step back,” Shapiro explains. 

Garcia highlights the IDB’s partial credit guarantee of long-term peso issuance by Rutas Del Pacifico, sponsor of a toll road also in Chile. In total, the IFC and the IDB invested $336 million in partial credit guarantees to the private sector last year, and both institutions believe this is proof of their continuing relevance. On their own, private banks and investors are “not comfortable going long term or second tier”, says Shapiro.  Spreads in the top tier are “abnormally thin” and the market is “over banked”, she says. 

The IFC has established strong links with small and medium-sized enterprises and non-investment grade financial services providers, and the private sector follows its lead.

But even for the IFC, geographical “frontiers” remain, such as north-east Brazil, alongside sectors and products so far not served by banks or capital markets: so the IFC can still help.

Scepticism

Private bankers remain sceptical of the multilaterals’ relevance, especially in markets like Brazil and Colombia that are rapidly approaching investment-grade. Ricardo Leoni, head of debt capital markets with Santander Brasil, says: “In my experience ... the amount those guys charge for their credit enhancements makes the transaction extremely costly. Maybe they help with second-tier companies, but usually they don’t approve them. They approve companies like Petrobras and Votorantim that don’t need the enhancement.” 

He cites the example of Brazilian construction firm Odebrecht, which was working towards a local-currency issue with the IDB five years ago. By the time the IDB approved Odebrecht’s credit quality and could structure a deal, the company was able to issue on its own. 

Leoni’s recent experience is that there is great demand from international investors for high-yield local-currency products, commercial mortgage-backed securities and structured products in illiquid markets.

The IDB did, however, agree to a $3 billion credit line to the Brazilian development bank BNDES in August, to finance micro-, small- and medium-sized enterprises throughout the country. Outside Brazil, the multilaterals have regularly worked with governments, doing the legwork to secure the legal and regulatory architecture for these financial products, which would have been too costly for the private sector.

The IDB’s Mexican Eurobond, for example, built on three years of negotiations with the Mexican securities regulator to approve the new asset class that would enable Mexican shareholders to invest in foreign securities.

Leading by example

“It’s difficult to know how to handle political risks,” says Shapiro. The IFC invests in credit supervision and appraisal that builds confidence and reduces risk by anywhere between 15% and 40%. In doing so it leads by example: “We give our clients in the private sector access to local currency and local capital. Our structures put us ahead of the private sector in developing local currency products. We open markets,” she says.

Moreover, in Garcia’s view the “basic underpinning” of healthy long-term bond markets continues to be macroeconomic stability, “especially given Latin America’s history of hyperinflation”.

“With all the euphoria about the markets doing well we cannot forget the basics: good financial management of the public sector and corporates,” he adds.

Shapiro points to Asia, where the IFC played a vital countercyclical role after the 1997 crisis. Clients who had “graduated” from IFC credit lines suddenly returned when the international banks pulled out.

“If we really were irrelevant that would be a good story,” she says. “But that would assume no more crises.”

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