By Maria Ahmed
With all the hype about the
performance of local Latin markets, is private capital now
king or are the multilaterals still
Latin Americas 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 sectors 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
According to Nina Shapiro, vice-president of finance and
treasurer of the IFC, We have to be profitable but
were 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
were very satisfied that as a by-product of our
operations we contribute to the development of local
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
Among the IFCs more innovative deals was its $6.9
million partial credit guarantee to securitize future tuition
earnings from Universidad Diego Portales in Chile.
Were not creating permanent advantage for
ourselves. The idea is to help them to open up then to step
back, Shapiro explains.
Garcia highlights the IDBs 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.
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 dont approve them. They approve companies
like Petrobras and Votorantim that dont need the
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
Odebrechts credit quality and could structure a deal,
the company was able to issue on its own.
Leonis 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
The IDBs 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
Its 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 Garcias view the basic
underpinning of healthy long-term bond markets
continues to be macroeconomic stability, especially
given Latin Americas 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