January 10, 2019 / 6:18 PM / 5 months ago

Brazil in focus for 2019 as bond market slows, Mexico's woes grow

NEW YORK, Jan 10 (LPC) - International banks are positioning their balance sheets toward syndicated loans for Brazilian borrowers in early 2019 as the country’s election in October has created more favorable financing conditions and global volatility continues to curb bond issuance.

Lenders are also willing to allocate more funds to Brazilian companies than Mexican firms, as lenders assess the economic policy of Mexico’s newly-appointed left-wing administration led by Andrés Manuel López Obrador, who has criticized the private sector and recently canceled large-sized infrastructure projects.

The election of Brazil’s right-wing conservative President Jair Bolsonaro in October was welcomed by lenders and investors, and his economy minister Paulo Guedes is expected to champion market-friendly policies such as social security reform and greater privatization of state-owned assets.

“Mexico’s woes are effectively Brazil’s gain,” a syndicated loan banker in New York said. “There is a lot of liquidity to put to work and this will be Brazil-heavy.”

Brazilian pulp and paper exporter Klabin opened the Latin American corporate loan market after lead underwriters scheduled a bank meeting this week for a proposed US$1.1bn five-year term loan and revolving credit facility, three sources said.

Klabin unveiled terms of the new loan in November and also mandated banks for a potential bond sale in the same month as part of its capital expenditure program. The company completed investor meetings, but did not issue the bond as global equity market volatility widened credit spreads across the emerging markets.

Citigroup, HSBC, Mizuho and Santander are pricing Klabin’s upcoming loan at 135bp over Libor. The leads have already garnered support from five extra lenders – Bank of America Merrill Lynch, Commerzbank, Export Development Canada, Scotiabank and Sumitomo Mitsui Banking Corp – in early syndication and sources are confident that leads will have little difficulty in sharing the commitments for BB+ rated Klabin, which benefits from dollar-denominated export revenues.

“Banks have pent-up demand for Brazilian credits and if you couple this with reduced holdings in Mexico, that leaves more liquidity to play with,” a second New York-based loans banker said.

PRICING SQUEEZE

Banks’ heightened focus on Brazil is also expected to keep pricing on new loans as competitive as 2018 rates, as lenders chase limited mandates throughout the region.

Frequent borrowers, such as Brazilian energy giant Petróleo Brasileiro (Petrobras) paid 170bp over Libor last March for a US$4.35bn revolving credit facility and this price could decrease if the company’s credit ratings improve. Pulp and paper exporter Suzano Papel e Celulose paid 133bp in March for a three-year loan and 165bp-175bp for a six-year tranche that made up a US$9.2bn transaction backing the acquisition of local peer Fibria.

Tight pricing is coupled with looser terms, sources said, adding that lenders are willing to offer flexibility to extend loans and fewer covenants for Brazilian credits.

A US$775m loan for Brazilian data center Ascenty last October, which backed a US$1.8bn buyout by Digital Realty and Brookfield Infrastructure, had few covenants and a similar structure to riskier US leveraged loans.

The transaction had leverage of 6.75 times and a debt to run-rate Ebitda covenant calculation that accounted for revenues that are yet to be generated, LPC reported.

“Banks are more accommodating,” said the second source. “It’s a borrowers market and the banks follow.”

As global equity market volatility continues to make bonds expensive for Latin American borrowers, banks expect more dealflow to move into the loan market, and lenders are lining up to finance established regional borrowers with strong debt market profiles.

“People are still a bit nervous so the volume will be mainly well-rated or well-known names,” a third banker said. “There is still some headline risk, but deals have to get done.” (Reporting by Aaron Weinman.Editing by Tessa Walsh and Jon Methven)

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