LatinFinance - Special Edition - August 2013 - 32

america’s banks have largely
straightforward capital
structures, with common
equity making up the bulk of
their capital.
a layer of subordinated,
tier two capital is common
among the larger institutions.
Just a few make use of hybrid
capital securities – deeply
subordinated instruments
that count towards tier one
capital but which are much
cheaper than equity as they
are accounted for as taxdeductible debt securities.
mexico’s Banorte proved
the point in July. needing
to raise capital to fill a gap
depleted by acquisitions, the
lender turned to the equity
market. conditions were not
great, and it trimmed the size
of the deal slightly. But still the
bank raised nearly 32 billion
pesos ($2.55 billion).
But, in recent years, banks
have increasingly looked at
capital instruments used
abroad to strengthen their
balance sheets while keeping
costs down. Banco do Brasil
grabbed attention in January
2012 with its radical hybrid tier
one instrument, structured
before the country cemented
its rules under the incoming,
global bank standards known
as Basel iii.
to increase the chances of
the security counting as tier
one capital under the new
rules, the bank incorporated
clauses allowing it to change
the structure of the note,
depending on the final shakeout of how Brazil
implemented Basel iii.
it was not the first time
a latin bank had looked
creatively at the instruments
it could use in its capital
structure. Brazil’s Bradesco
stands out. in 2002, it sold
a ¥17.5 billion ($145 million)
10-year subordinated bond,
picking yen because of a
favorable swap. Wrapped
with political risk insurance,

Bank financing deal of the quarter century

Banco do Brasil
$1bn perpetual hybrid tier one, 2012
overhauling capital and liquidity standards for lenders in the wake of largescale bank failures in european and the US has been a complex process. By
January 2012, new rules from the global standard-setter, the Basel committee
on Banking Supervision, were mostly clear on hybrid capital – securities that
are given equity-like treatment for regulatory capital purposes, but carry the
tax advantages of debt. But the Brazilian regulator, the Banco central do Brasil
had not yet ruled over its local application.
However, keen to press ahead, Banco do Brasil impressed bank capital structurers globally when it sold a $1 billion hybrid tier one with a unique structure:
the instrument granted scope to amend the terms once the final Basel rules
were in place to make it qualify as a tier one instrument. tthe fact that the
bank worked around regulatory uncertainty with a globally unprecedented
structure, the extent of the changes it allowed to the instrument, and the overwhelming investor interest earns Banco do Brasil LatinFinance’s bank financing deal of a quarter century.
most daringly, it allowed for a clause to be introduced – if final rules required
it – that would write the bond off altogether if the bank needed the capital.
Despite the risks, investors placed $6 billion of orders for the deal, which lead
managers Banco do Brasil, BnP Paribas, citigroup, HSBc and Standard chartered priced to yield 9.25%. “We perceived some commitment that implementation in Brazil would be similar to the Basel guidelines,” says Daniel maria,
executive manager at the bank. “We took the guidelines and gave comfort to
investors saying the amendments would be to adapt it to Basel iii, and would
be capped by some parameters.”
now Brazil’s rules have been finalized, the bank is working to incorporate,
among others, a clause for the security to be completely written off if Banco do
Brasil’s common equity capital slips below 5.125% of its risk weighted assets. it
hopes to have that in place by october 1, 2013, when Brazil’s Basel rules come
into force, allowing it to be treated as tier one capital. LF

covering the possibility that
Bradesco would not be able
to transfer funds or convert
reais into yen to meet interest
payments, the deal was
priced 200 basis points inside
the government curve.
three years later, the bank
was the first sub-investment
grade borrower in latam to
sell a perpetual note, a $300
million non-call five-year tier
two.
meanwhile, in 2007
BBVa Bancomer tapped
euro investors for capital
in a dual tranche deal that
was another latin first. the
mexican lender raised €600
million of tier two capital
and $500 million of tier one
paper.
the pace of subordinated

32 l atinfina nce.com - 25 Years - August 2013

Stanley louie

“InItIally It
was just the
bIggest and
second bIggest banks In
each country.
now we’re seeIng the fIfth,
sIxth and
seventh largest comIng
[to the bond
market]”

debt issuance has picked up
in recent years as Basel iii
rules on regulatory capital
have developed. that bought
lenders them some time to
come to terms with new rules
for bank capital – and now
means there is likely to be a
lull in the market.
“You saw quite a lot of
latin american banks,
especially in Brazil, selling
a lot of tier two bonds in the
international markets,” says
Vikram Gandhi, senior capital
structurer at BnP Paribas.
“in Brazil there was a lot of
tier two loading done as the
provisional Basel rules came
out. at the time when growth
was strong, an efficient way to
build up the capital structure
was to issue tier two.” LF

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