LatinFinance - January/February 2016 - 14

Since 2009, the region's borrowers set record after record for
issuance volumes, at the same time as they raked in the cheapest
debt in their history. Now, with the shift in global monetary policy
heralded by the US Federal Reserve's landmark interest rate hike in
December, the period of ultra-low rates is ending. The change comes
in tandem with a swathe of others: weak commodities prices, falling
Latin American currencies and, critically, a sharp slowdown in
economic growth across the region.
In response, Latin companies are slashing their investment
plans and rethinking their need for funding. After a supercycle of
borrowing, the region is settling down for a period of retrenchment.
The effect on capital markets has been sharp. Dealogic estimates
investment banks earned just over $1 billion in fees from M&A,
equity, debt and lending work in Latin America last year. The
previous year, the figure topped $1.8 billion.
After a boom of bond sales, now investment banks must work
harder to find business. They are shifting away from easy debt capital
markets flow work, and turning to advisory, structured instruments
and bespoke products where they can add extra value.
New order
International banks have been reacting to the shifting global
economy for some time already. Most insist they will continue to
offer investment banking services to clients across Latin America
and the Caribbean, even as they slash their retail banking operations
in the region.
John Cryan, who became Deutsche Bank's co-chief executive
officer in July, announced in October that the bank would pull its
onshore operations in 10 countries, including Argentina, Chile,
Mexico, Peru and Uruguay. The bank had posted a net loss of €6
billion ($6.6 billion) in the third quarter. Its global corporate banking
and securities business alone reported a pre-tax loss of €2.73 billion.
The lender is among many large international banks which have
seen revenues from investment banking fall as tighter regulations,
sluggish world economic growth, fines and low interest rates come
into play.
HSBC had a much better third quarter. Its global banking and
markets division posted a $2.1 billion pre-tax profit in the threemonth period, with the Latin American share of that coming to $188
million. Yet even the lender that once pitched itself as "the world's
local bank" has re-evaluated its Latin America exposure. In one of
the biggest single asset sales seen in Latin America for some time,
HSBC agreed to sell its Brazilian business to Bradesco for $5.2 billion
in August.

GERARDO MATO, HSBC

"COMPANIES NEED TO ADAPT TO
THE NEW REALITY IN TERMS OF
PRICES, COSTS, ADAPT TO CAPEX
AND FINANCING NEEDS. BUT
HAVING SAID THAT, YOU WILL SEE
MORE ACTIVITY COMING"
14 L ATINFINA NCE.COM - January/February 2016

European banks aren't the only ones scaling back. Citi began
offloading its regional consumer banking operations in 2014, selling
its eight branches in Peru to Scotia in December that year. The
US-based bank has since sold its retail and commercial banking
operations in Guatemala, Nicaragua, Honduras, Costa Rica and
Panama. Citi, which has investment bankers based in Mexico,
Brazil and Colombia and is not pulling back its investment banking
business, is also eyeing the sale of its El Salvadorian retail operations.
"There's a general trend for investment banking to be less
leveraged and smaller, and a lot of banks are looking at their core,
geographic areas," says Evan Koster, a partner at law firm Hogan
Lovells who works on financial products in the US and Latin
America.
Lower economic growth and tighter international banking
regulations are making profits more elusive for the world's biggest
financial institutions. Investment banking is just one part of that -
but in Latin America, the direction of market activity is clear.
Bond issuances from Latin America and the Caribbean reached
$108 billion between January and mid-December 2015, down
from $196 billion a year earlier, according to data from Dealogic.
Meanwhile, equity capital markets volumes in Latin America clocked
in at $10.4 billion, less than half of the $21.6 billion posted a year
earlier. Bank lending in the region saw slighter decreases, but the
trend was the same: volume came to $53.3 billion, down from $79.4
billion.
Buying opportunity
In the year ahead, activity in the capital markets is expected to
remain weak, but bankers, borrowers, issuers and their lawyers say
there are still areas for growth in Latin America.
Mergers and acquisitions advisory is expected to provide the lion's
shares of deals this year, bankers say. While a record volumes of
transactions hit the US space in 2015, Latin American M&A volumes
were the weakest they have been since before the financial crisis.
Announced mergers and acquisitions fell to $74.8 billion from $123.4
billion, according to Dealogic.
Gerardo Mato, chief executive of HSBC's global banking and
capital financing businesses in the Americas, is confident, however,
that much of the 2015 M&A pipeline will materialize this year after
being pushed back by volatility last year.
"Companies need to adapt to the new reality in terms of prices,
costs, adapt to capex and financing needs. But having said that, you
will see more activity coming," he says.
Brazilian companies are expected to keep up a stream of
divestments, as the country's economic rout deepens and Lava Jato
investigations cut off access to capital for many. Petrobras alone has
a huge target for asset sales: it hopes to bring in $15.1 billion through
divestments in 2015-2016. Most of that goal is still to be executed.
In early December, Odebrecht Peru, whose parent has been
implicated in Brazil's Lava Jato scandal, was said to be close to
reaching a deal to sell its Chaglla hydropower facility, in a larger bid
to shed non-core assets. At about the same time, BTG Pactual agreed
to sell the remaining 12% stake in hospital operator Rede D'Or São
Luiz to the Singaporean sovereign wealth fund GIC for 2.4 billion
reais (then $626 million).
At the same time, the region's weak local currencies offer
international buyers great value.
"With a stronger dollar, softer commodity prices and a lower local
currency environment, the value of the companies in Latin America
went down, as you see can see in the stock prices," says Alejandro

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Table of Contents for the Digital Edition of LatinFinance - January/February 2016