Latin Finance - December 2008 - 25

bank market prospects Libor, have been particularly shocked at their new proposed funding levels which have jumped well into the triple digits. The same goes for blue chip Mexican and Brazilian corporates, who are resisting an increase amid improvement in their own credit conditions. Aside from wider margins, structures will be shortened and covenants tightened to protect lenders. Braskem’s $725 million pre-export facility closed in October was strapped with a series of new covenants not included in either the bridge or any of its previous facilities, say bankers on the deal, declining to specify terms. The move by lenders is symptomatic of a general concern regarding falling cash levels on corporate balance sheets. While debt levels remain the same, revenues and incoming cash positions are deteriorating, pushing up leverage and tripping covenants. “Covenants are being triggered and people are going back to amend them,” says a LatAm syndications head, echoing the words of other bankers who note a sudden recent rise in covenant specific discussions on contracts. Mexican companies like Lamosa, which in the beginning of this year wrapped up a $675 million dual currency loan at 200 basis points over Libor and TIIE with leverage in the 3.0-3.5 times range, are heard facing rising ratios and having to renegotiate covenants. In Mexico and Brazil, derivative related losses are also seen hitting cash positions, say bankers. In project finance, bankers say tenors will not top 15 years in Chile, and fall well below 10 years in Brazil. Sponsors seeking funds may have to increase the equity to debt ratio for projects to something close to 25%-30%, from 20% and lower. “People are much more concerned about being very clear on the market flex provision,” says Dulin, adding that no deals today carry firm underwriting commitments. Protection against ratings downgrade and rising leverage are the object of special attention too. With most US and European banks funding themselves at 100-150 basis points over Libor for short term, and Libor itself changing every day, banks are making use of what is called a Libor inadequacy provision. This, say lawyers, has been common in most agreements for the past 20 years, but has never been invoked until these past months. The provision allows banks to pass on to corporate clients the premium they are being charged by their own interbank lenders. In a typical scenario, if a part of the lending group claims Libor does not reflect cost of funds, the leads bring this issue to the borrower and try to work out a new level so that the basis over which the transaction is priced covers lenders’ costs. 15-year post-construction phase. It was led by BNP and RBS, each of which took $104 million tickets. The deal was set to fund as LatinFinance was going to press. People close to the process say they expect some sort of a liquidity premium for the first disbursement, but declined to provide the formula they will be use to recalculate Libor, or indicate what the new level might be. Thanksgiving Leftovers Lack of appetite among banks for new deals forced two other syndications to be suspended. Arcos Dorados, the McDonald’s LatAm holdco, and Mirabela, an Australianowned Brazil mining project will try to be first out in 2009 to wrap up what they started. Arcos received in mid-November $350 million in five-year funds from a three-bank club, whose members hope to reopen syndication of the term loan next year to reduce holds. The company agreed to take a 150 basis point flex on the margin, elevating it to 425 basis points over Libor, from an originally targeted 275 basis points. The reason, say bankers on the deal, is higher funding costs. But bankers away from the process note such a permanent, non-negotiable change in pricing for the entire life of the facility says more about lenders’ view of the credit than it does about cost. Scotia, Santander and Bradesco shared books. And Mirabela, which launched in August, had less luck with its 6.5-year $280 million facility, which was flexed in September to 325 basis points over Libor from 250 basis points. Fees were also raised and the loan was still technically being syndicated in early November, say bankers close to the process. The project’s sponsors may have to wait until next year for the cash. The company secured some $100 million in subordinated offtaker loans and potential lenders were apparently unable to stump up further cash this year. Barclays and Credit Suisse are leading that deal. The hope is that January sees the backed up pipeline reopen for new money, projects, and refinancings. LF Biggest Maturities 2009-2010 Rollover risk in Mexico Borrower Deal Value ($m) Maturity Date Source: Dealogic Libor Inadequacy In addition, borrowers are having to shoulder more of the underlying risk affecting lenders in a volatile global environment. Banks are demanding that deployment of increasingly scare funds is contingent on flex provisions allowing a change in margin or liquidity premium. In October, two deals that had been in syndication for months, Chilean AES power plant project Angamos and Brazil’s Braskem, managed to close. But both took price adjustments due to jolts in Libor and funding costs. Braskem’s five-year $725 million pre-export facility came at 275 basis points over Libor, but a 100 basis point liquidity premium was added in the first six-month period, and this will be revisited should bank funding difficulties – as determined by members of the lending syndicate – persist. Angamos meanwhile closed a $989 million 17.5-year project loan with three tranches: a $675 million KEIC tranche, a $233.5 million commercial tranche and an $80 million letter of credit. Pricing is 205bp over Libor for the 2.5-year construction period, stepping up to 230bp-250bp in the UPDATE For daily news on the loans market, see www.latinfinance.com > December 2008 LATINFINANCE 25

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Latin Finance - December 2008

Table of Contents for the Digital Edition of Latin Finance - December 2008