After enduring the worst year for Latin American capital markets since the financial crisis, bankers fear there will be little improvement in 2016.
Katia Bouazza, HSBC With only slim prospects for a recovery in Brazilian deals, bankers are reluctant to forecast a big rise in volumes and investment banking fees. “We expect to see deal flow from Brazil in the second half of the year,” says Katia Bouazza, head of capital financing for Latin America at HSBC.
“Investors would like to see an increase in the overall level of stability and confidence in Brazil. I expect this will be achieved gradually.”
The Brazilian sovereign has been absent from international debt markets since late 2014. Petrobras, a repeat issuer in the past, has also stayed away and has found it hard to access local funding too.
Confusion over corporate exposure to the Lavo Jato corruption investigation and dollar-related financing (among other things) have caused the Brazilian risk premium to spike to levels that have kept other quasi-sovereign and corporates from accessing the market.
The combination of a fall of GDP in 2015 of between 3.5% and 4%, a lot of debt pre-funding in 2014 and a soaring dollar meant there was little appetite for fresh international debt.
Dealogic says investment banking revenues from Brazilian DCM activity stood at just $70 million year-to-date at the beginning of December 2015, versus $250 million for the full year 2014 and down from $313 million in 2012.
Vladimir Werning, head of economic research and sovereign debt strategy in Latin America at JPMorgan, expects a repeat of 2014 in the year ahead. Only $27 billion of debt will need to be financed from the region in 2016, he says. “Companies in the region aggressively pre-financed and pushed out maturities in recent years,” says Werning.
“Although in a rising rate environment we could see increasing levels or liability management at discount [in 2016] and we are seeing companies looking at taking out debt where bonds are trading at a discount in the secondary. We have seen quite a few transactions announced in the financial space and we expect that trend to continue.”
Argentina offers some hope. “Companies are starting to plan their capex for the future and we are in various discussions that are at different stages for different types of companies, but the comeback of Argentina is a 2016 event,” says Bouazza. “There has been a shift of appetite from the investor base and that will have an impact for financing activities, whether that’s debt, equity or M&A.”
If the timing and size of deal flow from Argentina remains uncertain, Mexico looks set to be the region’s leading market again this year. For the first time in more than a decade, Mexico generated the highest DCM and ECM fees for investment banks, with a 41% share and 71% share of total Latin American fees respectively.
At the beginning of December, Mexican equity fees had reached $100 million, while Brazil’s were just $15.6 million and set to break the previous year’s record post-crisis annual low of $22.6 million. Investment banking revenues from Brazilian equity issuances have collapsed since 2012’s $225 million total.
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