Loan markets in Latin America (including the Caribbean) fell into steep decline in the first half of 2020 as the COVID-19 outbreak caused the region’s economies and stock markets to tumble.
The IMF forecasts a 9.4% GDP contraction in the region and the S&P Latin America 40, the stock market index tracking its biggest companies, shed just under a third of its value this year.
Loan activity clearly felt the impact of these headwinds. Leveraged and non-leveraged loan issuance for Latin America (including the Caribbean) dropped 88%, from US$34.1 billion in H1 2019 to just US$4 billion in H1 2020.
Issuance of US$1.6 billion in Q1 and US$2.5 billion in Q2 represent the two weakest consecutive quarters for loan issuance in the region in the past five years.
Latin American loan activity was hit, in large part, by a fall in M&A activity (including global and domestic bidders), which dropped 70% from US$37 billion in H1 2019 to US$10.8 billion in H1 2020.
These transactions are traditionally the primary driver of loan issuance in the syndicated market in Latin America, but with COVID-19 casting uncertainty over target company earnings and valuations, dealmakers have put deals on the back burner and focused on holding cash.
Banks turn to bilateral loans
Despite this pronounced drop in deal activity and syndicated loan issuance, many Latin American banks have remained open for business by providing finance on a bilateral basis.
These bilateral loans may not make headlines, but borrowers have turned to these facilities in numbers to ensure they have enough liquidity to see out the crisis. This part of the market remained busy through H1 2020, with companies moving decisively to secure finance early, in case their sources of capital dry up and begin to shutter later in the year.
Banks, meanwhile, have focused on relationships with core clients and have been willing to provide finance to existing credits in the absence of business flowing from M&A.
Banks have also homed in on other opportunities to keep fee income and interest payments coming in. Brazil’s payroll loan industry, for example, which provides loans to public sector employees that are repaid directly from payrolls, has become a key business line for the country’s banks. According to Statista, the top six banks in the Brazilian payroll market have combined payroll portfolios worth US$68.5 billion.
Blue chips tap existing credit lines
Another noticeable feature of the market has been the use of revolving credit facilities by large Latin American multinationals. Many blue chip names would not have turned to revolvers in previous downturns, but with these facilities now in place, these companies have been able to secure cash without going to market.
Mexican blue chips have also tapped revolving credit facilities. Real estate developer Corporación Inmobiliaria Vesta, for example, has drawn down. A period of resilient trading by bakery multinational Grupo Bimbo, meanwhile, allowed it to pay back US$400 million of its revolving credit facility after drawing down US$720 million in March in anticipation of COVID-19 disruption.
Challenges ahead
The availability of revolving credit facilities and the bank appetite to lend on a bilateral basis have provided a buffer for many Latin American businesses against the sharp fall in syndicated loan issuance.
But there are still challenges ahead. COVID-19 hit Latin America after Asia and Europe. Case numbers continue to rise rapidly and the pandemic has not yet peaked in the region, even as second waves are occurring elsewhere in the world.
With the spread of the virus still on the up, Latin American capital markets and liquidity remain subject to uncertainty and volatility. M&A volumes, which predict syndicated loan activity, are unlikely to rebound before the pandemic retreats and there is better visibility of target company performance and valuation.
Distress is also starting to come through the market, with the region’s airline industry particularly hard hit. LATAM, Avianca, and Aeromexico, three of Latin America’s largest operators, have filed for bankruptcy protection under Chapter 11 in the US, while there are reports that auditors for Brazil’s Gol Linhas Aereas Inteligentes are expected to include a warning in the company’s accounts about its future viability. Panama’s Copa, meanwhile, has been grounded since March (though its liquidity profile was significantly improved through a convertible bond offering in April), and Azul has called in restructuring advisers.
Other sectors impacted by lockdowns and travel restrictions are also under pressure. Statista, for example, forecasts that more than 10 million jobs in the region’s leisure sector could be at risk in a worst-case scenario.
Despite these challenges, however, Latin American loan markets have demonstrated resilience in the past and will likely continue to do so. Banks remain willing to lend, even though M&A activity has dropped off, and have taken a long-term view that a recovery will come.
