Market talk: Q3.2020 outlook
Interview with Eddy LacayoHead of Corporate Lending Latin America, BBVA
By Toni Baini
Faced with an unprecedented economic shock, the past three months in the Latin American loan market has seen activity drop to low levels, with smaller-sized deals providing the majority of deals being pushed through as many businesses postpone their capital expenditures and focus on liquidity needs, said Eddy Lacayo Head of Corporate Lending Latin America at BBVA in New York.
According to data provider Dealogic, activity in the loan market for the three months ended May 31 fell precipitously from the same period a year ago. All-in-all there were just 12 transactions, for a total deal value of $3.37 billion. This compares to 44 transactions valued at $23.35 bln, a drop of 85.5% from the same period in 2019.
“The first part of the last three months, there was a wave of clients seeking liquidity from banks, clients with unfunded revolving credit lines withdrawing, and other requests for shorter-term financing needs to cover short-term needs,” Lacayo said.
Banks have been very busy providing short-term 12 to 18 month facilities and bridge-to-bond facilities, he said.
"There have been clients that have been shifting their interest towards refinancing existing debt, with long-term financial solutions that can run up to 2-3 years. The product has been very well-received by clients, but they are looking for the optimal timing,” Lacayo said.
As supply chain disruptions and aggregate demand fell, hitting many industries and weakening their balance sheets, the rush for liquidity has translated into higher cost of funding, higher market risk, and naturally, higher cost of debt for corporate clients.
Despite structural pressures across many economies in the region and their trading partners, financially healthy companies in most sectors are expected to weather the storm unscathed.
“The way we are seeing the situation is a temporary downside in some sectors, as long as you restructure accordingly to help the company. So far, except for a reduced number of specific cases, we’ve seen mainly amendments, extensions and light restructurings,” said Lacayo.
Looking at a new world ahead, the increasing adoption of revolving credit facilities might continue even after the pandemic is over, Lacayo said.
Up until now, they had mostly been used by large corporate borrowers in the region. Smaller-sized companies have been financing their working capital via uncommitted lines of credit.
“In today’s world, this can add uncertainty of pricing and funds, and as a result of the current financial stress and market situation, revolving credit facilities will become more common,” Lacayo said.
The pandemic is accelerating new trends in the modes of work, transport, communications, and payment, and with that an acceleration in the use of financial technologies to settle transactions could rise.
“Considering that banks and legal firms have been working very effectively from home and deals have been successfully closed online, blockchain could be a good tool to facilitate the lending process. But it would have to be widely used in Europe and North America before it becomes more widely implemented in Latin America,” Lacayo said.