While loan activity has been down so far this year, the prospects for a recovery in the fourth quarter are brightening. More companies are turning to the banks to finance M&A and prepare for 2024, analysts say.
By Hernán Goicochea
Loans activity in Latin America is expected to gain in the fourth quarter of this year, as companies pick up funds for mergers and acquisitions and prepare to meet their financing needs in 2024, analysts say.
“A good number of clients are getting a head start on their near-future financing needs for capex and maturities coming up in early 2024,” says Eddy Lacayo, head of corporate lending for Latin America at BBVA.
Companies are also borrowing to finance what is expected to be an increase in acquisitions before the end of the year, and to tap banks before financing costs rise further, he adds.
“As the cost of funds for banks increase, the financing costs available for clients have also increased,” Lacayo says. “A number of corporates are hedging this trend by securing financing for future needs earlier than expected.”
This expected growth comes after a lackluster time for the loan market so far this year. The total volume of loans fell 30% to $25.6 billion with 63 transactions in the year through September 15, down from $36.6 billion and 91 deals in the same period of 2022, according to data from Refinitiv.
Instead of loans, more corporates have been turning to the bond market, where they raised $65.9 billion in the year through September 15, up 27% from $51.7 billion in the same period a year earlier, the data shows.
“Although the bond market is rebounding, corporates still seem to prefer the flexibility and pricing levels available in the bank market to those available in the bond market,” Lacayo says.
He adds, however, that companies are turning to loans “as a temporary solution while conditions in the bond market improve.”
Reggie de Villiers, head of structured debt capital markets and Latin American DCM at UBS, says that the loan and private placement markets are still a go-to for companies in volatile market environments.
“The bank market has remained open for companies in the region,” he says. “If you’re looking for acquisitions, you need certainty of funding. Oftentimes, it makes sense to go to the bank market versus the capital markets initially. The loan market has remained open despite the volatility in the capital markets.”
The Mexican subsidiary of Canada’s TC Energy topped the ranking so far this year with a $2.3 billion loan, trailed by Mexican food processing company Grupo Bimbo with a $1.93 billion loan and Chilean water utility Aguas Horizonte for $1.8 billion, according to Refinitiv. Mexican energy company IENova also made the ranking with a $1.5 million loan, Refinitiv added.
Lacayo says he expects Mexico to remain the standout in the loan market, as more companies borrow ahead of the country’s 2024 presidential election and to finance a rise in M&A deals, led by the energy sector.
Regionally, the most active sectors in the loan market include energy and utilities, followed by infrastructure, cement, industrials and retail, Lacayo adds.
A spot of concern is the rise in political instability in the region, including an impeachment in Peru, a political crisis in Ecuador and protests in Brazil, Colombia and elsewhere. This has curbed corporate investment plans, leading to a decline in their financing needs, Lacayo says. The bright side is that this instability tends to spur attractive opportunities in M&A, he adds. This could be beneficial for the banks as “a catalytic driver to an increase in financing needs to support such acquisition activity in the region,” Lacayo says. LF