Latin American corporates are getting a taste for private placements and shunning the international public markets. In recent years, multiple companies in different jurisdictions have successfully raised capital through this mechanism.
This sort of transaction has become more popular in Latin America’s largest economies, namely Mexico, Chile and Colombia.
According to the Mexican Stock Exchange (BMV), private placements peaked in the continent’s second-largest economy in 2015 with MXN176.2bn raised - amount never seen since the exchange started recording this type of transaction in 2004.
And it is easy to see why: this type of papers allows companies to raise medium and long term capital in more flexible conditions. Usually increased activity in this sector is associated with higher rates of economic growth and financial stability.
In Colombia, for example, issuance of debt is generally reserved for the bigger corporations, and 30% of bonds sales are conducted by AAA companies. However private placements allow companies looking for smaller amounts of money to connect with investors.
For Emilio Muratore, CFO of Santander Chile, Latin America in the last few years saw allocations of private debt pick up as a direct result of the business environment in other regions.
“The low-interest rate environment in Europe and Asia (mainly Japan) has encouraged investors from those regions to look for other investment opportunities with high credit rating.”
Muratore adds that in order to feed the demand of foreign investors that are looking for higher yield assets, it is “imperative” for companies to have up to date debt programmes.
“In the case of Santander, it is done through medium-term notes (MTN), which provide a good starting point for private placements in terms of time, cost and paperwork.”
According to Muratore, in 2016 Santander raised US$175mn in different currencies (USD, EUR, and JPY) through private placements.
“Our three first transactions in euro achieved very attractive rates compared with the local markets” the banker adds.
Private Placements – a Mutually Beneficial Deal
Private placements usually represent a win-win deal for both the issuers and the investors.
With private placements, issuers can save time and money while at the same time tapping the markets for smaller amounts of money that would be atypical for public placements.
“The biggest advantages of private placements for issuers is the short time to market: provided that MTN is up to date, you only need to be in agreement with the term sheet to execute the deal. Also, regarding the size of the transaction, with private placements you can capture demand without having to do benchmark size placements with better prices,” Muratore noted.
The CFO mentions that this aspect is particularly attractive for Chilean markets because the average ticket of these placements is usually around US$30mn-US$50mn and they are quickly executed on the derivatives markets without affecting the market curve.
“It is also important to mention that the cost associated with a private placement are significantly lower than public issuances, mostly because these transactions are done in the RegS only formats,” Muratore concluded.
From the investor's point of view, a private placement gives them access to longer term debt (average 10 years) and to structures that are not common in the public debt market such as zero-coupon bonds, fixed to float structures among others.
“Above all these investors are attracted to this type of placement because it guarantees them the size of their investments, unlike what happens with public issuances, in which the investor is subjected to the allocation given to them by the issuer and the underwriter.”
However, Latin American corporates in general still have a long way to go if they want to receive the perks private placements tend to offer, as many investors are only interested in offerings from AAA rated companies.
This why supranational institutions such multilateral banks such as CABEI or CAF are for now the ones focussing on this type of transactions.
Still, if the low rates in the developed world endure, more and more yield starve investors will flock to EM corporates to fill the gap, and private placements seem to be the fastest and most cost-efficient channel to this market.
