A deep dive into financing in Latin America

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Amaury Guzman: Hello and welcome to ‘What's the Deal?’ on J.P. Morgan's Making Sense. I'm your host Amaury Guzman from the Leveraged Finance Desk. With us here today, I have Lisandro Miguens, a Managing Director at J.P. Morgan, and the head of the Latin American Debt Capital Markets Desk. Liso, thank you for joining us today.

Lisandro Miguens: Amaury, thank you for having me. It's a pleasure.

Amaury Guzman: So let's start from the top with the fundamentals. For the benefit of our listeners who may not be familiar with the funding dynamics in the region, can you explain what debt capital markets entails in Latin America?

Lisandro Miguens: Sure. The way I like to describe it, particularly for your audience, is to look at the similarities and the differences with the U.S. market. So in terms of the similarities, we still have a bond market and a loan market, similar to you. The bond market is characterized mostly by 144A, traditional 144A issuers, who have a certain issuers doing SEC register. And then we have two niche markets, which are smaller in size than the traditional, which are the private placement and the asset-backed securities. Then, moving on to the loan market, the loan market is mainly the borrowers are concentrated and in TLA (Term Loan A) and RCF (Revolving Credit Facility), which is like 90% of the market. And then the rest is direct lending, or have some direct lending, what we call it alternative financing in Latin America. That is a growing market that has been growing over the years, but still is very small. And in terms of the TLB, which is a very deep market in the U.S., we don't have that in Latin America. Some borrowers in the TLB, there's a few borrowers, like three or four only, which are names that are very related to the high-yield market, either by ownership or they have some assets in the U.S., but it's a very niche, small market. When you look at the differences, the differences are also big. In the sense that, for example, we have in Latin America, an international capital markets and a local markets. What does that mean? When I say local markets, I mean local denominated securities in the currency of the own country, local listing, local law, local investors – pure local markets. Interestingly enough, that market is two times larger than the international capital markets for Latin American issuers. So at the end of the day, 70% of all financing in Latin America is done in the local markets, and only 30% of the financing is the one that is done in the international capital markets. The local markets are dominated by local players, local banks, and international capital markets are dominated by companies or banks like J.P. Morgan. The second difference is the penetration and the size. So when you think about penetration of the financing market in the U.S., all the financing markets in the U.S., or capital markets in the U.S., comprise 170% of the GDP of the U.S. While if you look in Latin America, it's only 60%. So clearly there is a big difference between how much penetrated is the capital markets in North America than in LatAm. And then the size, the sheer size of the U.S. market is 10 times larger than the one in Latin America. So the total capital markets in the U.S. is $50-trillion, while the capital market size in Latin America is only $4-trillion. And then the last one, difference, is market sentiment. The market sentiment in Latin America is not only driven by the U.S. capital markets, U.S. rates, which we'll talk about in the rest of the podcast, but also is driven by idiosyncratic events in Latin America, FX currencies, current account deficits, political cycles in Latin America, commodity prices. So at the end of the day, when you look about market sentiment for an issuer in Latin America, borrower in Latin America, you need to think about what's going on in the U.S. but also all these factors affecting the Latin American space.

Amaury Guzman: Thank you for that, Liso. I think this compare and contrast that you've done vis-a-vis the U.S. market versus the dynamics, the products that we see in the Latin American market is very helpful for our listeners. Just double clicking a little bit into the products that are employed for capital raising in Latin America, why don't we start with international bonds, and the drivers to the segment of the market.

Lisandro Miguens: Sure. So basically, as I said before, the international capital markets is a complement to the local market. So when you look at the local capital markets, you have 80% of the financing for sovereigns, the local market is 80% sovereigns and 20% corporates. So most of the sovereigns are financing themselves in the local markets. And in international capital markets is 60% sovereigns, 40% corporates. So when you think about international capital markets for LatAm, it is still mainly focused on the sovereign side, but still 40% is corporates. Use of proceeds are usually large investments, re-fi of existing debt, in the case of the sovereigns managing the budget, which all the countries have fiscal deficits, so they need to manage that. And then in general corporate purposes. When you think about the high yield and high-grade component, in the high grade, is usually senior and secure. You have also subordinary structures that allow issuers to go to market with hybrid securities and A21s, in the case of banks. In the case of high-yield, you have senior and secure financings, and you have two types of high-yield different from the U.S. The first type is a typical that the U.S. are used to, which is the capital structure of the company, is such that it is a high-yield issuer, and has high-yield components in terms of indenture, governance, etc. But then you have a sub-segment which is top companies, which has an investment-grade capital structure, but happens to be in a country that is non-investment grade. And those are non-investment-grade issuers, but the way that they're being treated by the market is more like an investment grade, even though it's a non-investment-grade rating because of the country.

Amaury Guzman: That’s very interesting. And I just want to make a pause in this point you just mentioned. Here in the U.S., we're used to having very deep investment grade and high-yield market. But you're saying that in LatAm, or in Latin America, we could have a company with an investment-grade credit profile yet, just because of its jurisdiction where it's based, it could be rated by the agencies as a high-yield instrument. Is that right?

Lisandro Miguens: Correct. Yeah, that's right. When you looked at that instrument, at the end of the day, it's going to be an instrument that look like more like an investment grade in terms of the governance, in terms of the indenture. Why? Because when you looked at the company, isolated from the zip code, it is an investment-grade type of company. So the indenture will be such that will equal an investment-grade indenture.

Amaury Guzman: Got it. You also mentioned that in Latin America, issuers employ what the market calls hybrid bonds. It's an instrument that we don't typically see in the U.S., I think we more often see preferred securities for funding at that part of the capital structure. Do you mind just fleshing out in a little bit more detail what hybrid bonds are?

Lisandro Miguens: Yeah, sure. So hybrid bonds are highly subordinated debt instruments, like quasi-equity, that has certain features that make them like that. One is the long tenure, or the perpetual maturity. The second aspect is it has to be so deep subordinated on top of the equity, below all the rest of the debt. And last but not least, is the discretionary to pay coupons. So, those three elements make that hybrid security such that can be treated by rating agencies and sometime accounting purposes as partly equity. We've been using this instrument, like in the U.S., in high grade market as well, in Europe has been highly used. Also in Latin America for companies that they basically, they've been used in the context of M&A, that they need to put more capital, because they're going through an M&A process and they need more capital to retain the ratings. Sometimes for reasons of high leverage, because of the cycle. Remember that in Latin America, we have a lot of commodity companies. Commodity companies are very cyclical in terms of the revenues, and sometimes in the low part of the cycle, they need some cushion of equity. And so they use this instrument to basically support the low cycle of those companies.

Amaury Guzman: Got it. I know we’re to try to zoom out a little bit, and break down the volume in the market, as of most recently in terms of industries, how would you describe that?

Lisandro Miguens: So, when you think about the market, you have the bond market and the loan market. Loan market, there's no data that we can tell you where the industries of the issuers are coming from. But I would say that mimics the bond market. So if I take the bond market capitalization of Latin America, you're going to see a very fragmented, and at the same time, diverse industries represented in the indices. And we'll talk about the indices later. And it's very interesting, because if you looked at the break up, you're going to see that 20% of the issuers come from financial institutions, 20% from energy, 15% from utilities, and 10% from three different sectors, 10% each: mining, consumer, telecom. And then other industries: pharma, agribusiness, transportation make up the 15% remaining. So, it's very diverse, given the sense that most of the industries have access to the markets, not only the more strategic ones. I mean, we can think about commodity cycle or commodity-driven because of the force of the strength of the commodities in Latin America, or you can think about basic infrastructure for the good for the country, but also the other more marginal industries have access to the capital markets.

Amaury Guzman: Yeah, that's clear from that breakdown. Pivoting away, in terms of tracking the market, I know that for instance, in my day-to-day job on the leverage finance desk, I observe the high-yield index, the leverage loan index, and I point my clients and as well as investors and lenders towards that to try to get a sense of relative performance. What typical benchmarks do you observe to assess the performance of the asset class within Latin America?

Lisandro Miguens: Basically we have two, and both are within the families of indices of J.P. Morgan. One is the EMBI, and the second one is the CEMBI. The EMBI is the one that comprises all the sovereign issuers and quasi-sovereigns. I mean all these companies that they are basically partly or totally owned by governments. And then you have the CEMBI, which is the corporate index. In order to be part of the EMBI, you need to have an issuance at the minimum of $500-million and certain liquidity in the secondary market. And in order to be on the CEMBI, you need to have a minimum of $300-million, and also certain amount of minimum liquidity required. I don't think there are any other indices in Latin America that try to compete with these two. And this is widely used in the industry.

Amaury Guzman: I know that we've, so far, spent a lot of time diving deep into the intricacies of the bond market, but I now want to pivot into loans. Why don't you kind of walk us through the role that loans play in financing in Latin America?

Lisandro Miguens: Perfect. So first and foremost, if you think about size, just to give an idea the size of the loan versus the bond market in LatAm, the loan market is only 25% of bond market, international bond market in LatAm. So it's, the market cap of the loan market is around $300-billion, while the bond market is $1.2-trillion. Then the second is, most of the syndicated loans are New York law. And basically you have mostly international banks participating, but also you have some local banks participating, because some local banks have funding in dollars, so they use those deposits to participate, but like more marginal. Obviously the syndicated loan market is an additional source of financing to the local markets and to international capital markets. Those three groups of financings are the ones that they make up the majority of the financing for companies in the region. Most of the participant banks are international banks that we all know. I mean, in the U.S. are going to be the typical U.S. banks. You want to have the French banks very active. You have Italian banks, Spanish banks, super active in Latin America, obviously. The Netherlands. Also you have Middle East banks and Asian banks. And on top of that, regional banks who have some regional banks in Latin America, they have a regional presence, and they like to participate in some of these loans. So, it is really widely distributed between the different banks. It is a relationship lending, TLA. Pricing tend to be very aggressive. Particularly below the bond market. That's why the clients like this market a lot. When you think about sizes as well, we issue around between $50 and $75-billion of loans per year. The tenures are between three and five years, amortizing, some of them balloon payments. And then you have the sub-segment that I talked about with you before, which is the project finance and the alternative financing. Typically in project finance, greenfield and brownfield projects in Latin America, or companies that they have highly contracted cash flows. And then they can go to seven years. Mini-perm in that market is very common, so they go further than five years, and usually it's amortizing. Then, in terms of the alternative financing, which is more niche market for solutions that are not driven by a traditional syndicated loan market, that is a growing market as I said before, don't have a size per se, because it's very private, difficult to measure the size. But you can see around five to 10 deals, per year in the region.

Amaury Guzman: Got it. Thank you for that. It sounds like you guys have been very active in the sector and you employ some of the features that we use here in the U.S., in terms of kind of the loan market for being able to originate financing for borrowers in the region, but then perhaps other kind of shy away from other features, just kind of to cater to the bespoke needs of the borrowers down there. We've been very busy here in the U.S. over the last couple of years with financing in the market, specifically in high-yield, which is where I kind of spend most of my time. Can we now pivot to speaking to the drivers to primary activity in the market and the depth of demand for both bonds and loans across the region?

Lisandro Miguens: Great. So, the yearly volumes in the bond market ranges between $70-billion and $150-billion. $70-billion was a low mark in 2022, as we all know what happened in the markets that year. And $150-billion is a high mark that we saw last year in 2024. So far this year, we printed in six months, $100-billion. So, we are basically tracking a number that can end up being a record volume of issuance on a historical basis. When you think about how deep that market can be in terms of how much you can raise being an issuer in that market, you can raise between $500-million or $300-million and $2-billion. I think the highest market that we've seen for corporates in the region has been $2-billion. You can go from 10 to 30 years, no problem. In the local markets, the tenures are shorter, five to seven, we tend to use in the international capital markets more for the 10 to 30 year mark, even though we can do five years, no problem. When you looked at the local markets, it is not as deep as in the international capital markets. So issuance in the local markets goes from $50-million to $500. More than $500-million in the local markets feels like that is a lot. So you need to move to the international capital markets for size, and tenures are five to seven years, the sweet spot. You have sometimes 10 years or longer, but most of the issuance happens between five and 10 years and seven years. When you think about the split between countries. Like the two big countries, Brazil and Mexico, they represent 50% of the issuance. When go to the Andean region, we call it the Andean region, Colombia, Peru, and Chile, represent 30% of the issuance. And then the small countries represent 20. And the small countries are countries that you don't have on the radar: Dominican Republic, Guatemala, Panama, Costa Rica, El Salvador. Those count for 20% of the issuance, which is because they don't have local markets in those countries, they tend to every big issuance, they don't go to the loan market, goes to the international capital markets. So we don't have in the small countries, the local markets comparison, or competition to the international capital markets. That's why they represent, even though they're small countries, a good chunk of the issuance, per year.

Amaury Guzman: It's quite interesting what you mentioned about the larger countries or economies having the option of deciding between the local market and international market in order to cover their financing needs, whereas the smaller countries only having the international market as their funding source. Now that we've covered that, can you speak a little bit about the windows of opportunity that the borrowers in the regions have, how they act as a market and as well as, how people think about pricing the credit risk in the region?

Lisandro Miguens: Yeah. So when you think about windows of opportunity, you need to qualify by the type of sources of funding. So we talked about local markets, syndicated loan and bonds, international bonds. So local markets is always open. It is a traditional financing source for these companies, is local currency, is all local investors, they know those companies very well. Interestingly, that market is such that moves from fixed income to equities. So you have migration from fixed income to equities. That market suffers in the fixed income side, suffers when the equity market is booming. And there's a lot of opportunities because the assets under management migrate to the equity side, which is not what happened in the U.S. So that's one of the effects. But usually it's always open at very good levels. The syndicated loan market is also always open because it's basically two things. One is relationship lending, and second is the largest companies in the region, the best credits in the region. It's highly concentrated on high grade. Because of those two factors, even in 2022, for example, when the international capital market was going through tough times, the syndicated loan market was wide open. In the case of the bond side, the windows are not as clear as in the U.S. because you basically are correlated to do two main factors. One is what's going on in the U.S. capital markets, particularly U.S. rates. We are highly correlated to U.S. rates. And second is all the idiosyncratic events that I described before that, that happen in Latin America from political cycle to effects volatility to commodity prices, et cetera, et cetera. So you need to put the two together to start finding windows. Still, we have a ton of windows during the year, but not as many as a high-grade issuer would have in the U.S. When you think about pricing, I think that a couple of interesting factors here. Number one is that when you compare a similarly rated company in the U.S. with a similarly rated company in Latin America, they usually in the investment-grade land, they trade around 75-basis points wider in LatAm than the similarly rated peer in the U.S. Today we're at 60-basis points, but usually the average for the last five years has been 75-basis points. When you go to high-yield is a hundred basis points the average and today we're at 75-basis points. So clearly Latin America pays a premium over what the similarly rated company pays in the U.S., and that creates the crossover demand. Sometimes when the markets are really good in the U.S., what the U.S. investors that invest in the U.S., capital markets, they do crossover investments into Latin America picking up in some of those names that they can give them more yield with the same rating.

Amaury Guzman: Thank you for that. It sounds like it's a good time to be accessing the markets 'cause relative to where they would price vis-a-vis a U.S. credit, the pickup today is not as much as they would pay on average over time. Can you quickly walk us through what the current market conditions are in Latin America? How would you describe market conditions for financing right now?

Lisandro Miguens: Couldn't be better. Because if you, you have these three factors combined right now, number one is, basically the resiliency of economy in both in the U.S. and in Latin America, given what's going on globally. Number two is that the prevailing low spreads, we are probably only 30-basis points away from the lowest spreads in the last 30 years in LatAm. And number three is a strong technical position that we have. So let's go one by one. Number one is the resiliency. So we had a lot of news coming from the trade side, uncertainties coming from that, plus all the geopolitical uncertainties as well. So when you put all of those together and you see how the economy is performing, both the U.S. and Latin America is extremely resilient, and that is creating some confidence factor into the investor base about how we can navigate these periods of uncertainties that we are exploring right now. Number two is preventing low spreads. I mean, we are a very low spreads in the market, and that creates the incentive for the issuers and borrowers to basically print. So you need two to tango, and sometimes you need a combination of good factors in terms of cost of financing and liquidity to have a large volume of issuers. Otherwise, we have what happened in 2022 that the yields were too high, investors were willing to put money to work, but nobody in the issuer side or borrower side was willing to print, because they have other alternatives. As we said before, the Latin American companies, they have alternatives in the local markets and other sources of financing. Then the third thing is strong technicals. Latin America has been net financing negative for the last four years. What does that mean? If you start putting everything that is issued per year, minus the coupon pay, minus the tender offers, and minus the amortizations, for the last four years, the asset class, Latin America corporate bond has been giving money back to investors in the order of around $55-billion. So that technical position is such that investors have been shrinking the asset class, having less exposure to the region, and again, that is creating the technical positive to be willing to put more money to work.

Amaury Guzman: Thank you for that. Clearly, you can’t beat those conditions. It’s effectively the call to action for folks with responsibility to raise funding in the market. Now, if you were to give them a word of advice for the rest of the year, as they monitor and navigate market conditions, what would you suggest for them to keep an eye out, or kind of what keeps you up at night as you monitor market conditions?

Lisandro Miguens: So obviously, when you are in a market that is strong and, with very high valuations, which means very low spreads, you don't have much room to improve. So at the same time, if you look forward, you see a lot of uncertainties in the global economy. You see geopolitical risks out there that are very high. You see fiscal deficits around the world that are unsustainable, that can create a slowdown in the economy around the world. So you have so many factors of risk out there that have not been priced in the market today, and you are almost priced to perfection. And usually the issuers or borrowers in Latin America they are always asking the same is, "Shall I wait for the treasury cycle or the interest rate cycle in the U.S. to start slowing down so I have a better yield?" And they always want to basically tap the market in the perfect moment. But I think that there is a lot of risk out there to be taking that risk. And the market is liquid enough right now. This is one idiosyncratic trend that happen is happening in Latin America. I think that Latin American economies, they have something to win from the de-globalization of the world economy, by being a good proximity to the U.S. and being a good friend and partner of the U.S., and being the U.S. the largest consumer country in the world. We have a lot to benefit from that de-globalization process, which hopefully the countries will proactively take advantage of. Number two is that we are in the middle of a political cycle in, or political elections in Latin America. So in 2026 will be marked by presidential elections in Colombia, Chile, Brazil, and Peru. the people are expecting those elections will go to the more market- friendly, business-market-friendly, government. So that can be a good cycle for business for Latin America in the years to come.

Amaury Guzman: Liso, thank you so much for such an interesting conversation. I'm sure our listeners will find it fascinating.

Lisandro Miguens: Amaury, thank you very much. It has been a pleasure, and let's do it again.

Amaury Guzman: Absolutely. And thank you to our listeners for tuning into another episode of ‘What's the Deal?’ We hope you enjoyed this conversation. I am Amaury Guzman until next time.

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