Loan markets in Latin America (including the Caribbean) saw a sharp decline in the first half of 2020, as the COVID-19 outbreak caused the region’s economies and stock markets to fall.

The IMF is forecasting a 9.4% GDP contraction in the region and the S&P Latin America 40, the stock index that tracks its largest companies, has lost just under a third of its value this year.

Credit activity has clearly been impacted by these headwinds. Leveraged and unleveraged loan issuance for Latin America (including the Caribbean) fell 88% from US $ 34.1 billion in the first half of 2019 at just US $ 4 billion in the first half of 2020.

Show of $ 1.6 billion in the first quarter and US $ 2.5 billion in the second quarter is the two weakest consecutive quarters for loan issuance in the region over the past five years.

Lending activity in Latin America was largely affected by a decline in M&A activity (including global and domestic bidders), which fell 70% from 37 billion US dollars in the first half of 2019 to US $ 10.8 billion in the first half of 2020.

These deals have traditionally been the primary driver of loan issuance in the syndicated market in Latin America, but with COVID-19 casting uncertainty over the earnings and valuations of target companies, negotiators have shelved the deals and backed down. are focused on holding cash.

Banks turn to bilateral lending

Despite this sharp decline in syndicated loan transactions and issuance, many Latin American banks have remained open for business in providing financing on a bilateral basis.

These bilateral loans may not be making the headlines, but borrowers have turned to these bulk facilities to ensure they have enough liquidity to get out of the crisis. This part of the market remained active until the first half of 2020, with companies moving decisively to obtain financing early, in case their sources of capital dried up and began to close later in the year.

Banks, on the other hand, have focused on relationships with their main customers and have been willing to finance existing loans in the absence of business arising from mergers and acquisitions.

Banks have also looked at other opportunities to maintain commission income and interest payments. Brazil’s payday loan industry, for example, which provides loans to public sector employees that are repaid directly from the payroll, has become a key industry 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 exploit existing credit lines

Another notable feature of the market has been the use of revolving credit facilities by large Latin American multinationals. Many top names would not have turned to guns in previous downturns, but with these facilities now in place, these companies were able to get cash without going into the market.

Mexican blue chips have also used revolving credit facilities. Real estate developer Corporación Inmobiliaria Vesta, for example, has pulled out. A resilient period of negotiation by bakery multinational Grupo Bimbo, saw it repay US $ 400 million of its revolving credit facility after drawing US $ 720 million in March in anticipation of the COVID-19 disruption.

Challenges ahead

The availability of revolving credit facilities and the willingness of banks to lend on a bilateral basis have provided a buffer for many Latin American companies against the sharp decline in syndicated loan issuance.

But there are still challenges to be overcome. COVID-19 has hit Latin America after Asia and Europe. The number of cases continues to rise rapidly and the pandemic has not yet reached its peak in the region, although second waves are occurring elsewhere in the world.

With the spread of the virus still on the rise, Latin America’s capital markets and liquidity remain subject to uncertainty and volatility. M&A volumes, which predict syndicated loan activity, are unlikely to rebound until the pandemic subsides and there is better visibility into the performance and valuation of target companies.

Distress is also starting to show itself in 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 Chapter 11 bankruptcy in the United States, while reports indicate that auditors at Brazilian firm Gol Linhas Aereas Inteligentes should include a warning in the company’s accounts regarding its future viability. Panama’s Copa, meanwhile, has been on hold since March (although its liquidity profile improved significantly thanks to a convertible bond offering in April), and Azul has brought in restructuring advisers.

Other areas affected by closures and travel restrictions are also under pressure. Statista, for example, predicts 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 credit markets have shown resilience in the past and are likely to continue to do so. Banks remain willing to lend, even though M&A activity has fallen, and have looked at a recovery in the long term.