Renewed Latin America Loans: Is It Deja Vu All Over Again?
Enthusiasm for high-yield Latin American lending may be blinding some banks to risks that ought to look familiar, industry sources are warning.
Two deals in late October highlighted the accelerating activity in Latin America. J.P. Morgan & Co. announced a $1 billion loan to a Mexican investment group as Citicorp was closing a $200 million, three-year note for a Brazilian company.
These are attractive transactions that pay hefty fees and bestow bragging rights in one of the world's hottest lending regions.
But with memories of one Latin debt crisis still fresh, some analysts worry that renewed confidence in lending to Latin American borrowers may be misplaced.
Upturn Considered Fragile
"The problem is, most banks are still coping with the exposure numbers," said Lawrence Brainard, vice president for emerging debt markets at Goldman, Sachs & Co. "If they show numbers that are significant, they are going to be in trouble."
As evidence that the economic upturn in Latin American countries is more fragile than some bankers would like to believe, analysts pointed out that prices for Argentine and Brazilian commercial bank loans on the secondary market lost as much as half their value in recent weeks.
Nonetheless, the bank units of Chase Manhattan Corp., Manufacturers Hanover Corp., and Bankers Trust New York Corp. also are beefing up lending activities in Latin America.
A chastened veteran of the last round of Latin debt restructuring commented: "At a certain point, there is no reward that's worth the risk."
The lesson ought to be clear enough. But intervening crises in lending for energy, real estate, and highly leveraged transactions appear to have dimmed some bankers' memories of what can go wrong in developing countries.
"Happy days are here again," snorted one banker in a comment on the Morgan deal.
The loan to a Mexican group not only broke a decade-long freeze on Morgan's activities in Latin America but also added a twist to the usual loan structure.
Morgan is retaining more than $250 million for itself - the first large Latin loan risk taken on to a U.S. bank's balance sheet since the international debt crisis began almost 10 years ago.
"There's a window opening up on the bank financing side in selected areas, which have a lot better pricing than capital-market issues," said Peter Geraghty, senior vice president in charge of developing country debt trading at NMB-Postbank, a bank that participated in the Morgan syndication. "More and more banks are starting to look at the opportunities."
All these banks are looking at ways to reduce risk, of course. One way bankers have devised to collect fees without walking a tightrope is to syndicate or underwrite loans.
In October, for example, Citicorp also completed a $150 million program of medium-term Euronotes for Cemex.
The danger, some bankers said, is that many banks are marketing both loans and bonds, along with the risks, to less sophisticated institutions like large regional banks that are attracted by high yields.
"It's sort of like the early days [of the debt crisis] when the big boys were out seeking business and convinced everybody else to come in," said one banker.
Still, some bankers said they are prepared to take the gamble.