Troubled by a volatile economic environment, smaller U.S. and foreign banks are pulling out of the syndicated lending market for Latin America, according to senior bankers.
And the exodus is leaving the larger banks that structure these deals to take on more of these loans, as well as the added risk.
"Syndications have no place to go, and the net result is that the large international banks have been supporting the market," said Steve Capp, managing director for Latin American syndications at NationsBank Montgomery Securities, a unit of BankAmerica Corp.
As larger institutions hold on to bigger and bigger amounts, he added, they are becoming increasingly exposed "to enormous market risks," Mr. Capp added in a speech before the Bankers Association of Foreign Trade fall conference here last week.
Other bankers agreed.
"The concentration may be a risk for individual banks," added a senior Chase executive who requested that his name not be used. "The question is when you expect some degree of liquidity to come back."
The concentration of syndicated loans held by larger institutions can be seen in the numbers. According to data compiled by Brown Brothers Harriman & Co., U.S. banks' exposure to Latin America included $50.4 billion in local-country liabilities such as derivatives contracts and $87.5 billion in cross-border exposure as of June 30. The six U.S. money-center banks, however, held $35.5 billion in local-country liabilities, or 70% of the total, and $59.4 billion of the cross-border exposure, or 68%.
This exposure has increased concerns among investors about losses at big banks and badly battered share prices of U.S. banks with international operations.
Though smaller U.S. banks have been slashing their international exposure for 18 months, money-center banks are finding it harder to follow suit for several reasons.
First, their exposure is much bigger and more difficult to unwind, and they risk large defaults if they call in their loans. Banks have little choice except to roll over, or extend the maturities on outstanding loans - because default would force them to write off billions of dollars in loans and steeply reduce their capital.
Second, international capital markets are now virtually closed to emerging-market countries. As a result, big U.S. and foreign banks as well as multilateral lending agencies such as the International Monetary Fund are the only sources of external funding left to borrowers in regions like Latin America.
And big banks are unwilling to abruptly abandon Latin corporate customers and governments with whom they have done business for years, since this would only compound the difficulties these clients are experiencing.
"Banks have got a significant secondary market liquidity problem on their hands," Mr. Capp said. "Our hope is that the capital markets will come back and provide some relief."
But if capital markets do not soon become accessible to Latin borrowers, however, the strategy currently pursued by banks could soon become "unsustainable," he warned.
Accompanying the increasing difficulty in finding banks willing to lend to Latin America has been a sharp increase in pricing and an increasing tendency on the part of banks to go for shorter-term loans.
A $400 million three-year loan to Telefonica de Argentina, for example, was priced at the London Interbank Offered Rate, or Libor, plus 137.5 basis points in April. A similar 18-month $50 million loan to Telecom Argentina now being syndicated is being offered at Libor plus 300 basis points.
Similar pricing is occurring in Chile, one of Latin America's strongest countries financially. A five-year $180 million loan syndicated in the first quarter for the CTC telecommunications group was priced at Libor plus 37 basis points. A similar five-year $250 million loan to same company in October was priced at Libor plus 200 basis points.
"We're seeing an increase in funding costs," said Jose Castaneda, chief executive officer of Banco Latinoamericano de Exportaciones SA. "There was mispricing in risk for a long time, and now we have to pay for it."
With banks and investment banks reducing their emerging market activities and slashing staff, Mr. Capp predicted the syndicated lending market for Latin America is unlikely to revive soon.
And if capital markets continue to refuse to buy debt by Latin countries and corporations, big banks arranging funding could be forced "to maintain most of the commitments on their balance sheet for some time to come," he said.
"There is a great deal of uncertainty about the willingness of large banks to continue holding the ball," Mr. Capp said.