An Understanding of the Capital Markets

Transcription

1 An Understanding of the Capital Markets By: Mario Espinosa Managing Director and Co-Head of Latin America Credit Markets 1

2 Table of Contents 1. Capital Markets Overview 3 2. Alternatives for Corporate Debt Financing Banking Environment Citi s Presence and Franchise 19

3 1. Capital Markets Overview

4 The Advantages of the Emerging Markets Emerging market economies have weathered the storm better than industrialized nations and have outpaced developed nations in growth terms Responsible fiscal policies by most EM nations have allowed them to bounce back quicker than the majority of industrialized nations As a result, the European debt crisis has not directly affected LatAm The economies of the emerging countries enjoy strong investment and capital inflows as well as established and well-capitalized banking institutions For the most part since January 2007, the equity indexes of BRIC nations (Brazil, Russia, India and China) have outperformed those of industrialized nations 2 8.0% 6.0% 4.0% 2.0% GDP Growth 6.2% 6.0% 5.7% 4.1% 4.2% 3.3% 2.9% 2.8% 2.2% 1.7% 2.1% 2.2% 1.6% 1.3% 1.5% 1.3% 0.7% 0.0% F -0.4% 2013F -2.0% Global U.S. LatAm Developed Nations Eurozone Emerging Markets Equity Performance EM vs. Industrialized Nations 60% 40% 20% -- (20%) (40%) (60%) (80%) Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 U.K. U.S. Brazil China India

5 Current Global Growth vs Pre-Crisis Average For most regions of the world, economic growth between 2000 and 2007 was much higher than it is today, whereas emerging markets have more growth today than they did back then, placing this region, and most notably Latin America, as an attractive asset class with strong fundamentals Latin America and the Caribbean: A Promising Story of Growth and Development Below (2.0%) Between (2.0%) and 0.0% Between 0.0% and 2.0% Above 2.0% Insufficient Data (Legend s colors indicate %Growth minus %Growth ) 3

6 Introduction to Financing Alternatives in the Debt Markets Corporates, Governments, Quasi Sovereigns and Financial Institutions have three main sources for securing financing Hedge Funds Local Banks Corporates Pension Funds Private Banks Regional Banks International Banks Governments Quasi- Sovereigns Financial Institutions Asset Managers International Bond Markets Insurance Companies Local Pension Funds Hedge Funds Regional Banks Local Banks Regional Banks International Banks Asset Managers Regional Markets Insurance Companies Syndicated Loan market 4

7 Capital Markets at Citigroup What Do We Do? CMO advises corporate clients on debt and hybrid capital solutions in the fixed income markets, both in the U.S. and internationally Why Access the Market? Refinancing; M&A; Growth Capital ;Capital Structure Optimization Who Do We Work With? CMO works closely with coverage in Investment & Corporate Banking, Product Partners in Equity and Fixed Income and with Syndicate. Issuer Investment Bank / Corporate Bank Issuer Considerations Equity Capital Markets Capital Markets Origination Financial Impact; Ratings; Regulatory; Tax Legal Market Considerations Syndicate Sales and Trading Private Public 5 Public vs. Private; USD vs. Non-USD; Institutional vs. Retail; Size, Timing, Maturity; Marketing; Market Conditions CMO Product Partners Derivatives New Products Liability Management Structured Bonds Capital Strategies Investors

8 Historical Debt Issuance in LatAm DCM International LatAm Capital Markets Regional LatAm Bond Markets Volume (US$ BN) CAGR: 17.9% Volume (US$ BN) CAGR: 2.6% Syndicated LatAm Loan Market Cumulative LatAm Credit Markets Volume (US$ BN) CAGR: 6.9% CAGR: 10.3% Volume (US$ BN) Source all graphs: Dealogic as of August

9 Traditional International Capital Markets Issuers generally access institutional U.S. market with a 144A/Reg S transaction Enhances speed of execution and simplicity Sale of securities on a firm commitment basis Subsequent resale to non-u.s. investors and to qualified institutional buyers ( QIBs ) 144A / Reg S are the most common securities in LatAm, however, frequent issuers also access through registered transactions In recent years we have also witnessed offerings in non US markets in currencies such as EUR/GBP/CHF/JPY/AUD An offering in the International Capital Markets generally takes 8 weeks for infrequent/first-time issuers but a frequent SEC-registered issuer can access the market within one week Pros Largest pocket of liquidity Longest possible tenors (30 years and Perps) Free up cash flow given bullet payment at maturity Significant structural flexibility, incurrence test for non-investment grade issuers and no financial covenants for investment grade Cons Ratings required Standard terms for draw downs (only one) and prepayment (bullet) Limited prepayment flexibility Typically more expensive than bank financing 7

10 Traditional International Capital Markets (Cont d) International Issuance Breakdown 2012 YTD Country Sector Tenor 3% 12% 21% 5% 4% 2% 5% 15% 6% 24% 50% 19% 60% 22% 52% Brazil Mexico Peru Colombia Chile Other Corporate Sovereign Financial >7-10 years >10 years >3-5 years 2-3 years Perp >5-7 years < 2 years Source all graphs: Dealogic as of 2012YTD 8

11 LatAm Syndicated Loan Market Review LatAm Loan Spreads Average spreads in 2Q 12 have come down from the previous quarter LatAm Loan Share by Tenor Tenors between 1 to 5 years remain most tapped Source all graphs: Dealogic as of 2Q

12 LatAm Syndicated Loan Market Review (cont d) LatAm Issuance by Loan Type Term Loans comprise bulk of LatAm lending in 2Q 12 LatAm Loan Issuance by Purpose 2Q 12 Project and Trade Financing comprise over half of issuance in 2Q 12 5% 6% 7% 8% 11% 4% 3% Project Financing Trade Financing 31% Acquisitions Refinancing Other GCP Repayment ECA Capex 25% Other denotes: Bridge Facilities, Export Credit, Mezzanie Loans, Buyer Credit and L/C Facilities 10 Other denotes: Working Capital, Debt CP Support, Dividend Recapitalization and Shipping Source all graphs: Dealogic as of 2Q 2012

13 2. Alternatives for Corporate Debt Financing

14 Understanding the Company s Objectives International Bond Market Upside Syndicated Loan Market Upside Largest pocket of liquidity Relationship focused Longest possible tenors (10, 30 years) Structural flexibility Non-Investment Grade: Incurrence Covenants Experience in assessing risks and projected cashflows Prepayment flexibility Taps into Mexican bank peso liquidity Investment Grade: No financial covenants No need to pledge security Downside Ratings required One Draw Down and One Payment Downside Amortization payments Maintenance covenant packages Shorter tenors than bond market Cross sell required by banks to meet returns Often requires asset or stock security 11

15 Understanding the Company s Optimal Leverage The optimal amount of leverage is a trade-off between the benefits of the tax shield, the higher likelihood of financial distress and rising cost of capital. Implications of Higher Leverage Possible Financial Distress Increased Cost of Capital Loss of Financial Flexibility More leverage implies a higher likelihood of financial distress Possible costs include: Diverting management s focus Loss of capital markets access Suppliers and clients reluctant to do business Higher leverage = lower credit ratings and higher cost of debt Cost of equity increases as equity holders require compensation for increased risk Less capacity to use debt for funding strategic initiatives (such as acquisitions or capex) Tax Shield Improved Incentives For a typical US C-corporation, increasing leverage provides a tax shield by reducing taxable income with interest expense Provides a benefit to the company s cost of capital Value of tax shields depends on the company s ability to generate positive earnings Estimated by (tax rate * taxable income after considering NOLs) Increased leverage increases management s incentive to extract operating efficiencies, as interest expense creates a hurdle rate of return on capital that must be cleared Agency costs are reduced Costs Benefits 12

16 3. Banking Environment

17 European Banks Key Indicators: Snapshot 13 Market Cap (ERU bn) 1,200 1, Market Cap of Top 30 EU Banks (1) More Than Halved Credit Ratings Have Been Adjusted (2) 1,174 1, Source: Moody s, SNL, Bloomberg, FactSet as of June 25, Notes: (1) 30 largest listed European banks, by market capitalisation as at June 25, (2) Moody s ratings of main operating banking entities YTD Market Cap European Banks Loss in Market Cap: 61% Total Return of Euro Stoxx Banks since Jan 2006: (69.8%) EURO STOXX BANKS - Performance 0 Price (EUR) Dec. '07 Aug. '12 Notches BBVA Aa1 Baa3 (9) Banco Santander Aa1 Baa2 (7) Bank of America ML Aaa Baa2 (8) Danske Bank Aa1 Baa1 (6) OTP A2 Ba2 (6) RBS Plc. Aaa Baa1 (7) Citibank N.A. Aa1 A3 (5) Lloyds TSB Bank Plc. Aaa A2 (5) UBS Aaa A2 (5) Barclays Bank Plc Aa1 A3 (2) BNP Paribas Aa1 A2 (4) Credit Agricole Aa1 A2 (4) Deutsche Bank Aa1 A2 (4) Intesa Sanpaolo Aa2 Baa2 (6) KBC Bank NV Aa2 A3 (4) Societe Generale Aa1 A2 (4) UniCredit Aa2 Baa2 (6) Credit Suisse Aa1 A2 (4) DnB Aa1 A1 (3) Erste Bank Aa3 A3 (3) JPMorgan Chase Bank N.A. Aaa A2 (5) Morgan Stanley Bank N.A. Aa3 Baa1 (4) Natixis Aa2 A2 (3) Nomura Holdings Plc. A3 Baa3 (3) Royal Bank of Canada Aaa Aa3 (3) Goldman Sachs Banks USA Aa3 A3 (3) Nordea Aa1 Aa3 (2) Macquarie Bank A1 A2 (1) European Banks Non-European Banks

18 Banking Sector the New Norm? Change in Banking Sector Drivers Old World New World 1 Strong credit fuelled growth 1 Low growth & pressure from sovereign crisis Low provisions Robust NIMs Light touch regulation Higher leverage = Maximize RoE Deteriorating asset quality Record low interest rates Higher capital requirements / deleveraging needs Lower leverage to reduce risk = Lower RoE 5 Abundance of liquidity 5 Higher funding costs and liquidity requirements 14

19 Implications of Basel III As Basel III is incorporated throughout the market, cost of funds and return hurdles for ALL BANKS are expected to increase, especially for non-investment grade credits. Basel III Main Enhancements from Basel II and Basel I Minimum Capital Ratios Liquidity Requirements Constituents of Capital Leverage Requirements 15

20 Implications of Basel III (cont d) Basel III will increase the cost of debt for lowered rated companies Break-even Pricing Implication (in bps) for a $100MM Unsecured 5yr Loan to maintain Returns on Risk Rated Capital 10.0% Cost of Capital (%) IG HY Lowest Cost (Basel II) Lowest Cost (Basel I) Total Debt / Total Capitalization (%, Market Value) Basel II / III Basel I Illustrative 0 bps 75 to 100 bps ~ 250 bps -30 to -20 bps -30 to -20 bps AA A BBB BB B 16

21 How Much Capital Will Banks be Required To Hold? 9.5% 11% 7% 8.5% 5% 4.5% 6% 6% Basel III Minimum + Buffer + G- SIB Surcharge (2.5%) Basel III Minimum + Buffer (2.5%) Basel III Minimum + Buffer + G-SIB Surcharge Basel III Minimum + Buffer Basel III Minimum Basel III Minimum Basel I Minimum Tier 1 Common Tier 1 Capital Basel I Minimum 17

22 4. Citi s Presence and Franchise

23 Citi s Presence in LatAm & CCA International Bonds LTM Domestic Bonds LTM Syndicated Loans LTM Ranking Bookrunner Proceeds (US$MM) No. Deals Share Ranking Bookrunner Proceeds (US$MM) No. Deals Share Ranking Bookrunner Proceeds (US$MM) No. Deals Share 1 Deutsche Bank 14, % 1 Itau BBA 2, % 1 2, % 2 HSBC 12, % 2 2, % 2 HSBC 2, % 3 12, % 3 HSBC 2, % 3 Itau BBA 1, % 4 JPMorgan 10, % Source: SDC Thomson Reuters as of April 14, BBVA 2, % 4 BNP Paribas 1, % 5 Credit Suisse 9, % 5 Bradesco BBI 1, % 5 JPMorgan 1, % 6 BAML 7, % 6 Santander 1, % 6 Sumitomo Mitsui 1, % 7 Morgan Stanley 5, % 7 Banco do Brasil 1, % 7 BBVA 1, % 8 Santander 5, % 8 BTG Pactual 1, % 8 Credit Agricole 1, % 9 Goldman Sachs 4, % 9 BCP % 9 ING % 10 Itau BBA 3, % 10 Bancolombia % 10 BAML % Source: Dealogic as of August 21,

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