A close relationship and an ability to act fast when market conditions become favourable enabled Barclays Capital’s New York-based Latin American team to offer Petrotemex a range of options to refinance existing debt. Sophie Roell talks to the team.

It is a truism that timing is critical for any deal but for Latin American issuers, it is even more critical than for most. Volatility in the region is high, markets open and close quickly, and great opportunities can turn into missed chances in a matter of weeks.

The all-Latin American team at Barclays Capital in New York were not going to let that happen to Petrotemex. They had had a close relationship with the Mexican petrochemical company since doing a deal for it in 2002, and were determined that uniquely favourable conditions would not pass the company by.

“We were very close to the client for about three months and exploring the possibilities for them to take the best market opportunities to refinance their existing bank debt,” says Lorenzo Gonzalez, director, investment banking, Latin America at Barclays Capital.

The opening that the team were waiting for was a sudden and marked improvement in the syndicated loan market. The bank debt market had been dead until then, as a blow-out start to the year in the bond market had diverted attention elsewhere. But as bond issuance slowed, things started looking up.

Reading the market

The Barclays syndication team thought they could be the first with a deal. “We read the market pretty well,” says Jaime Frontera, associate director, global loans. “We read the five-year market in Mexico coming out: as a result of NAFTA [North American Free Trade Agreement], relations with the US are good, investors feel more comfortable with Mexico than with the rest of Latin America.”

At the same time, the bond market was not looking too bad either. A huge January – about $9bn in debt was issued out of Latin America – had given way to a jittery February and March, as investors became nervous about US interest rate rises. But issuance had stepped up a bit in the second quarter – and, in any case, Mexico had been shielded from the worst of it. “Even though Mexican spreads did suffer some volatility in the process, a widening in the demand continued,” says Carlos Mauleon, managing director and head of Latin American debt capital markets and investment banking. “Mexico has been able to separate itself to some extent from the volatility of what we call the high beta credits in the region; and therefore we felt that, even though there was some volatility, the Mexican market continued robust.”

Decisions, decisions

The result presented Petrotemex with what every issuer wants: a choice. “As a bank, we proactively made contact with the issuer and explained how the overall market conditions had improved, and that this was an opportunistic moment for them to refinance existing debts,” says Vidal Ramirez, associate director, global loans.

“And we were able to give them multiple options. It wasn’t just a financing opportunity in one market, but in several. And it was done in a co-ordinated way – where we showed them both pitches and indicative levels in different markets, as opposed to just one.”

The company, which needed about $300m, decided to go with both markets: a five-year syndicated loan, initially planned for $125m, and a private placement to raise longer-term money. Critically, it decided to do both at once.

To take up as little management time as possible, the road show was packed into 10 days. According to Mr Ramirez: “Our biggest concern was the constraints it would put on Petrotemex’s management. Could they handle syndicating and being in two markets at the same time? But they were willing to undertake the effort, so we started the road show [for the private placement] on the west coast, and then moved eastward and handed over the baton to the syndicated loan side and finished off in Mexico. It all took a little over a week.”

The beauty of the syndicated loan side was that there were no competing deals in the market at that time. The first-to-market advantage was decisive. The $125m loan raised in excess of $250m in general syndication (and was ultimately upsized to $165m) – closing on June 16.

The private placement, meanwhile, was increased from $100m to $115m after being two times oversubscribed. Strong sentiment in the bank market had a spillover effect on the bond financing. Mr Mauleon says: “The strength of the syndicated loan market allowed the company a lot of flexibility in deciding the size and the road ahead regarding the private placement; it gave us a lot of confidence going into the private placement discussions.”

A derivatives option had been included from the start. “The key issue was interest expense,” says Rodrigo Collada, director, corporate risk management and derivatives. “Keeping long-term financing in fixed rates may be very costly in terms of cashflow, so we swapped the full amount of the private placement into a floating transaction at very attractive levels for the company, reducing the expected interest expense. We were able to achieve it just in time before the US Federal Reserve moved – right before everything moved – and we did a forward starting swap, just for them to catch a good moment in rates.”

The most serious dilemma for the company ended up being which money to take. “I think the most difficult part of the whole transaction for the company was deciding the trade-off between longer tenor and slightly higher pricing, and shorter-dated syndicated loans at cheaper pricing,” says Mr Ramirez.

Mr Mauleon adds: “We raised more money than the $300m in terms of targets because we were significantly oversubscribed on both markets. So we were able to lever the company into saying ‘I’m going to do less of a private placement or more of a syndicated loan,’ because both transactions had been successful. And we were able to execute a better deal for them, from a pricing point of view, in both markets, by doing that.”

It was the best of both worlds, and Barclays had been able to put the whole package on the table. Says Mr Gonzalez: “I think Petrotemex liked the fact that it was a one-stop-shop opportunity, in which Barclays was willing to provide the three elements of the equation: to be one of the lead arrangers of the syndicate, one of the lead arrangers of the private placement and the sole executor of the interest rate swap.”

The bank’s history with Petrotemex certainly helped get the company on-board. If an ongoing dialogue carried favour with Petrotemex, so did Barclays’ success in pulling off the 2002 deal in much more tumultuous market conditions. “We had executed for them in more difficult times,” says Mr Mauleon. “So I think that ultimately helped swing the balance in our favour vis-ŕ-vis our competitors.” He claims there were at least two, possibly three, other firms pitching for the deal.

But team work was also critical to making the key recommendations quickly. The team, while touting different products, sit together on the trading floor in BarCap’s Park Avenue offices.

“When we began to discuss the alternatives it was pretty easy for us from a team point of view,” says Mr Mauleon. “We’re listening to each other’s conversations and when we come up with a strategy, we get feedback from the different areas immediately. We were able to put together very quickly the thoughts of the different groups and provide some flexibility as to the different alternatives.”

Nor do they compete internally between different products, Mr Ramirez points out. “We were equally happy if the company decided to do more in one market or another,” he says.

More of the same

The plan is to do more of the same deals. “Our mission is to do more of these trades, exactly in the same way,” says Mr Mauleon. “So we look at different markets, we look at different structures and we try to put them together in a simultaneous fashion.”

Working closely together will be more important than ever then. “When you’re in Latin America, and you’ve seen the volatility and the cycles that we’ve gone through, where sometimes the market shuts down for two or three months or even more at a time, pulling everything together and getting it done quickly is important,” says Mr Mauleon. “The one thing you don’t have in our region is time.”

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