Image as big credit risk fading for Latin America

August 29, 1994|By Bloomberg Business News

NEW YORK -- International bankers are still a long way from making the sort of big loans to Latin American governments that saddled them with huge losses in the 1980s.

Yet they're getting closer.

Last week, the Argentine government said that Chemical Banking Corp. and Credit Suisse would arrange a $500 million loan to help finance debt payments, the first major credit to a Latin government since the early 1980s.

Latin lending ground to a halt in 1982 when Mexico threatened to default on its debt. Other countries followed suit, leading to billions of dollars in loan losses for banks around the world.

However, "one deal does not a trend make," warned Brian O'Neill, a senior vice president who heads corporate finance in Latin America for Chase Manhattan Corp., which has offices across the region.

"A lot of bankers -- U.S., European, Japanese -- lost a lot of money in the early '80s, so clearly nobody's keen on seeing that happen again," he said.

Still, there's no doubt their interest is picking up. Chilean Finance Ministry officials say they are regularly approached by foreign bankers offering loans they don't even want on favorable terms.

Among the most skittish are Japanese and European banks. They're still smarting from the debt crisis and are wary of the risks posed by Latin American countries, despite widespread political and economic reforms that have sparked the rosiest economic outlook in decades for much of the continent.

"I can't see [European] banks putting these loans on their books again -- their boards wouldn't tolerate it," said an executive at Lloyds Bank PLC who is involved in rescheduling such debt. Lloyds, Britain's fifth-largest bank, was forced to set aside nearly 3 billion pounds ($4.59 billion) against its Latin American loans between 1987 and 1989 alone.

"We've only recently finished writing off and restructuring the nonperforming Argentine debt on our books," added a spokesman for Sakura Bank, Japan's second-largest bank in terms of assets.

That seems to be the general sentiment. Banks in the world's 10 richest countries saw claims in Latin America drop by $1.1 billion in the first quarter, compared with a $2.3 billion increase in the last three months of 1993, according to the Bank for International Settlements, in Basle, Switzerland.

"Our appetite for going back is limited," said an official at Barclays PLC, the parent of Britain's biggest retail bank.

Many U.S. bankers, though, don't share their foreign cousins' qualms. They're attracted by the actions of governments in Argentina, Chile, Mexico, Brazil and elsewhere, which have restructured debts and imposed strict economic policies aimed at taming inflation, cutting government spending and selling state-owned businesses to the private sector.

Even their enthusiasm so far has strict limits. Rather than carrying massive loans on their books, the lending will be handled by syndicates. The Argentina credit, for example, will be split among 10 to 14 banks, reducing the risk to any single bank. Thus Chemical will limit its exposure to about $50 million.

"The key to [the Argentine loan] is the word syndicated. This credit won't sit on Chemical's balance sheet," said David Berry, an analyst with Keefe, Bruyette & Woods, a brokerage firm that specializes in banks.

Moreover, while Argentina didn't formally tie the loan to any specific source of revenue, bankers expect it will be paid back with the proceeds from the expected sale of government stakes in several natural gas companies.

"We're not going back to the 1980s or 1970s," said Larry Miller, Chemical Bank's senior managing director for Latin America. "This is a very different kind of animal."

With bank credit largely unavailable, Latin American countries have increasingly turned to bond sales to raise the capital they need. That's fine by the banks, since they earn fat fees from underwriting the bonds and aren't left with any risk at the end of the day.

Last year, Argentina, for example, borrowed $6.47 billion, 99 percent in the form of bond sales, according to the Organization for Economic Cooperation and Development.

Over the past few years, international banks began edging back into the Latin American market by making project loans to companies based there. J. P. Morgan & Co., for instance, has lent money to build new factories for Latin companies, but most were bridge loans -- debts supposed to be repaid quickly from the proceeds of bond sales.

Most new loans, whether to companies or governments, will be tied to projects that will produce the cash needed to pay them off, said Bruce Magid, who heads BankAmerica Corp.'s corporate finance business in Latin America.

"We're not planning to become a provider of loans to sovereign," that is, government borrowers, he said. BankAmerica's Bank of America unit suffered huge losses from Latin American loans gone bad in the 1980s.

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