EM Swiss surge takes up slack in dollar market

Fri Mar 7, 2014 2:20pm EST

NEW YORK, March 7 (IFR) - The flood of Chilean Swiss franc bank deals may be reaching a saturation point, but there is room for other Latin credits seeking arbitrage advantages and diversity in a market still offering attractive pricing versus dollar and local currency funding.

At a time when the dollar sector has come to a virtual standstill, Swiss franc deals continue unabated with Chile's Banco BICE becoming the latest Latin American credit to join the queue as it prepares to debut in the currency after mandating Deutsche Bank and UBS.

This year has already seen Latin American borrowers raise CHF1.4bn (USD1.57bn) in the currency and more could be on the way if cost advantages remain in issuers' favour.

Chilean banks have largely taken centre-stage, partly due to the country's single A rating - the highest in Latin America. This brings greater comfort levels to conservative investors seeking a pick-up to European comps.

For instance, Santander Chile, rated Aa3 by Moody's and A+ by Fitch, raised CHF300m in January through a 3.5-year at mid-swaps plus 68bp that still looks alluring against the 40bp-45bp on bonds issued by similarly rated French banks.

"Investors recognized Santander in the name, but it was from Chile, which, on a sovereign level, has a high rating and its economy is doing well," said Slaven Maligec, head of Swiss syndicate at BNP Paribas. "I doubt Santander Spain could achieve this pricing and size."

BIGGEST FUNDING SOURCE

Top-rated supra-nationals like CAF and Cabei, as well several Chilean banks, also benefit from having their paper qualifying for use in the repo market, attracting treasury demand in the process, said a banker.

For Banco de Chile, rated Aa3 by Moody's and A+ by S&P, the Swiss market has become its largest funding source in the international market, having raised more than CHF1bn (USD1.2bn) over the years.

By tapping this niche market, the bank has not only achieved more competitive funding costs than it would have realised in the dollar market, but it has also seen yields tighten along its local curve after it demonstrated that it had access to other financing sources.

"We found that the cost of the cross currency from Swiss francs to local currency is in line with our local benchmark here," said Sergio Karlezi, head of treasury at Banco de Chile.

The five-year cross-currency swap to go from Swiss francs to dollars is now back down to 25bp from 50bp last year, but nowhere near the zero costs seen in 2008, Maligec said.

"Cross currency is the main driver," said Maligec. "Historically, it is still poor, but it has improved from the ugly levels of last year."

LatAm banks have also taken a shine to the Swiss market as they can avoid the larger size thresholds required in a dollar market, which typically demands a premium for smaller illiquid deals.

This works to the benefit of many issuers that have limited funding needs, but still want to diversify their investor bases in tenors unavailable in dollars.

"The market is very flexible," said Marcelo Delmar, managing director of Latin America debt capital markets at BNP Paribas. "You can do odd maturities that fit into amortization profiles. The dollar market is like going to McDonald's. There is a menu of five, seven and 10 years and nothing in between."

Momentum may be fading somewhat as Swiss buyers suffer some indigestion after gorging on Chilean names, but bankers believe that other issuers from top-notch LatAm sovereigns could find a welcome reception in Switzerland.

This is especially true of Mexican issuers that saw Moody's upgrade their country to A3 earlier this is year. "We have seen America Movil and Pemex tap this market, but no financials yet," said a banker. "I wouldn't be surprised if we saw one soon."