Corporate Financing Trends and Balance Sheet Risks in Latin America
IMF Working Papers, January 22, 2015
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Bibliographic details
- Authors: Fabiano Rodrigues Rodrigues Bastos, Herman Kamil, Bennett W Sutton
- Published: January 22, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498307802.001
Overview
- Easy global liquidity conditions, stronger risk appetite and a retrenchment in cross-border bank lending led to a surge in emerging market firms’ bond issuance in international markets (termed “The Bon(d)anza”).
- Study uses firm-level data for five large Latin American economies to document changes in external funding strategies, liability structures, and balance sheet risks after 2010.
- Stepped up bond issuance was mostly aimed at re-financing rather than funding investment projects.
Key findings
- Bond issuance objectives and maturity:
- Firms extended the average duration of their debt while securing lower fixed-rates.
- The changes reduced roll-over and interest rate risks.
- Currency composition and leverage:
- Shift towards safer maturity structures coincided with a leveraging-up in foreign-currency-denominated financial debt in several countries—reversing a de-dollarization trend seen during the last decade.
- For some corporations, rising dollar debt and high leverage will be particularly taxing in an environment of US dollar strengthening, less buoyant commodity prices and slowing domestic activity.
- Issuance channels and motivations:
- A substantial part of bonds were issued through offshore vehicles, suggesting regulatory and tax arbitrage strategies.
- Use of proceeds:
- Bond proceeds were primarily used for re-financing rather than financing new investment projects.
Balance sheet risks and vulnerabilities
- Increased foreign-currency exposure:
- Higher levels of dollar-denominated financial debt raise balance sheet vulnerability to US dollar appreciation.
- Sectoral and macro linkages:
- Risks are amplified by simultaneous pressures from commodity price weakness and slowing domestic demand in some economies.
- Risk reduction trade-offs:
- Lower roll-over and interest rate risks came at the cost of greater exchange-rate exposure and higher foreign-currency leverage.
Issuance patterns and structural implications
- The Bon(d)anza characterization:
- Easy liquidity and improved risk appetite drove increased access to international bond markets for emerging market firms.
- Offshore issuance:
- Evidence that a substantial share of issuance was routed through offshore vehicles, indicative of regulatory and tax arbitrage considerations.
- Implications for de-dollarization trends:
- The surge in foreign-currency bond issuance reversed prior de-dollarization trends observed in the previous decade.
Policy implications and considerations
- Monitor currency and maturity composition of corporate debt:
- Authorities should track foreign-currency-denominated debt accumulation and its distribution across firms and sectors to assess systemic vulnerability.
- Consider regulatory and tax frameworks:
- Offshore issuance through special-purpose vehicles points to possible regulatory and tax arbitrage; review of frameworks could mitigate incentives for excessive external currency exposure.
- Prepare for adverse external scenarios:
- Policymakers should assess corporate sector resilience under scenarios of US dollar strengthening, weaker commodity prices, and slowing domestic activity.
- Corporate risk management:
- Encourage firms to manage currency mismatches and leverage, balancing roll-over and interest rate risk reduction against exchange-rate exposure.
Fabiano Rodrigues Rodrigues Bastos, Herman Kamil, and Bennett W Sutton. "Corporate Financing Trends and Balance Sheet Risks in Latin America", IMF Working Papers 2015, 010 (2015), January 22, 2015, https://doi.org/10.5089/9781498307802.001