An Understanding of the Capital Markets
By: Mario Espinosa
Managing Director and Co-Head of Latin America Credit Markets
The Financial Professionals Forum 2012
1
Table of Contents
1. Capital Markets Overview
3
2. Alternatives for Corporate Debt Financing
12
3. Banking Environment
14
4. Citi’s Presence and Franchise
19
The Financial Professionals Forum 2012
1. Capital Markets Overview
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
GDP Growth
Equity Performance EM vs. Industrialized Nations
8.0%
6.2%
6.0%
5.7%
6.0%
40%
4.2%
4.1%
4.0%
2.0%
1.7%
20%
3.3%
2.9%
--
2.8%
2.2%
1.3%1.5%
60%
2.2%
2.1%
1.6%
1.3%
0.7%
(20%)
(40%)
(60%)
0.0%
2011
2012F
-0.4%
2013F
(80%)
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
-2.0%
Global
U.S.
LatAm
Developed Nations
Eurozone
Emerging Markets
U.K.
U.S.
Brazil
China
India
The Financial Professionals Forum 2012
2
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 2011-2012 minus %Growth 2000-2007)
The Financial Professionals Forum 2012
3
Introduction to Financing Alternatives in the Debt Markets
Corporates, Governments, Quasi Sovereigns and Financial Institutions have three
main sources for securing financing…
Hedge
Funds
Pension
Funds
Private
Banks
Corporates
Local Banks
Regional Banks
QuasiSovereigns
International Banks
Asset
Managers
Insurance
Companies
Financial
Institutions
Governments
Regional
Banks
Hedge
Funds
Local
Pension
Funds
Asset
Managers
International
Bond
Markets
Regional
Banks
Regional
Markets
Insurance
Companies
International
Banks
Local Banks
Syndicated
Loan
market
The Financial Professionals Forum 2012
4
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
Who Do We Work With?
– CMO works closely with coverage in
Investment & Corporate Banking, Product
Partners in Equity and Fixed Income and
with Syndicate.
Why Access the Market?
Issuer
 Refinancing; M&A; Growth Capital ;Capital
Structure Optimization
Investment Bank / Corporate Bank
Issuer Considerations
Equity Capital Markets
 Financial Impact; Ratings; Regulatory;
Tax Legal
Syndicate
Sales and Trading
Market Considerations
 Public vs. Private; USD vs. Non-USD;
Institutional vs. Retail; Size, Timing,
Maturity; Marketing; Market Conditions
Capital Markets Origination
Private
Public
Investors
CMO Product Partners
•
•
•
•
•
Derivatives
New Products
Liability Management
Structured Bonds
Capital Strategies
The Financial Professionals Forum 2012
5
Historical Debt Issuance in LatAm DCM
International LatAm Capital Markets
Regional LatAm Bond Markets
▲ 05-11 CAGR: 17.9%
▲ 05-11 CAGR: 2.6%
90.7
80.0
94.4
35.0
69.5
67.2
60.0
42.7
40.0
35.1
33.9
19.5
Volume (US$ BN)
Volume (US$ BN)
100.0
20.0
29.6
28.0
25.2
24.1
21.0
13.8
14.0
0.0
2005
2006
2007
2008
2009
2010
2011
2012
2005
Syndicated LatAm Loan Market
2006
▲ 05-11 CAGR: 6.9%
74.2
63.0
51.5
43.3
46.5
44.3
40.0
22.2
20.0
Volume (US$ BN)
82.9
60.0
2008
2009
2010
▲ 05-11 CAGR: 10.3%
200.0
80.0
2007
2011
2012
Cumulative LatAm Credit Markets
100.0
Volume (US$ BN)
18.8
17.8
17.8
7.0
0.0
186.9
164.6
160.0
132.2
120.0
143.3
131.6
110.5
103.6
84.8
80.0
40.0
0.0
0.0
2005
2006
2007
Source all graphs: Dealogic as of August 2012
6
29.5
2008
2009
2010
2011
2012
2005
2006
2007
2008
2009
2010
2011
2012
The Financial Professionals Forum 2012
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
Cons
▲ Largest pocket of liquidity
▼ Ratings required
▲ Longest possible tenors (30 years and Perps)
▼ Standard terms for draw downs (only one) and
prepayment (bullet)
▲ 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
▼ Limited prepayment flexibility
▼ Typically more expensive than bank financing
The Financial Professionals Forum 2012
7
Traditional International Capital Markets (Cont’d)
International Issuance Breakdown 2012 YTD
Country
Sector
Tenor
12%
5%
21%
3%
4% 2%
15%
5%
6%
50%
52%
19%
60%
24%
Brazil
Mexico
Peru
Colombia
Chile
Other
Corporate
Sovereign
Financial
22%
>7-10 years
2-3 years
< 2 years
>10 years
Perp
>3-5 years
>5-7 years
Source all graphs: Dealogic as of 2012YTD
The Financial Professionals Forum 2012
8
LatAm Syndicated Loan Market Review
LatAm Loan Spreads
LatAm Loan Share by Tenor
Average spreads in 2Q’12 have come down
from the previous quarter
Tenors between 1 to 5 years remain
most tapped
Source all graphs: Dealogic as of 2Q 2012
The Financial Professionals Forum 2012
9
LatAm Syndicated Loan Market Review (cont’d)
LatAm Issuance by Loan Type
LatAm Loan Issuance by Purpose 2Q’12
Term Loans comprise bulk of LatAm
lending in 2Q’12
Project and Trade Financing comprise over half
of issuance in 2Q’12
4%
3%
Project Financing
5%
Trade Financing
6%
31%
Acquisitions
Refinancing
7%
Other
GCP
8%
Repayment
ECA
Capex
11%
25%
Other denotes: Bridge Facilities, Export Credit, Mezzanie Loans, Buyer Credit and L/C Facilities
Other denotes: Working Capital, Debt CP Support, Dividend Recapitalization and Shipping
Source all graphs: Dealogic as of 2Q 2012
The Financial Professionals Forum 2012
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2. Alternatives for Corporate Debt Financing
Understanding the Company’s Objectives
International Bond Market
Syndicated Loan Market
Upside
Upside
▲ Largest pocket of liquidity
▲ Relationship focused
▲ Longest possible tenors (10, 30 years)
▲ Experience in assessing risks and projected
cashflows
▲ Structural flexibility
– Non-Investment Grade: Incurrence
Covenants
▲ Prepayment flexibility
▲ Taps into Mexican bank peso liquidity
– Investment Grade: No financial
covenants
Downside
– No need to pledge security
▼ Amortization payments
Downside
▼ Ratings required
▼ One Draw Down and One Payment
▼ Maintenance covenant packages
▼ Shorter tenors than bond market
▼ Cross sell required by banks to meet
returns
▼ Often requires asset or stock security
The Financial Professionals Forum 2012
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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
 For a typical US C-corporation,
increasing leverage provides a
‘tax shield’ by reducing taxable
income with interest expense
 More leverage implies a higher
likelihood of financial distress
Possible
Financial
Distress
 Possible costs include:
– Diverting management’s focus
– Loss of capital markets access
– Suppliers and clients reluctant
to do business
Increased
Cost of
Capital
Loss of
Financial
Flexibility
Costs
Tax
Shield
 Higher leverage = lower credit
ratings and higher cost of debt
 Value of tax shields depends on
the company’s ability to generate
positive earnings
 Estimated by (tax rate * taxable
income after considering NOLs)
 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)
– Provides a benefit to the
company’s cost of capital
Improved
Incentives
 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
Benefits
The Financial Professionals Forum 2012
12
3. Banking Environment
European Banks’ Key Indicators: Snapshot
Market Cap of Top 30 EU Banks (1)
More Than Halved
Credit Ratings Have Been Adjusted (2)
Loss in Market Cap: 61%
1,200
1,174
1,020
500
Total Return of Euro
Stoxx Banks since Jan
2006: (69.8%)
1,000
400
727
700
300
600
469
461
200
400
408
100
200
-
0
2006
2007
2008
Market Cap European Banks
2009
2010
2011
2012YTD
EURO STOXX BANKS - Performance
Source: Moody’s, SNL, Bloomberg, FactSet as of June 25, 2012.
Notes: (1) 30 largest listed European banks, by market capitalisation as at June 25, 2012.
(2) Moody’s ratings of main operating banking entities.
13
Price (EUR)
Market Cap (ERU bn)
800
BBVA
Banco Santander
Bank of America ML
Danske Bank
OTP
RBS Plc.
Citibank N.A.
Lloyds TSB Bank Plc.
UBS
Barclays Bank Plc
BNP Paribas
Credit Agricole
Deutsche Bank
Intesa Sanpaolo
KBC Bank NV
Societe Generale
UniCredit
Credit Suisse
DnB
Erste Bank
JPMorgan Chase Bank N.A.
Morgan Stanley Bank N.A.
Natixis
Nomura Holdings Plc.
Royal Bank of Canada
Goldman Sachs Banks USA
Nordea
Macquarie Bank
Dec. '07
Aug. '12
Notches
Aa1
Aa1
Aaa
Aa1
A2
Aaa
Aa1
Aaa
Aaa
Aa1
Aa1
Aa1
Aa1
Aa2
Aa2
Aa1
Aa2
Aa1
Aa1
Aa3
Aaa
Aa3
Aa2
A3
Aaa
Aa3
Aa1
A1
Baa3
Baa2
Baa2
Baa1
Ba2
Baa1
A3
A2
A2
A3
A2
A2
A2
Baa2
A3
A2
Baa2
A2
A1
A3
A2
Baa1
A2
Baa3
Aa3
A3
Aa3
A2
(9)
(7)
(8)
(6)
(6)
(7)
(5)
(5)
(5)
(2)
(4)
(4)
(4)
(6)
(4)
(4)
(6)
(4)
(3)
(3)
(5)
(4)
(3)
(3)
(3)
(3)
(2)
(1)
European Banks
Non-European Banks
The Financial Professionals Forum 2012
Banking Sector – the New Norm?
Change in Banking Sector Drivers
New World
Old World
1
Strong credit
fuelled growth
1
Low growth & pressure
from sovereign crisis
2
Low provisions
2
Deteriorating asset
quality
3
Robust NIMs
3
Record low interest
rates
4
Light touch
regulation
4
Higher capital
requirements /
deleveraging needs
5
Abundance of
liquidity
5
Higher funding costs
and liquidity
requirements
Higher
leverage
=
Maximize
RoE
Lower
leverage to
reduce risk
=
Lower RoE
The Financial Professionals Forum 2012
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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
The Financial Professionals Forum 2012
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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 $100MM Unsecured 5yr Loan to
maintain Returns on Risk Rated Capital
10.0%
~ 250 bps
Illustrative
HY
IG
9.5
9.0
75 to 100 bps
Lowest
Cost
(Basel I)
Basel I
Lowest
Cost
(Basel II)
Cost of Capital (%)
Basel II / III
8.5
8.0
0
10
20
30
40
0 bps
-30 to -20 bps -30 to -20 bps
50
60
AA
A
BBB
BB
B
Total Debt / Total Capitalization (%, Market Value)
The Financial Professionals Forum 2012
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How Much Capital Will Banks be Required To Hold?
11%
9.5%
8.5%
7%
6%
4.5%
5%
Basel III Minimum + Buffer + G-SIB Surcharge
6%
Basel III Minimum + Buffer + GSIB Surcharge (2.5%)
Basel III Minimum + Buffer
Basel III Minimum + Buffer
(2.5%)
Basel III Minimum
Basel III Minimum
Basel I Minimum
Basel I Minimum
Tier 1 Common
Tier 1 Capital
The Financial Professionals Forum 2012
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4. Citi’s Presence and Franchise
Citi’s Presence in LatAm & CCA
International Bonds LTM
Ranking
Bookrunner
Proceeds
(US$MM)
No.
Deals
Domestic Bonds LTM
Share
Ranking
Bookrunner
Syndicated Loans LTM
Proceeds
(US$MM)
No.
Deals
2,965
27
11.8%
1
2,908
38
11.6%
2
3
Share
1
Deutsche Bank
14,583
35
13.9%
1
2
HSBC
12,687
43
12.1%
2
12,261
40
11.7%
3
HSBC
2,226
26
8.9%
10,283
33
9.8%
4
BBVA
2,153
37
8.6%
3
4
JPMorgan
Itau BBA
Source: SDC Thomson Reuters as of April 14, 2011
5
Credit Suisse
9,213
27
8.8%
5
Bradesco BBI
1,851
19
7.4%
6
BAML
7,009
28
6.7%
6
Santander
1,823
29
7.3%
7
Morgan Stanley
5,331
16
5.1%
7
Banco do Brasil
1,495
10
6.0%
8
Santander
5,137
16
4.9%
8
BTG Pactual
1,449
14
5.8%
9
Goldman Sachs
4,136
16
3.9%
9
BCP
588
13
10
Itau BBA
3,587
19
3.4%
10
Bancolombia
417
9
Ranking
4
No.
Deals
Share
2,990
21
6.5%
HSBC
2,226
11
4.9%
Itau BBA
1,966
15
4.3%
1,578
6
3.5%
Bookrunner
BNP Paribas
Proceeds
(US$MM)
5
JPMorgan
1,478
11
3.2%
6
Sumitomo Mitsui
1,200
8
2.6%
7
BBVA
1,178
6
2.6%
8
Credit Agricole
1,118
8
2.4%
2.3%
9
ING
974
7
2.1%
1.7%
10
BAML
936
6
2.1%
Source: Dealogic as of August 21, 2012
The Financial Professionals Forum 2012
18
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