Rising commodity prices are softening the impact of the credit crisis in Latin American markets, writes Luis Waldmann.

For international banks, expensive food and metals are insulating Latin America from the lending crisis. They are betting on commodities-related deals here while coping with losses at home.

“The liquidity crisis that started in the US mortgage market one year ago brought opportunities,” in structured commodity finance in Latin America, claims Sadia Ricke, global head of mining finance and structured commodity finance at Société Générale Corporate & Investment Banking (SG CIB).

Ricke adds that the turmoil in credit markets has made loans available in the region shorter-dated, pricier and with tighter structures.

In Brazil, home to the bulk of SG CIB’s structured commodity finance portfolio in Latin America, competition among lenders is strong. Banks that never previously specialised in financing natural resources, as well as hedge funds, are increasingly betting on this market, she comments.

“We did not see the impact of the crisis right away in Brazil, where liquidity remains very very strong and competition remains very very fierce,” says Ricke, who eyes opportunities in the sugar, soybean and meat markets in Brazil.

To Ricke, SG CIB”s structured commodity loans have become all the more attractive for local companies and farmers seeking to raise output to catch up with the booming economies of Brazil, Peru, Colombia and other countries.

The bank is also bullish on metals and mining in Peru, where borrowers are eager to come to international lenders for structured commodity credit because local banks have seen their cost of funds climb, she says.

According to IMF projections, the Peruvian economy will expand 6.95% in 2008, whereas Brazil’s GDP will rise 4.75%. Economic growth in the US is expected to be 0.52% this year.

Looking ahead, SG CIB projects that sugar and ethanol prices will remain at an elevated level through 2008, in line with a strengthened real adding to the cost of Brazilian producers. Soy prices are to follow suit in 2008 and 2009 due to strong Chinese demand and hedge funds actively trading the commodity. Conversely, metals prices will ease in 2009 and 2010 as supplies are slated to rise.

Fortis, the Brussels-headquartered bank, is optimistic on soybeans, sugar, coffee, ethanol and meat, which account for 70% of the bank’s exposure in Brazil, says Sandra Nolasco, head of commodities at Fortis in São Paulo. Lending within Brazil’s metals sector is also on the rise since early 2008, she comments.

SG CIB can grant seven-year tenors to loans and project financing involving oil and gas, metals and mining. In soft commodities, crop financing may be as long as three years but exceptionally up to five years for certain producers.


Cotton, sugar and ethanol

Cotton will be the fastest-growing commodity in ING’s portfolio in Latin America, foresees Mark Wolthuis, head of international trade and export finance in Latin America at ING. That will be followed by orange juice, coffee, metals and petrochemicals.

Still, sugar and ethanol are the most important commodities for the bank in the region. Deals involving sugar and renewable fuels account for more than US$400mn of ING’s exposure in the region, and are 90% sourced in Brazil.

Transactions closed in 2008 include a US$185mn loan for soy and cotton producer Multigrain in Brazil. This four-year financing, provided with Belgium’s KBC, cost 180 basis points plus fees. In a separate transaction, ING teamed up with Standard Bank to lend US$85mn at 300 basis points to tobacco merchant Premium Brazil. The loan is due in 18 months.

“For good deals and good structures there is strong appetite from far away. Not only local banks but international banks are still interested in this type of deals,” Wolthuis says, adding that pricing has climbed from “aggressive” levels seen last year.

Moreover, ING was the sole arranger in a US$140mn soybean-backed syndication to soybean grower IMCOPA in Brazil. The five bank credit included KBC, HSH, Deutsche Bank and BNP.

In general, ING loans supported by soybeans can have three-year tenors or longer when the offtaker is either ADM, Bunge, Cargill, Dreyfus or Noble, says Wolthuis. The longest tenor for sugar is seven years, and 18 months for tobacco and coffee.

ING, which is based in Amsterdam, will hire five more people this year to help manage the booming commodities and trade finance business. They will work alongside 12 employees already in Brazil and six in Argentina.

In spite of all the euphoria, dearer commodities are fueling inflation worldwide. Brazil, whose long-term sovereign debt was boosted to investment grade by Fitch and Standard and Poor’s earlier this year, will potentially soothe this in the medium term as fresh investments in ports, roads, rigs and other infrastructure will make additional food and oil reach international markets.