Chapter

III Recent Developments in Private Market Financing

Author(s):
International Monetary Fund
Published Date:
January 1993
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Private market financial flows to developing countries continued to increase during the past year, although experience was highly uneven across market segments and across countries. The volume of securitized flows reached unprecedented levels, while the range of borrowers with access to private market financing broadened further. The structure of securitized flows shifted markedly toward bond financing, as borrowing in the international bond market recovered strongly following a market correction in the final quarter of 1992. In contrast, the volume of international equity issues by companies from developing countries declined sharply in the second half of 1992 and remained subdued during the first half of 1993. Activity in the syndicated loan market continued to focus on countries that avoided debt-servicing difficulties during the 1980s, although there were signs of renewed interest in other borrowers on a highly selective basis. Finally, international investors have begun to invest sizable amounts in local currency-denominated debt instruments.

Bonds

With issuance activity in the international bond market reaching record levels owing partly to a general decline in long-term interest rates, investors have demonstrated an increasing appetite for high-yielding sub-investment grade debt. In this particularly favorable environment, issuance activity by developing country borrowers almost doubled during 1992. Volume increased further in the first half of 1993 and reached an historical high of $21.7 billion, nearly twice the amount in the second half of 1992 (Table 8).10 In relative terms, developing country borrowers continued to increase their share in global primary activity; in the first half of 1993, they accounted for 8.7 percent of total international bond issues, up from 7.1 percent in 1992 and 4.2 percent in 1991. The range of borrowers also widened as an increasing number of private sector borrowers from 18 developing countries tapped the international bond market. Consequently, the concentration of the issuer base declined somewhat, as issuers from the five largest borrowing countries accounted for 69 percent of total issuance activity by developing countries during the first half of 1993, down from 75 percent during the two previous years.

Table 8.International Bond Issues by Developing Countries and Regions1(In millions of U. S. dollars)
1989199019911992First Half

1993
Developing countries and regions5,4876,16412,42823,52621,718
Africa15990236725
Algeria15990
South Africa236725
Asia1,6011,6303,0005,8465,430
China1151,2891,057
Hong Kong19366100185657
India450274227
Indonesia1758036949330
Malaysia425500
Philippines345
Singapore105
South Korea2581,1052,0123,2082,014
Taiwan Province of China1001606036
Thailand17612791
Europe2,1711,8561,9604,5624,120
Bulgaria101
Czechoslovakia, former375277129
Czech Republic375
Hungary8798881,1861,2421,642
Turkey1,1905934973,1912,103
Middle East7234001,000
Israel7234001,000
Western Hemisphere8332,5896,83212,39211,167
Argentina217951,570941
Brazil1,8373,6552,962
Chile200120333
Colombia325
Mexico5702,3063,3735,9165,932
Panama50
Trinidad and Tobago100
Uruguay100140
Venezuela263262578932535
Memorandum items
Issue under Euro-medium term note (EMTN) programs3751,165710
Argentina4050
Brazil110110
Mexico375615550
Venezuela400
Total bond issues in international bond market255,800226,556297,588333,693249,317
Share of developing countries and regions in global issuance (in percent)2.12.74.27.18.7
Sources: IMF staff estimates based on International Financing Review, Euroweek, Financial Times, and OECD.

Western Hemisphere borrowers continued to account for more than half of total issuance activity by developing country borrowers, raising $11.2 billion during the first half of 1993, compared with $12.4 billion in 1992 as a whole. The market for Latin American Eurobonds was able therefore to recover strongly from the market correction that occurred in the fourth quarter of 1992; yields generally declined from their late-1992 peaks and the size of several issues was increased because of strong demand.

Mexico has maintained its position as the leading developing country borrower. During the first half of 1993, it raised some $5.9 billion, as much as it raised in 1992 as a whole. A series of ground-breaking issues were involved. Cemex, Mexico’s largest cement producer, successfully placed a $1 billion issue, the largest ever Eurobond issue by a Latin American borrower; TMM, Mexico’s largest shipping company, became the first Latin American private sector borrower to tap the domestic U.S. bond market (“Yankee” market) with a $200 million issue of ten-year notes; and the United Mexican States launched Latin America’s first Samurai issue since the debt crisis with a ¥10 billion three-year issue. Several issues featured novel structures including collared floating rate notes (FRNs), embedded warrants, and export receipt securitization. Brazilian entities, including a number of private sector banks, resumed their borrowing in the international bond market after a hiatus in the second half of 1992 and raised some $3.0 billion. Venezuelan issuers, including the treasury, stepped up their borrowing activity as well, but had to accept wide yield spreads (446 basis points above reference rates during the first half of 1993) to ensure placement of their paper in the face of market concerns with political developments.

The range of Western Hemisphere borrowers with access to the international bond market broadened further in 1992 and the first half of 1993 to include Chile, Colombia, Guatemala, Trinidad and Tobago, and Uruguay. Colombia joined the ranks of re-entrant countries in April 1993 when the Republic successfully placed a $125 million five-year Eurobond at a spread of 215 basis points over U.S. Treasury bonds. This was followed by two further issues, including one for Colombia’s state-owned oil company (Ecopetrol) that placed $150 million of five-year Euronotes at 218 basis points above comparable U.S. Treasury bonds. Guatemala’s Asociación Nacional del Café raised $60 million through five-year bonds, which, in addition to being guaranteed by the Republic, were reportedly partially collateralized with coffee export receivables.

Asian borrowers also continued to expand their bond issuance activity and generally commanded favorable borrowing terms. During the first half of 1993 they raised the equivalent of $5.4 billion, compared with $5.8 billion in 1992 and $3.0 billion in 1991. Chinese and South Korean borrowers continued to account for the bulk of Asian issues. South Korean entities continued to constitute the largest group of Asian borrowers, raising $2 billion during the first half of 1993 at a yield spread of 84 basis points above reference rates. During the same period, Chinese public sector entities raised the equivalent of $1.1 billion at a yield spread of only 58 basis points, a significant improvement over 1992. Thai borrowers also increased their recourse to the international bond market and commanded favorable terms. The Philippines made a successful return to the international capital markets after an absence of a decade; a $150 million three-year note was issued in February priced at 320 basis points above U.S. Treasury bonds. This was followed by a $175 million Euronote issue in June 1993 for the Development Bank of the Philippines.

European developing countries also significantly stepped up their borrowing, raising the equivalent of $4.1 billion during the first half of 1993, compared with $4.6 billion in 1992 and $2 billion in 1991. Turkey was the third largest developing country issuer during the first half of 1993, raising $2.1 billion. Most issues involved the public sector, which tapped a wide range of markets, including the deutsche mark, U.S. dollar, and yen sectors. The National Bank of Hungary also expanded its borrowing activity, raising $1.6 billion during the first half of 1993, compared with $1.2 billion in both 1992 and 1991. The Czech National Bank launched its debut issue in March 1993, a $375 million three-year Eurobond issue priced to yield 270 basis points over U.S. Treasury bonds, while the Slovak National Bank entered the market in September 1993, raising $240 million in a private placement. Finally, Israel raised $1 billion on exceptionally favorable terms through the issuance of bonds guaranteed by the U.S. Agency for International Development (AID) in March 1993. The notes were issued in the context of a $10 billion loan guarantee program, under which Israel can borrow up to $2 billion annually until 1998.

The share of sovereign borrowers in developing country issuance activity recovered from the low level recorded in 1992, reaching 30 percent during the first half of 1993 as re-entrant countries (including Colombia, the Czech Republic, and the Philippines) tapped the market through sovereign issues, while other sovereign borrowers floated large issues to lock in low interest rates (Table A4). During the same period, private sector borrowers continued to account for more than 39 percent of developing country issues. The range of private sector borrowers broadened further and included borrowers from countries whose private sector entities were not previously active issuers, including Chile, Colombia, the Philippines, and Uruguay.

Terms on new issues improved for most issuers during the first half of 1993 (Table A5) as the selling pressures that marked the market correction in the final quarter of 1992 were relieved. The decline in U.S. long-term interest rates and the continued broadening of the investor base significantly contributed to this process. Spreads in the secondary market for developing country bonds generally followed a similar pattern (Chart 3). For example, the average yield spread for Mexican public sector borrowers, which rose from 197 basis points in the second quarter of 1992 to 288 basis points in the fourth quarter of 1992, declined to 198 basis points during the first half of 1993.

Chart 3.Secondary Market Yield Spreads on Bond Issues by Selected Developing Countries1

(In percent)

Sources: Reuters; and the Wall Street Journal.

1The chart reflects the spread of a single bond issue for each country. The bonds chosen had roughly the same terms to allow for a crosscountry comparison. In the case of Mexico and Korea, the bonds were issued in the first half of 1992 while the bonds for other countries were issued before 1992.

Bond issuance by developing country borrowers continued to be heavily concentrated in three currency sectors, with the bulk of issues denominated in U.S. dollars, yen, and deutsche mark (Table A6). The U.S. dollar sector remained the major funding source for developing country borrowers, particularly from Latin America, thanks to historically low U.S. interest rates and greater receptiveness on the part of U.S.-based investors. In these favorable circumstances, several developing country entities made their debut in the Yankee bond market, while South Korean borrowers consolidated their position as the main developing country borrowing group in this sector. Also, the first intraregional international bond issue in Latin America emerged in March 1993 when Venezuela launched a sovereign issue simultaneously in the domestic Colombian market and internationally. The yen sector, which remained the second largest currency sector for developing country borrowers, was the largest currency sector tapped by European developing countries (including sovereign issues from Hungary and Turkey). It also saw heavy issuance by Asian borrowers, including the Kingdom of Thailand and public sector borrowers from China and South Korea, and the first Latin American issue since the outset of the debt crisis. Finally, the deutsche mark sector was tapped by developing country borrowers from Europe and Latin America.

Although overall recourse to credit enhancement was reduced as the re-entry process consolidated and the creditworthiness of developing country borrowers was generally perceived to have improved, many borrowers continued to use a broad range of enhancement techniques to reduce borrowing costs. Overall, 18 percent of funds raised during the first half of 1993 by developing country borrowers involved such techniques as equity convertibility options, securitization of export proceeds, guarantees by industrial country agencies, early redemption options, or embedded warrants (Table A7). (This was down from 22 percent in 1992 and 30 percent in 1991.) As in previous years, the pattern of enhancement continued to differ significantly among regions. Asian borrowers enhanced 38 percent of their issues (down from 50 percent in 1991 and 1992), mainly in the forms of early redemption and equity convertibility options. Latin American borrowers moved away from use of securitization techniques and early redemption options, but have not yet made significant use of convertible bonds. The amounts raised through enhanced instruments dropped from 36 percent in 1991 and 28 percent in 1992 to 13 percent during the first half of 1993. Among several innovative structures used by Latin American borrowers, a $100 million issue for Nafinsa featured the first ever Latin American public sector Eurobond with warrants to the stocks of an unrelated company. Also, PEMEX raised $366 million through its first asset securitization deal backed by revenues from future oil exports. Elsewhere, Essar Gujarat launched India’s first Euro-convertible bond in July 1993; the bond replaced an initially envisaged equity issue in the face of a weak stock market.

In line with recent patterns in global capital markets, developing country borrowers have shown increased interest in floating rate notes, which accounted for 11 percent of total developing country borrowing in the international bond market during the first half of 1993, up from 5 percent in 1992. In this context, Nafinsa issued Latin America’s first collared floating rate note (under which the coupon rate—LIBOR plus 25 basis points—can fluctuate between a minimum and a maximum). The notes have the shortest maturity (five years) seen in the collared sector to date and offer the highest floor of 6⅝ percent.

In another sign of the gradual consolidation of developing country re-entry to international capital markets, a broadening range of developing country borrowers have been assigned credit ratings by major credit-rating agencies. There has also been an improving trend in previously assigned credit ratings (Table 9). Four developing countries received first-time credit ratings during 1992, of which three were investment grade (Chile, Indonesia, and Turkey). Four others were assigned credit ratings in the first half of 1993, two of which were investment grade. In March 1993, Moody’s upgraded the rating of the Czech Republic from sub-investment grade to Baa3, in part a reflection of the smooth dissolution of the former Czech and Slovak Federal Republic and of the new country’s low debt burden. Colombia became the second Latin American country to be awarded an investment grade credit rating when Standard and Poor’s (S&P) assigned its long-term foreign debt a BBB–rating. In addition, Moody’s assigned a sub-investment grade Ba2 first-time rating to Trinidad and Tobago in February 1993. The Philippines also received a first-time sub-investment grade from both rating agencies in July 1993. Also worthy of note, in December 1992 Chile’s Empresa Nacional de Electricidad became the first Latin American private sector company to secure an investment grade rating from one of the main rating agencies. Finally, in May 1993 the U.S.-based credit rating agency Duff and Phelps awarded the United Mexican States (UMS) its first investment grade rating (BBB) for a planned Samurai issue.

Table 9.Credit Ratings of Developing Country and Region Borrowers1
Moody’s

Rating
S&P

Rating
Recent Changes
SingaporeAa3AA+
Taiwan Province of ChinaNRAA+
KoreaA1A+
ThailandA2A–
MalaysiaA2AMoody’s upgraded rating from A3 in March 1993.
Hong KongA3A
ChinaBaalBBB
ChileBaa3BBBMoody’s assigned a Baa3 rating to Compañía de Teléfonos de Chile in April 1993.
IsraelNRBBB+Standard & Poor’s (S&P) upgraded sovereign rating from BBB in September 1993.
TurkeyBaa3BBB
ColombiaBalBBB–S&P and Moody’s assigned first-time ratings in July and August 1993 respectively.
IndonesiaNRBBB–S&P assigned first-time rating in July 1992.
Czech RepublicBaa3NRMoody’s upgraded rating from Bal in March 1993.
HungaryBa1BB+
VenezuelaBa1BBS&P lowered the Eurobond outlook to negative from stable in April 1993.
(Conversion bonds)Ba1NR
(Par and discount bonds)Ba2NR
IndiaBa2BB+
MexicoBa2BB+S&P assigned first-time rating in July 1992.
(Par and discount bonds)Ba3BB+
Trinidad and TobagoBa2NRMoody’s assigned first-time rating in February 1993.
PhilippinesBa3BB–First-time ratings assigned in July 1993.
ArgentinaB1BB–S&P assigned first-time rating in August 1993.
(Par discounts and bonds)B2
BrazilB2NR

In the fourth quarter of 1992, credit rating agencies began assigning ratings to local currency-denominated debt instruments issued by Latin American borrowers. In December 1992, S&P assigned an implied AA – rating to the senior peso-denominated debt obligations of the United Mexican States.11 S&P also has assigned an implied AA – rating to the senior domestic long-term debt of Chile. Since then, other Mexican peso-denominated instruments have received ratings. Such ratings have typically been above comparable ratings on foreign-currency denominated instruments because of the borrower’s stronger capacity to service local currency-denominated debt than foreign currency-denominated debt.

The trend toward explicitly rating developing country debt instruments and toward an improvement in these credit ratings is important since it helps broaden the investor base for developing country borrowers. This is especially important for a number of large institutional investors, which face internal or government-mandated restrictions against buying unrated or sub-investment grade debt.

Equities

International equity issues by companies from 17 developing countries totaled $4.2 billion during the first half of 1993, compared with $9.3 billion in 1992 and $5.4 billion in 1991 (Table 10). Issuance activity has been subdued since June 1992 mainly because of weak equity prices on most of the main Latin American stock markets (Chart 4). Only a handful of equity issues were brought to the market during the first half of 1993, although signs of revival of the “depositary receipts” sector were observed toward the end of the period, in particular the successful international flotation of $2.1 billion of shares in Yacimientos Petrolíferos Fiscales (YPF) by the Argentine Government in June. This issue was the largest single equity offering by a developing country and one of the world’s largest privatizations. Elsewhere in Latin America, Mexican companies raised $375 million in the international equity market through American depositary receipts (ADRs) and global depositary receipts (GDRs) while Corporación Financiera del Valle launched the first ever international offering from Colombia through a depositary receipt facility.12

Table 10.International Equity Issues by Developing Countries and Regions(In millions of U.S. dollars)
199019911992First Half

1993
Developing countries and regions1,2625,4379,2594,179
Africa143270
South Africa143270
Asia1,0401,0224,7321,478
Bangladesh18
China111,049438
Hong Kong1401,250374
India240
Indonesia633168262139
Korea40200150178
Malaysia382
Pakistan11485
Philippines53159392
Singapore214125272212
Taiwan Province of China54372
Thailand10020914542
Europe124916730
Hungary6891339
Poland1
Turkey563420
Middle East6012760
Israel6012760
Western Hemisphere984,1204,0632,611
Argentina3563722,095
Brazil133
Chile98129114
Colombia27
Mexico3,7643,058375
Panama88
Venezuela283
Global equity issues in international equity market8,15215,54622,63212,854
Share of developing countries and regions in global issuance (in percent)15.535.040.932.5
Source: IMF staff estimates based on IFR Equibase, International Financing Review, and Financial Times.

Chart 4.Share Price Indices for Selected Emerging Markets in Latin America

(IFC weekly price indices, end 1984 = 100; in U.S. dollar terms)

Source: International Finance Corporation, Emerging Markets Data Base.

The number of depositary receipt programs for Latin American companies continued to increase; by the end of June 1993, the stocks of 67 Latin American companies traded internationally through programs involving ADRs or GDRs, 41 more than at the end of 1991. Latin American companies accounted for 16 out of the 29 programs established by developing country companies during the first half of 1993. These companies, which in the initial stages of market re-entry offered securities to U.S. institutional investors through the Rule 144A private placement market, are now increasingly pursuing the option of listing securities directly on the public market.

Issuance activity by Asian companies in international markets rose sharply in 1992 to $4.7 billion, and a further $1.5 billion was raised in the first half of 1993. (Chart 5 shows share price indices for selected emerging markets in Asia.) Companies located in China and Hong Kong remained the two leading groups of Asian issuers. While “B” shares listed in Shanghai or Shenzhen remained the main instrument used by Chinese companies to tap international investors, new instruments listed abroad have been introduced to broaden the investor base. Since 1992, several Chinese companies have floated shares in Hong Kong through Hong Kong-based subsidiaries, which have generally been well received. To tap this investor base and help consolidate Hong Kong’s position among financial centers, Chinese companies in July 1993 began issuing special international stocks or “H” shares that are listed on the Hong Kong Stock Exchange (HKSE).13 H shares permit direct investment in Chinese companies while providing international regulation and settlement. Three Chinese companies listed shares on the HKSE in July; six others are scheduled to issue shares in the near future. Also, Brilliance China Automotive, a Chinese-owned offshore holding company, raised $80 million in 1992 through the first Chinese equity issue listed on the New York Stock Exchange. Elsewhere in Asia, Taiwan’s Chia Hsin took advantage of a rally in the Taiwan stock market and raised $72 million in May 1993 through a GDR issue. International equity issues by companies located in the rest of the developing world remained scanty; companies from Europe and Israel raised only $194 million in 1992 and $90 million during the first half of 1993.

Chart 5.Share Price Indices for Selected Emerging Markets in Asia

(IFC weekly price indices, end 1984 = 100; in US. dollar terms)

Source: International Finance Corporation, Emerging Markets Data Base.

For an increasing range of developing countries, cross-border equity flows have also occurred through direct purchases on local exchanges. Recent estimates suggest that secondary market purchases amounted to some $12 billion in 1991 and $14 billion in 1992, and that 28 percent of total international equity flows went to emerging markets in 1992 (up from 12 percent in 1991).14 This trend is reflected in secondary market trading. While ADR trades represented 89 percent of transactions by international investors in developing country equities in 1991, by the fourth quarter of 1992 this share had reportedly declined to 47 percent. While comprehensive data are not available, country-specific information indicates that portfolio investment increased substantially in 1992 and the first half of 1993. For instance, net foreign investment in the Brazilian stock exchanges increased from $0.6 billion in 1991 to $1.7 billion in 1992 and $1.3 billion during the first five months of 1993. Foreigners invested some $2.1 billion in Korean equities in 1992, after they were given limited direct access to the stock market in January.

Finally, issuance of shares in new closed end mutual funds targeting developing country financial instruments (mostly equities) plummeted in the first half of 1993 to a low of $373 million, after having recovered somewhat in 1992 to $1.4 billion. Investors have increasingly invested directly in local emerging markets or through ADRs or GDRs instead of using such mutual funds (Table 11).

Table 11.Issues of Closed End Funds Targeting Emerging Markets in Developing Countries and Regions(In millions of U.S. dollars)
1989199019911992First Half

1993
Developing countries and regions1,8593,4821,1931,421373
Global funds7636253137338
Africa17
Mauritius17
Asia1,4171,89521387018
Multicountry48760222
Specific country or region9301,29421384818
China64618
India168105
Indonesia199312
Korea478140170
Malaysia150292
Pakistan236
Philippines253
Singapore
Taiwan Province of China564026
Thailand105107
Viet Nam10
Europe136976122
Multicountry45841
Country specific136135122
Bulgaria
Czechoslovakia31
Hungary8010022
Israel
Poland69
Turkey5635
Western Hemisphere230575727293
Multicountry178203440181
Country specific230372288112
Argentina56
Brazil112
Chile230180
Mexico192132
Venezuela100
Source: Lipper Analytical Services.

Bank Loans

Following a decline in bank loan commitments to developing countries in 1992, syndicated bank lending recovered somewhat in the first half of 1993, although banks continued to emphasize improving profitability and containing risk. As in previous years, access to syndicated bank credit was severely restricted for developing countries that had experienced, or are experiencing, debt-servicing difficulties. For these countries in particular, new lending has been limited mainly to short-term credit, project finance, or loans structured using a variety of risk-mitigating techniques, including co-financings with international financial institutions, official export credit guarantees, or asset securitization (see Section VI). Medium- and long-term bank loan commitments to capital importing countries declined from $16.7 billion in 1991 to $14.1 billion in 1992 and amounted to $8.7 billion during the first half of 1993 (Table A8).15

Asia has continued to account for the bulk of total commitments to developing countries, and China consolidated its position as the leading developing country borrower in this sector. New commitments to Asian developing countries dropped by $3 billion in 1992, reflecting the reduced pace of borrowing by Indonesia and Korea. Loan commitments to the region recovered somewhat during the first half of 1993, mainly because Chinese entities stepped up their borrowing activity on favorable terms, raising some $2.6 billion—150 percent more than in the same period a year before. Heavy foreign borrowing by Chinese entities accompanied rapid economic growth and facilitated a surge in domestic investment, including infrastructure and corporate investment, as well as real estate investment mainly in coastal areas. Thai borrowers also stepped up their borrowing activity as output growth accelerated and the external current account deficit widened; Thailand remained a significant focus for project financiers. In contrast, in Indonesia, new commitments dropped markedly after the government set limits on offshore borrowing in 1991, while in South Korea, a slowdown in economic growth, improved external current account performance, and stepped-up issuance in the international bond market have contributed to a decline in the pace of bank borrowing. In the Philippines, conversely, a pick up in lending activity was observed, particularly in project financing for the power sector. Finally, India raised $580 million during the first half of 1993, mostly for the Indian Oil Corporation through a series of short-term loans.

New commitments to European developing country borrowers remained subdued, amounting to $2.1 billion in 1992 and $1.3 billion during the first half of 1993. Turkey was the largest European borrower in the syndicated credit market, accounting for 86 percent of total commitments to the region in 1992 and about three fourths in 1993. Several deals were recently reported that show emerging interest in lending to East European borrowers. Two countries actually made their debut in the international capital markets through straight syndicated loans. The Czech Republic established in February 1993 a $200 million one-year revolving credit that carried an interest margin of 138 basis points above LIBOR. In July, the Republic of Slovenia made its debut in the international capital markets through a $100 million three-year loan priced at 237.5 basis points above LIBOR. Proceeds of the loan are for general balance of payments purposes. Elsewhere, a $20 million five-year term loan was established for the Republic of Georgia; structured offshore, the facility is secured on oil tankers. Part of the $90 million debt element of a $130 million gold mining project in Uzbekistan was syndicated in May 1993. In April 1993, Avto VAZ, a recently privatized car maker, became the first Russian company in decades to borrow internationally without government guarantee. The $100 million revolving credit and medium-term loan facility is reportedly fully collateralized by the company’s export receipts. Finally, the first build-operate-transfer (BOT) financing for toll roads in Eastern Europe is being established. The Ft 32.5 billion (some $375 million) transaction for Hungary involves a complex structure; return on equity and repayment of loans are to be secured by toll revenues, and the European Bank for Reconstruction and Development (EBRD) is reportedly to bear a large share of the project’s risks.

Recourse by borrowers from Latin America to the syndicated bank credit market continued to be limited, in sharp contrast with the region’s position as the main borrower in the international bond market. Uninsured medium- and long-term commitments to the region amounted to $0.9 billion in 1992 and to $0.5 billion during the first five months of 1993. Nevertheless, a series of loan facilities have been established that confirm renewed interest in lending to selected borrowers, including Chilean banks and corporations, and public sector oil exporters from Mexico and Venezuela. Also, several structured project loans were established, including a $290 million limited recourse loan for Chile’s Compañía Minera Candelaria and a $56 million loan for a power project located in Colombia, the first Latin American private power project to be financed on a nonrecourse basis. Additionally, a $400 million five-year facility was established in June 1993 for a large Mexican mining company (MEXCOBRE); the facility is fully secured by exports of the company and is priced at 300 basis points above LIBOR. The deal was reportedly the largest for a Latin American private sector company since the early 1980s.

For developing countries as a group, the lending terms of commercial banks during the past year generally hardened. Average interest margins for new commitments reached around 80 basis points in 1992 and rose further to 100 basis points in the first half of 1993, their highest level since the early 1980s (Table 12). At the same time, average maturities shortened from 7.6 years in 1991 to 6.7 years in 1992, and further to 6.1 years during the first half of 1993.

Table 12.Terms of Long-Term Bank Credit Commitments, 1987–June 19931
198719881989199019911992Jan–June

1993
Average maturity (in years)8.35.76.26.85.45.74.3
OECD countries7.55.15.85.85.15.74.1
Eastern Europe8.18.48.311.9
Developing countries10.89.07.39.87.66.76.0
Other5.66.58.87.73.56.95.5
Average spread (basis points)43355654798581
OECD countries34315451808678
Eastern Europe24304950
Developing countries696568667580100
Other53423266716081
Memorandum (in percent)
Six-month Eurodollar interbank rate (average)7.308.139.278.356.083.903.36
U.S. prime rate (average)8.219.3210.9210.018.466.256.00
Sources: Organization for Economic Cooperation and Development (OECD), Financial Market Trends; and IMF, International Financial Statistics (for Eurodollar and prime rates).

Other Developments

Fixed income instruments denominated in local currency have begun to be attractive to international investors. Initially, interest in this sector was mainly confined to Mexican Government paper. Foreigners invested about $6 billion in Mexican Government paper in 1992, mainly in CETES (Mexico’s federal government treasury bills). The internationalization of the investor base for CETES continued in 1993; by mid-1993, foreign investment in CETES totaled $12.1 billion, about half of CETES outstanding. On the back of strong perceived demand for Mexican peso-denominated debt instruments, BANAMEX, Mexico’s largest commercial bank, presented in July 1993 the first Latin American peso-denominated Euro-medium-term note facility. The NPs1 billion program is to have standard Eurobond features, and investors will pay and receive interest and repayment in U.S. dollars. S&P assigned an A rating to the program.

In a recent survey of institutional investors in the United States and Europe, 90 percent of the institutions surveyed reported holdings in Mexican CETES or AJUSTABONOS (medium-term bonds with returns indexed to the consumer price index), or both, while only 24 percent held local currency instruments in other markets.16 One fifth of the survey participants invested in Argentina and 10 percent held Venezuelan paper. In other regions, interest is reportedly growing in fixed income instruments in Southern and Central Europe, while in Asia investment is largely concentrated in Malaysia, the Philippines, and Thailand. The internationalization of the investor base for fixed income instruments denominated in local currency has been helped by the recent assignment of investment grade ratings to such instruments.

This amount includes reported private placements and notes issued under Euro-medium-term note programs.

An implied credit rating represents the highest rating that the rating agency would assign to the debt of an issuer, although specific instruments have not yet been rated at the issuer’s request. An implied rating is an assessment of the sovereign borrower’s overall creditworthiness.

ADRs are U.S. dollar-denominated equity-based instruments backed by a trust containing stocks of a foreign company. ADRs are traded on major U.S. exchanges or in the over-the-counter market, with clearance and settlement handled by the custodian bank in the United States. A GDR is a depositary receipt whose technical structure is similar to that of an ADR, but which is issued and traded internationally.

These shares can also be listed on the New York Stock Exchange through depositary receipt facilities while maintaining a primary listing on the Hong Kong Stock Exchange.

See Michael Howell, and others, Small Is Bountiful (London: Baring Securities, June 1993).

These flows cover commitments that are not insured by official export credit agencies, as identified by the Organization for Economic Cooperation and Development (OECD).

Kleinman International Consultants, 1993 Emerging Bond Market Survey (Washington, May 1993).

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