Scotiabank responds to Latin America’s growing sovereign, ESG and liability management demands

While Scotiabank has earned respect as a long-standing partner and provider of comprehensive corporate, investment banking and wholesale services across the Americas, the Bank is proving its ability to evolve its solutions with local client priorities. Scotiabank’s teams are bringing value to the region’s top sovereign institutions as they embark on ambitious sustainable finance programs, and top corporates that want to optimize their capital structures as rates shift.

Earning a place alongside Mexico’s sovereign

Latin American observers have noticed that the Canadian-headquartered bank has achieved leadership in the region’s sovereign debt markets, delivering sizable transactions for most-respected issuers, including the United Mexican States (UMS) and the Republic of Chile (Chile).

In particular, Scotiabank was selected as Sole Structuring Agent and Joint Bookrunner by Mexico’s Secretaría de Hacienda y Crédito Público when the UMS made its inaugural local currency Sustainable Sovereign Bond issuance for a peso equivalent of US$980 million.

The May 2, 2022, issuance of Mexico’s first peso-denominated ESG Bond – aligned with Mexico’s Sustainable Development Goal Sovereign Bond Framework – represented an important milestone for UMS. Having previously issued euro-denominated sustainable bonds, UMS wanted to satisfy high demand from domestic investors for ESG-labelled issuances and establish a sustainable yield curve in the local bond market, to support future sustainable financing programs and support the development of the local sustainable debt market.

“This transaction is very important to UMS since more than three quarters of Mexico’s budget programs are now aligned with UN Sustainable Development Goals,” remarks Roberto Lazzeri, Debt Issuance Managing Director at Secretaría de Hacienda y Crédito Público. “Our country is highly committed to bringing capital to crucial national and global sustainable development priorities, and Scotiabank was an excellent partner to help bring this successful transaction to the market.”

Scotiabank proved its capabilities in its first-ever mandate for UMS, notes Vinicio Alvarez, Managing Director and Head of Debt Capital Markets at Scotiabank Mexico: “UMS had very clear objectives, so we provided timely advice on the terms, timing and optimal distribution strategy. This included extensive domestic investor outreach, with meetings for more than 80 institutions, to present UMS’ framework and build enthusiasm for the planned issuance.”

As a result, UMS successfully advised key market participants on their plans, achieved more than three times oversubscription on the two tranches, and attained both a desirable spread, greenium and order book. “Sovereigns have a key role to play in developing local sustainable finance markets. Through our in-country relationships, local distribution abilities, and our regional and global knowledge and expertise in sustainable finance, we were able to support UMS in this successful issuance which will drive local sustainability issuances by creating a reference sustainable yield curve in local currency,” notes Daniel Gracian, Director of Sustainable Finance at Scotiabank.

Delivering added value to The Republic of Chile

Scotiabank also stood out for supporting one of the largest recent sovereign transactions in LatAm, serving as Joint Bookrunner for Chile’s January 2022 issuance of three tranches of US-dollar denominated sustainable notes totalling US$4.0 billion. As the tenth such transaction by Scotiabank on behalf of The Republic of Chile since 2018, it demonstrates the Bank’s ability to support this large, regular issuer across local and international currencies. “We started serving the Republic with local currency bonds, based on our in-country strength, and they began to entrust us to deliver on their hard currency needs. This is important to any Sovereign that wants flexibility to manage its debt and currency exposures,” says Deneb Schiele, Director of Corporate Finance, with Scotiabank Chile.

“This evolving relationship reflects Scotiabank’s strategy to become a bridge and bring the Americas to international investors, and to introduce international investors to the Americas, as they seek access to strong bond issuers in international or local currencies,” explains Franco De Nigris, Director, with Scotiabank’s Latam Debt Capital Markets in New York. “The Republic has seen how Scotiabank is committed to Chile and how we can draw foreign investors in a seamless way.”

De Nigris notes that agile teamwork enabled them to recommend the right transaction elements regarding timing, tranche sizes, mix of US and Euro currencies, and leveraging Chile’s solid Sustainable Bond Framework. “We worked constantly across our LatAm DCM team and our Sustainable Finance and Syndicate teams in New York and London, to gain the latest market intelligence to structure transaction details and then, we activated our global distribution platform to bring in the orders.”

Despite market volatility, the transaction met Chile’s pricing expectations and was five times oversubscribed, with exceptional offshore investor demand. “Once again, we demonstrated our ability to perform challenging transactions in difficult markets,” says Schiele. “We’ve earned a reputation in Chile, by partnering with everyone from the smallest account holder to the most sophisticated debt issuer, and, with our combination of local and global capabilities we can help clients find the preferred solution at the right moment across currencies1.”

Liability Management leader in Latam

Scotiabank also demonstrated its capabilities through several recent liability management transactions. Among them was a US$2.0 billion cash Tender Offer for Petróleo Brasileiro S.A. (Petrobras) in April 2022. Petrobras targeted 19 US dollar, Euro and GBP bonds, split into two groups; one pool organized bonds by increasing maturity, while the other prioritized lower cash-price bonds.

“Petrobras is a sophisticated debt issuer, and in light of their sound risk management strategy they were well-positioned to take advantage of the market to repurchase bonds at aggressive levels,” observes Fabio Romanelli, Senior Associate, Corporate Banking in São Paulo. “This trade added to our long-term relationship of providing Brazil’s largest company with a full suite of lending and debt capital markets solutions.”

As the latest in a series of successful de-leveraging exercises, the chosen approach was very familiar to both Scotiabank and Petrobras. For example, acceptance of each bond on an “Any-and-All” basis with the ability to “drop” tranches – and accept one of lower priority – eliminated proration risk for investors, while giving Petrobras the flexibility to stay within sizing parameters. Fixed spreads would help insulate the offer from rates movement while a five-day offer period minimized market exposure.

This transaction also encompassed splitting of the bonds into two groups to better deliver portfolio maturity extension and offset repurchase costs. Healthy account engagement amid heightened uncertainly also spoke to Scotiabank’s ability to tailor executions to the prevailing backdrop. As a result, participation slightly exceeded the US$2.0 billion target without adjusting spreads.

Noting that the final tender prices came in at a 1-2 point discount from market levels, Hugo Tran, Director and Head of Liability Management points out that, “This was a clear illustration of the appeal of liquidity events at times of elevated Treasury volatility, which can in turn dislocate the corporate fixed income market.”

“While Brazilian and emerging market new issue activity lags versus 2021, as markets adjust to tightening financial conditions, liability management operations by companies using existing funds has picked up, with cash-rich issuers looking to opportunistically de-lever. This can set up improved metrics for issuers to tap the market aggressively when conviction swings back to a positive stance,” says Ricardo Tessarotto, Associate Director of Debt Capital Markets.

“The Petrobras transaction highlights Scotiabank’s ability to deliver a seamless liability management process, reflecting the solid coordination between our New York, São Paulo, and global offices,” observes Tessarotto. “Even with the market moving, we achieved the target amount for the client and aligned with their priorities.”

Offering meaningful solutions beyond lending

Cohesive teamwork also enabled Scotiabank to deliver an ‘out-of-the-ordinary’ liability management solution for Mexico’s Cydsa, when the diversified, multi-national chemicals and industrial company sought to retire a portion of its outstanding bonds. In this April 2022 transaction, which caps a 10-year cross-product relationship between the conglomerate and the Canadian bank, Scotiabank served as Dealer Manager, when Cydsa announced a Modified Dutch Auction Tender Offer for approximately 10% of its US$450 million 6.25% notes.

“Over time, we have closely engaged with this client, to be a more meaningful partner to them, and we have collaborated across our Corporate Banking and Capital Markets teams to generate conversations when we see an opportunity for them,” explains Jose Jorge Rivero, Managing Director and Head, Corporate Banking in Mexico, “In this case, with a rising rate environment, we helped Cydsa replace bond debt to improve their borrowing costs and maturity profile.”

“The customized structure and technology of our solution was crucial to success,” observes Franco De Nigris. “Although tender offers are often made at a fixed price, our Liability Management team believed we could deliver more competitive pricing to Cydsa, given market volatility and investor interest, through an auction format that enabled Cydsa to pick up the desired quantity of bonds in the most efficient way.” He adds that the strategy was successful, with Cydsa ultimately up-sizing its buyback, to $48 million, in light of 14% participation levels by submitting bond holders, and pricing that was below the top end of the auction price range.

Rivero proudly notes that the transaction highlights Scotiabank’s growing involvement with the client: “Through our relationship-building, our holistic local and international product offerings – which provide a client with more options – and perseverance in developing solutions, Cydsa has repeatedly turned to us as both a lending partner and for bringing alternatives to them.”

Reflecting on the range of specialized transactions the Scotiabank Global Banking and Markets team has delivered recently across the Americas, including timely liability management and sustainable finance solutions, Stephen Guthrie, Senior Vice President, International Corporate and Commercial Banking, observes that: “Scotiabank has shown both our stable, long-term commitment to the Americas region and our readiness to develop impactful solutions for local and multi-national clients as conditions change and new opportunities emerge.”

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