LatAm should see low fees as the frightening future

GlobalCapital

September 16, 2015 06:00 PM

It seems that Latin America bond fees are going the way of CEEMEA — small to the point of non-existent for some issuers — and that is a frightening prospect. But it is better that banks accept and plan for that now rather than rage against the dying of the wallet.

Bond bankers focused on Latin America last week told GlobalCapital of their dismay at the tightening bond fees in the region. That said, LatAm bond fees seem to be, by and large, still more generous than those CEEMEA issuers pay.

But this will not last. With the increasing popularity of request for proposal processes and volumes for LatAm bonds having taken a hit this year because of the absence of Brazil, fees are being eroded as banks fight over fewer scraps of business. It is difficult to see how this trend will stop, or more pointedly, who will stop it.

It is perhaps in issuers’ long term interest to set fees themselves, or a floor for their fees. More attractive fees mean more banks fighting over a deal and execution and lending may be more attractive as a result. But with issuers still questioning smaller expenses, such as the legal costs of deals, it is difficult to see that leap being taken for many and issuers voluntarily paying more when they can get away with paying less.

The banks could stop it, by agreeing with each other a floor for fees. But that would require non-competitive co-ordination and teamwork with their closest competitors. That does not seem likely — this is Wall Street, not Sesame Street.

So, for banks still wanting to operate in this business, the base case has to be that LatAm bond fees will, probably not before long, start looking like the super tight fees of the CEEMEA market.

Several LatAm teams last week in New York seemed confident that even with the LatAm bond volumes 41% down on last year, their teams were lean enough for staffing cuts to be a long way off. Some are even still in hiring mode.

But with fees being pounded too, banks might want to consider whether or how to make replacements when staff voluntarily leave and start thinking now about how they make money when DCM starts to look like more of a relationship business than a profit generator. Accepting lower fees as an inevitability and planning for that — as distasteful as it is — makes more sense than simply hoping that the rot will stop.