Latin America has seen a strong rebound from the COVID 19 pandemic and has continued to show resilience despite geopolitical and global macroeconomic challenges. In advance of one of the largest industry conferences in the region, the head of our Latin America corporate trust and agency business considers some of the challenges and opportunities in the region.
While concerns surrounding economic growth and political risk continue, Latin America remains a region rich with potential for investment and growth. Three interesting areas of opportunity that deserve discussion include the financing of the region’s infrastructure gap, the growing importance of environmental, social, and governance (ESG), and opportunities associated with nearshoring.
Addressing the infrastructure investment gap
A key issue Latin America has been facing for some time is the need to increase its investment in infrastructure. According to the Inter-American Development Bank (IADB), the infrastructure gap in Latin America is estimated at around $150 billion per year. Current investment needs in infrastructure are recommended to be 4%-8% of the region’s gross domestic product to meet the needs of economic growth. Average investment across the region is on the low end of that scale, with some countries investing less than 1%.[1]
Given the infrastructure investment needs in the region, the ability to attract private sector capital is critical. Latin America has been quite resourceful in that regard, and we’ve seen the capital markets evolving with emerging financing structures. Corporate trust and agency providers, in turn, must be capable and prepared to service these emerging structures. For instance, we’ve seen a growing use of multi-source facilities to finance projects by securing financing from both the debt capital markets and the syndicated loan market. In these structures, we provide the roles required for the bond issuance such as trustee, registrar, and paying agent, the administrative agent function for the syndicated loan, and the intercreditor agent role, which coordinates the actions of the distinct creditor groups in connection with management of the project’s common collateral package. These transactions have long tenors, often 10-15 plus years. Thus, it’s important to ensure that the corporate trust and agency provider is willing and capable of executing deals with such long tenors. As part of a company with an operating history of nearly 125 years, Delaware Trust is well-positioned to carry through on such complex, lengthy transactions.
Adding value to evolving ESG opportunities
Although Europe is clearly the market leader in ESG capital markets activity, Latin America’s participation has nonetheless been impressive. While overall bond issuance was down last year due to market volatility, S&P reports that nearly one-third of bond issuances in Latin America in 2022 came from the green, social, sustainable, and sustainability-linked bond (GSSSB) market.[2]
There is a clear ESG agenda in the region’s project finance market as well. According to the Global Energy Monitor (GEM), Latin America is poised to become a major renewable energy producer, with more than 319 gigawatts of utility-scale solar- and wind-power projects due to be launched by 2030—equal to almost 70% of the region’s total current electrical capacity from all sources combined[3]. Nearly a billion solar panels worth of large-scale clean-electricity projects are slated to come online in the next seven years[4].
We’re also starting to see an ESG focus in certain sectors that historically have not been attractive from an ESG perspective, like mining. The market is beginning to realize that we must be attentive to these sectors because they are closely related to ESG. For some aspects of renewable energy like electric vehicles, mining is critical. For example, we need lithium for electronic batteries as well as copper for the renewable energy infrastructure. We’re realizing that these more challenging sectors need attention and that there are exciting emerging opportunities for providers to have a positive impact and contribute to the financing ecosystem and bring even more value forward in ESG-focused transactions.
Providers of corporate trust and agency services must be prepared to support clients with their ESG financing strategies. At Delaware Trust, this ranges from serving as administrative agent on ESG-themed loans, to indenture trustee on GSSSB bond issuances to the full suite of corporate trust and agency services required on cross-border project financing. In addition, we address specific client needs as they may arise in connection with ESG-themed financing. For example, if an issuer needs to or wishes to segregate issuance proceeds from a green or social bond offering, we can offer our services as depositary or escrow agent depending on the specific requirements of the transaction.
Private capital key to nearshoring in Mexico
The supply chain disruptions witnessed in recent years coupled with geopolitical uncertainty have many companies with offshore operations considering relocating operations closer to their home market or end customer market. Latin America, and Mexico in particular, stand to benefit from this nearshoring push. In fact, Reuters reports that Mexico’s government expects nearshoring to add up to 1.2% to its growth[5]. While we have seen an uptick in foreign direct investment levels into Mexico, significant investment is needed in commercial real estate, infrastructure, energy, refined logistics and transportation systems. Once again, attracting private capital will prove essential as current levels of public funding are not sufficient to meet the level of investment needed.
Companies will be engaging in activities ranging from foreign direct investment, M&A, capital raising and the financing of energy and infrastructure projects in support of their nearshoring initiatives. We’re well-prepared to support clients with our comprehensive offshore product offering including escrow agent services in support of M&A activity, and corporate trust and agency services in connection with capital raising—particularly with cross border debt and project finance agency services.
An eye on the evolution of the market
As providers of corporate trust and agency services, we watch the evolution of the market and continuously speak with our clients and partners to ensure we remain ready to meet emerging needs for our services. There are growing opportunities to use existing products and strategies in new and innovative ways to boost economic activity and make a lasting impact on the development of the region. We’re looking forward to discussing these and other issues critical to investment and economic growth in the region during the Bonds, Loans & ESG Capital Markets Latin America and Caribbean meeting November 27-28 in Miami. It will be fascinating to connect with peers, hear how financial leaders anticipate navigating the current economic climate, and gain fresh insight into the future for the market.
Why CSC
CSC is a leading provider of global business administration and compliance solutions, including a comprehensive suite of administration, financial, and agency services for debt issuances, securitizations, structured finance transactions, and restructuring mandates. We have office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East, deploying experts in every market we serve. Our Global Capital Markets team has a wealth of expertise and deep institutional experience. We carefully analyze each deal and tailor services accordingly to provide bespoke solutions to our clients’ requirements.
We’re the trusted partner of choice for 90% of the Fortune 500®, 10,000 law firms, and more than 70% of the PEI 300. Headquartered in Wilmington, Delaware, USA, CSC has been privately held for more than 120 years and acts as stable and conflict-free provider. Our broad geographic coverage means we possess local knowledge and infrastructure to support capital market participants worldwide. We are the business behind business®. Learn more at cscgfm.com.