As Merrill Lynch and Bank of America (BofA) shareholders cast votes on the proposed merger today, questions surrounding the extent of the post-vote carnage swirl both internally and among the banks’ haggard competitors. The deal is expected to go through, forming a temporarily bloated entity employing some 370,000 people, according to one internal estimate. News reports citing market speculation in the days leading up to the vote suggest up to 30,000 could be eliminated globally. For Merrill’s LatAm business, insiders express cautious optimism that its relatively high profitability compared to other regions covered by the bank will shield it from the worst of the layoffs. “LatAm is profitable. There aren’t any areas within the region that have lost money on a net basis,” notes a senior official at the firm. LatAm barely overlaps with BofA’s existing businesses, which is an additional plus, and BofA has said it wants to keep the Merrill’s international businesses, especially those exposed to higher growth regions. However, BofA’s interest in LatAm beyond Mexico has long been in doubt, and some Merrill businesses are likely to be shut or significantly downsized by merger-related redundancies. There is added pressure from forecasts of a dramatically reduced LatAm fee pool in coming years versus estimates made 12 months ago when Merrill was beefing up. Among more vulnerable sectors are lines that generate less profit. ECM is one business that appears more exposed to bearish public markets that have for months shunned new transactions, say internal executives. The shop’s Brazil office, heard employing some 200 people, may also be “right sized,” to use the polite term. “There will be cuts, though I don’t think they’ll cut to the bone,” notes the Merrill official. Thursday, Credit Suisse announced an 11% reduction in global headcount following a 10% cut only a month earlier. Morgan Stanley, Citi, Goldman Sachs and JPMorgan have also trimmed a minimum of 10% in the past 2 m
Yearly Archives: 2008
EM “Shot in Thigh in Nightclub”
From the somber tone of this year’s EMTA annual meeting in New York, it would seem that EM is dead. A relatively thinly attended round of buy and sell side panels at the traditional location – Citi’s Tribeca HQ in New York – exuded bearishness, but the consensus is for significant spread tightening, albeit from oversold levels. The main problem for EM – besides lack of cash inflows – is that US high grade is yielding far too much for investors to look elsewhere. According to JPMorgan, US high grade will return 17% next year, versus close to 20% in EM. On top of that, the US government has taken a direct stake in 23% of that market, making a switch to EM very hard to justify, says JPMorgan. “The reputation of emerging markets and its value as a diversifier just took a huge downgrade,” says David Rolley, senior portfolio manager and head of global fixed income at Loomis Sayles, which has over $100bn under management. “You might say we’ve shot ourselves in the thigh in a nightclub or something,” he adds. However, the investor says EM yield is still decent and that the consensus is for fewer defaults than in developed markets. “The structural case for these assets has always been profound . . . the default rate in EM is actually lower than the default rate in the US – this stuff is cheap,” adds Rolley. “If you look at it from 3-5 years out, I think you have to be massively bullish about emerging markets, because they are not the ones facing these policy dilemmas, making these huge policy mistakes,” says James Barrineau, head of economic analysis at Alliance Bernstein, referring to the US. Asked where the EMBIG will end next year, JPMorgan and Credit Suisse both predict 600bp, from 797bp Thursday, while Deutsche Bank and Merrill Lynch see further compression to 500bp and 575bp respectively. “That implies 20% returns next year, the question is how much volatility will we face in between,” says Joyce Chang, head of global EM and global credit research at JPMorgan. She tell
Few Corporate Defaults Expected in 2009
Thanks largely to liquidity support from governments, EM corporates should see low default rates in 2009, says Anne Milne, head of Deutsche Bank’s LatAm corporate bond research group. “We see almost no default next year in Latin America,” she tells investors at an EMTA event in New York, adding that her shop forecasts a 4.0% default rate in EM. JPMorgan and Merrill expect 1.0% and 3.0% respectively, versus 0.3% currently. The most probable candidates are Argentine corporates having difficulties long before the credit crisis, she says. Milne places Brazil and Mexico as among the best EM corporates going into 2009, citing the Brazilians’ low short-term debt and available BNDES support and Mexico’s liquidity support. She says her shop likes industry leaders and quasi-sovereigns like Petrobras, Vale and Televisa in a conservative portfolio, as well as Braskem, CSN, Embraer, Gerdau and Odebrecht for the moderate investor. She also tips top tier Argentine oil companies that have not defaulted, and TGS, for more aggressive allocation. Though hedge funds and others with a shorter-term view may be mostly gone, Milne sees the buy-side slack next year picked up by local market investors. Generally in EM, analysts are concerned about the private sector. “The sovereign looks great, the problem is the corporates,” says Joyce Chang, head of global EM and global credit research at JPMorgan. “They have about $210bn to roll over,” she adds.
Oil Hedge, Infrastructure Boost Mexico
Put options to sell oil at $70/barrel over the next few years and more than MXP100bn in the budget for infrastructure projects should allow Mexico to maintain a constant fiscal policy in 2009, says finance undersecretary Alejandro Werner. “We will be able to implement the 2009 budget without any problem,” the official tells investors gathered at an EMTA event in New York, despite a forecast of 1.8% for 2009 economic growth that could trend toward the downside. Werner says the hedge and about MXP96bn in 3 oil stabilization funds will allow the government to adopt strong countercyclical fiscal policy for more than the next 12 months. He also expects the government’s infrastructure agenda – including MXP35bn in toll road concessions, MXP30bn in suburban train projects and the MXP50bn+ Punta Colonet port project – to stimulate growth. Funds from the MXP270bn Fonadin infrastructure fund and development bank Banobras can fill the void left by private sector lenders, Werner says.
Odebrecht Ethanol Sub Lands BNDES Credit
Brazilian ethanol producer ETH is set to receive a BRL1.15bn loan to help finance the construction of 3 production facilities. The 10.5-year facility pays interest at the TJLP rate plus a spread of approximately 2.5%, according to an ETH finance official. The 3 mills in the states of Sao Paulo, Goais and Mato Grosso do Sul should be fully operational by 2013, at a cost of BRL1.9bn.
ISA Prices COP105bn Local Retap
Colombian state-controlled electricity grid operator Interconexion Electrica has priced COP104.5bn ($46m) in reopened 2026 bonds. The notes paying a coupon of the IPC rate plus 4.58% were discounted through an auction mechanism resulting in a yield of IPC plus 7.1%. The transaction was 1.63x subscribed. Citi, Correval and Bancolombia managed the sale, rated AAA on a national scale.
Ferromex Repays Debt
Mexico’s Ferrocarril Mexicano has paid off MXP1.2bn in 5-year floating-rate local notes due Thursday, it says. Ferromex, the railroad unit of copper miner Grupo Mexico, said the paid using its own cash, and is left with $8m in bank debt due next year, MXP1bn in peso notes due 2014, and MXP1.5bn in peso notes due 2022.
IDB Provides Caribbean PCG; Sao Paulo Funds
The IDB has established a $200m partial credit guarantee facility to support FirstCaribbean’s long-term loans to infrastructure projects, tourism ventures and mid-size businesses. The facility, denominated in USD or local currency, will be available for 3 years to support at least $400m in FirstCaribbean lending to private sector borrowers. The IDB says initially the facility will focus on transactions in Jamaica, and later expanded to the Bahamas, Barbados, Belize and Trinidad and Tobago. Separately, the IDB has approved a $194m 25-year loan to the state of Sao Paulo to improve its roads network. The program will be carried out by the Sao Paulo state highways department and the loan has a 5-year grace period and is priced basis Libor.
Greystar Plans Colombia Mine Investment
Greystar Resources could invest up to $600m in getting the Colombian Angostura gold and silver mine into production, president David Rovig tells LatinFinance. Rovig says the company has already invested $100m in the project and is now conducting a feasibility study that should be ready in September. Once the study is done, Rovig expects to spend an initial $250m on Angostura. Greystar has not yet secured financing for the project, says Rovig, but it is considering some options such as financing from multilateral banks or bringing in a large joint-venture partner. The company has about $30m of cash on hand.
Fitch Negative Posadas, Chops Iansa
Fitch has downgraded the outlook on the BB rating of Mexican hotel operator Grupo Posadas to negative from stable. The agency says exchange rate volatility has tightened the company’s liquidity as it requires it to post cash on margin calls related to positions held with derivatives. As of September, negative market value on derivative instruments totaled $11.1m, and a month after that, exposure had grown to approximately $50m. Cash required for margin calls at October 31 was approximately $33m. Fitch also says that it expects year-end results in the hotels segment to remain stable, as a depreciated MXP leads to improved performance in coastal hotels and Mexican destinations become more attractive from a cost perspective. In 2009, decreased global economic activity might affect performance and results, Fitch notes. Elsewhere, Fitch put Chile’s Empresas Iansa on watch negative and downgraded its foreign and local currency and $100m unsecured notes due 2012 ratings to BB minus from BB+. The agency says deteriorating financials in 2008 and weak profitability and cash flow as well as a substantial increase in debt levels as reason for the cut. For the first nine months of 2008, says Fitch, Iansa’s debt/Ebitda ratio was 15.1x compared to an average of 4.2x and 2.9x, respectively, between 2005 and 2007. As of September 30, short-term debt represented 59% of Iansa’s total debt, while cash and equivalents cover only 11% of short-term debt. The agency says that if sugar and juice concentrate businesses continue to trend down over the next few months, the company could have difficulty decreasing its leverage below 8.0x by the end of 2008. Meanwhile, Fitch cut ElectroAndina’s outlook to stable from positive and affirmed its local and foreign currency ratings at BB. The outlook revision, says Fitch, reflects the company’s increasing working capital needs, high contracted position under a context of natural gas restrictions for power generators, and uncertainty related to the ou