Category: Chile

Chile plans to turn to a mix of outside funding sources to raise the more than $700m it needs to fund earthquake reconstruction, according to the new finance minister. “We have a number of options to finance the reconstruction,” says Felipe Larrain, adding that the $700m will come from running a budget deficit and be put in a special reconstruction fund. He explains that the shortfall should be funded through a mix of multilateral borrowing, the sale of local and international bonds, and by drawing on a $12bn sovereign wealth fund. He declines to give further details, saying that the exact proportions of the different options are now under study. The government is now working on an agreement with the IDB, he says, and expects an announcement soon. Larrain expects the budget deficit this year should still be less than the 4.5% Chile ran last year. The $700m figure represents what the government will initially put toward public infrastructure repairs. The total cost of the damage from last month’s strong earthquake is estimated at $30bn. CAF approved earlier this month a $300m credit line for Chile. The government had already planned to raise $3bn equivalent through local debt sales in the first half of 2010. It has not sold a dollar bond since 2004. Local brokerage BCI Corredores de Bolsa expects Chile to issue $2bn more in bonds to help finance reconstruction, according to Dow Jones, which cites a BCI report. Larrain was speaking at IDB meetings in Cancun.

As expected, Chile’s central bank left the monetary policy rate unchanged at 0.5%. The bank says that “given the current circumstances, marked by the uncertainty associated with the effects of the earthquake, maintaining the policy rate at its minimum 0.5% level until at least the 2Q2010 is coherent with projected inflation at 3.0% over the relevant horizon for monetary policy.” Goldman Sachs says that rather than initiating the rate normalization cycle sometime during Q2, it now expects the central bank to delay the first move to no earlier than Q3, with the policy rate likely reaching year-end 2010 at no more than 2%. Bulltick, which also expected no changes to the policy rate, believes there will be no hikes “until earliest the last quarter of this year if at all.”

S&P has placed its ratings on 3 Chilean entities on credit watch with negative implications pending further analysis of the financial and operational consequences of the earthquake. The agency says steel producer CAP may have suffered damage to its productive assets that may delay its ability to improve credit metrics. Fitch said last week that the event could undermine CAP’s rating. S&P also thinks urban toll-road operator Sociedad Concesionaria Vespucio Norte Express may experience a prolonged period of operating with part of its highway closed to traffic. This could threaten its ability to generate the strong revenue growth needed to meet original estimates after the toll road initially attracted low volumes of traffic, adds the agency. It adds that Petropower Energia faces increased credit risks because of its single-asset nature and other challenges. “While we believe reconstruction will not ultimately affect the country’s creditworthiness, the damage is extensive, and we think there may be some bottlenecks in rebuilding activity and processing insurance claims,” says S&P. It expects to resolve the credit watch during the next 90 days.

The recent Chilean earthquake could dent the BBB minus rating of steel producer CAP, says Fitch, which notes severe damage at its CSH subsidiary. “The company estimates that the repair work required to produce steel at normal capacity will take at least 3 months, which could apply downward pressure on existing ratings on the back of difficult trading conditions already experienced during 2009,” says Fitch. It adds that steel rolling lines were not largely affected, and CAP also has insurance policies expected to cover a substantial part of the repair work. Fitch awaits further information to assess the impact of the disaster on the credit profile of CAP. It adds that CAP has a comfortable liquidity position with cash and equivalents of $387m as of end 2009 and a low amortization schedule for the next 12 months totaling $45m.

Banco de Chile has sold UF4m ($164m) in inflation-linked bonds on the domestic market, according to regulators. The 2014 bond priced at 95.18 with a 1.75% coupon to yield 2.99%. The bank is rated AAA on a national scale. The bank’s own brokerage managed the sale.

Chilean companies are filing regulatory reports indicating the extent of the damage they suffered in the February 27 earthquake. Steelmaker CAP says it had to stop operations due to damages at its port and manufacturing areas. It estimates it will take at least 3 months to bring operations back to normal. Elsewhere, wine producer Concha y Toro says it suffered serious damage, as the quake hit “the heart of wine-making activity” in Chile. It is assessing the impact on operations. Fertilizer and chemicals producer Soquimich meanwhile says that facilities in Penco were affected by a tsunami produced by the quake, but that operations should resume in 15 days. It is evaluating damages to the San Antonio port. The company’s Puerto Montt operations are operating normally, it says, adding that it has insurance to cover any damages to facilities and products. Paper and pulp company Celulosa Arauco says it has paralyzed operations while it investigates the extent of the damages. It states that it has insurance to cover any damages as well as losses arising from halting operations. Elsewhere, CMPC declared force majeure for an initial period of 30 days in order to mitigate damage to customers and suppliers, says Dow Jones Newswires, citing a letter from CMPC CEO Sergio Colvin. Moody’s said Tuesday that the earthquake was unlikely to impact the sovereign’s A1 ratings, which remain on positive outlook. Fitch reiterated its A grade with a stable outlook.

Sell side analysts say Chilean growth is unlikely to take a significant hit from the 8.8 magnitude earthquake that hit the country February 27. Global insurance and reinsurance advisor Eqecat estimates damage from the earthquake at $15bn-$30bn, equal to 10%-15% of the country’s GDP. But Bank of America Merrill Lynch says the impact will be limited to the near term, and that the country will post healthy growth of 4.0% in 2010, down from a prior estimate of 4.7%. Barclays meanwhile expects the impact on growth to be short-lived, given a lower death toll and higher availability of resources to pour into reconstruction versus to similar disasters in places like Indonesia and Thailand. “The financing of whatever extraordinary spending is decided should be a non-issue, in our view, as Chile counts on $11.3bn in its Economic and Social Stabilization Fund,” the shop says. It adds that whatever weakness is observed in growth will likely reflect supply-side constraints, rather than a demand shortfall. The quake, which has brought a death toll surpassing 700, is not expected to significantly impact banking or copper, Chile’s most important export. “We . . . do not expect the earthquake to have an immediate impact on the financial system or to our bank ratings,” says Moody’s VP Jeanne Del Casino. Codelco, the state-run miner and the world’s largest copper producer, says it has restarted operations in the central part of Chile, where the impact from the quake was strongest. It also says operations in northern Chile suffered no significant damage, and that it will meet supply contracts. Copper prices rose less than 0.1% March 1, according to US-based metals retailer Kitco. “The effect on copper prices will be purely transitional as Codelco’s mines are mostly in the north,” says Christopher Ecclestone, a New York-based mining strategist at Hallgarten. Barclays agrees, saying that the earthquake was far enough from mines not to affect infrastructure there. It adds that production

Chilean airline LAN will today auction 21.8m shares, or a 6.4% stake, on the local exchange for a minimum price of CLP9099.58 per share, according to a regulatory filing. Based on the minimum price, the total sale could be worth $367.7m. The shares belong to Axxion and Inversiones Santa Cecilia, investment vehicles controlled by Chile’s president elect Sebastian Pinera. Chilean brokerage Celfin Capital is managing the auction. Costa Verde Aeronautica, the investment vehicle controlled by the Cueto family, acquired an 8.6% share in the airline from Pinera’s vehicles on February 23. It already held a 25% stake in the airline. After the 6.4% stake is auctioned, there will be an 11% stake remaining in the investment vehicle’s hands. One potential buyer is said to be Brazil’s TAM airlines. Brian Moretti, equities analyst at Planner Corretora in Sao Paulo, writes in a research note that TAM has around $725m in cash, enough to acquire the remaining stake, which, if sold at CLP9,099.58 per share, could be worth about $575m. Pinera had promised during his campaign that he would divest his 26% stake in the airline held by Axxion and Inversiones Santa Cecilia by March 11, when he is slated to take the presidency.

Chile’s Cueto family, which owns a 25% stake in LAN Airlines through its Costa Verde Aeronautica holdings, says it is buying only an 8.6% additional stake in the airline from Axxion and Inversiones Santa Cecilia, which are controlled by president-elect Sebastian Pinera. The move, which will cost the Cuetos CLP264bn ($488m), has surprised market watchers who expected the family to purchase all of the 21.10% in LAN it had a right of first refusal on. Costa Verde had also recently announced plans to raise $1bn equivalent in additional equity, a deal presumed to be done in anticipation of the full exercising of the LAN stake option. The move opens the possibility for Brazil’s TAM to buy a larger stake in LAN than originally what was originally expected by the market. Brian Moretti, equities analyst at Planner Corretora in Sao Paulo, writes in a research note that TAM has around $725m in cash, enough to acquire the remaining 12.5% stake held by the Chilean entities. Based on the CLP9,100 per share paid by Costa Verde Aeronautica, the remaining stake could be worth CLP391bn ($723m). The Cuetos are paying for their smaller stake with CLP237bn going to Axxion and CLP27bn to Inversiones Santa Cecilia. Of the total amount, the buyers say they will pay CLP132bn in cash at closing and the remaining CLP105bn in installments.