Vale says it will buy a 50% stake in the subsidiaries of African mining exploration holding company Teal Exploration for CAD81m, which will be taken private for CAD3 per share in cash. Joint venture partner African Rainbow Minerals will own the other half. Although the companies do not say how the deal is being financed, a Canadian analyst who covers Vale says: “this is a very small deal for Vale and it is interesting because for a little more it could have bought a producing copper miner in that part of Africa.” Teal’s subsidiaries operate in the Democratic Republic of Congo, Mozambique, Namibia and Zambia. CIBC World Markets advised Teal, who had Fasken Martineau DuMoulin as legal counsel. The transaction is expected to close in Q4 2009.
Category: Daily Brief
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Gigante Sells Radio Shack Stake
Grupo Gigante has sold its stake in Radio Shack to Tandy for MXP563.2m after the two did not reach an agreement on how to expand the chain in LatAm. Proceeds from the sale will likely be used to finance future acquisitions by Grupo Gigante. In a letter to the BMV, the company says proceeds will “complement and reinforce the consolidation and growth strategy.” Spokesmen from the companies could not say how the deal is being financed. According to Actinver analyst Marisol Huerta, Radio Shack contributed to 14% of Gigante’s revenue in 2007. She also says Gigante has $400m in cash, which allows the company to look for acquisition opportunities. Gigante recently said it would invest up to $50m to expand Office Depot de Mexico – in which it holds a 50% stake – to Colombia, possibly through acquisitions.
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Gold Target Fends Off Bidder
Gold Reserve is fighting off an unsolicited offer from Rusoro Mining, citing a conflict of interest at Rusoro advisor Endeavour Financial. The potential target alleges that Endeavour also provides advisory services to Gold Reserve and has in-depth knowledge of confidential and proprietary information about the miner. Because of this, Gold reserve is seeking an injunction restraining Rusoro and Endeavour from proceeding with the unsolicited offer, significant monetary damages, and various other items. Rusoro is offering to buy each of Gold’s outstanding shares and equity units for three shares of its own. Gold Reserve has retained RBC Capital Markets and JPMorgan as financial advisors, and Fasken Martineau DuMoulin and Baker & MacKenzie as legal advisors to evaluate the offer
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Ecuador Seen Pushing for Harsh Haircut
Moody’s has downgraded Ecuador to Ca with a developing outlook from Caa1 on review for possible downgrade and expects significant losses for bondholders. “The new Ca rating for Ecuador, the second lowest in Moody’s rating scale, expresses the likelihood that expected losses will be very high to bondholders, placing Ecuador’s default much closer to that of Argentina in 2002 than that of Uruguay in 2003,” says Moody’s senior analyst Alessandra Alecci. “We expect negotiations with bondholders to be complicated and drawn out with bondholder participation in an exchange perhaps limited by the country’s solvency and its unclear grounds for default,” she adds. “We expect the government to propose a very aggressive 80%-90% reduction in principal and a strong and likely protracted legal battle to ensue, with bondholders trying to enforce their claims against an admittedly solvent and liquid debtor that is not experiencing any form of financial distress,” says Goldman Sachs in note Tuesday. “That is, the default was triggered by manifest ideological and dogmatic unwillingness to pay not any clear economic or financial need for debt relief,” it adds. Ecuador’s debt indicators are among the most favorable in the region and compared to similarly rated peers around the world, says Moody’s. The debt-to-GDP ratio stands at around 23%, well below the 85% level during its previous default in 1999 and Argentina’s 150% prior to the 2002 default, according to the agency. Measured against central government revenues, Ecuador’s debt burden is small at 100%, compared to over 500% in 1999.
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Cemex Pays up to Extend Loans
Mexico’s Cemex is paying a significant premium to term out as much as $4.7bn in loans by 1-2 years, following downgrade to junk amid looming nearby debt maturities. The refinance involves bilaterals and part of a 2006 Rinker acquisition facility. Bankers on the deal say the company hopes to close renegotiations by the end of the year, but will likely end up finalizing the process early in 2009, since credit committees are all but closed for calendar 2008. On the $6bn acquisition facility, Cemex is asking lenders to extend maturities for a portion of the B tranche with a value of $1.5bn-$2.0bn until December 2010, from a scheduled end-2009 due date. To get banks to term out 12 months, Cemex will boost total payback including margin and fees to Libor plus 200bp through 2009, and Libor plus 225bp-250bp through 2010, depending on ticket size and currency, from 40bp originally, according to a banker close to the talks. Cemex is also asking bilateral lenders at the holdco level to extend on up to $900m, while bilateral lenders to Cemex Espana are requested to refinance $1.8bn. Two new joint bilateral facilities (JBFs) – one for each borrowing entity – are being created so as to group bilats in a basket that includes different maturities and lenders. Both JBFs mature in February 2011 and carry rates equivalent to Libor plus 200bp-300bp. Most of the loans Cemex raised in 2004-2007 priced well beneath Libor+75bp. In general, the process is gaining positive momentum, though some banks are choosing not to extend and will be demanding timely payback, say people involved the deal. BBVA, Citi, HSBC, RBS and Santander are leading the refinancing.
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S&P Predicts 0%-30% Ecuador Recovery
S&P has cut Ecuador to SD from CCC minus and predicts scant payback for investors still holding sovereign bonds. “The recovery rating on the global 2012s and global 2030s is 6, indicating the expectation for negligible (0%-10%) recovery in the event of a payment default,” says the agency. “The recovery rating on the global 2015s is 5, indicating the expectation for modest (10%-30%) recovery in the event of a payment default,” it adds. The downgrade follows the government’s decision not to pay $30.6m due on $510m in 2012s, which were chopped to D from C. The $650m in global 2015s fell to C from CC, while $2.7bn in global 2030s were unchanged at C. “We do not expect the government to make the next coupon payment of $135m on February 15, 2009, at which time we would revise the rating to D,” says S&P. The default by Ecuador is its second in less than 10 years and the second by a rated sovereign in 2008. S&P revised Seychelles to SD in August. S&P’s assessment is much more gloomy for investors than Fitch, which sees up to 50% payback from the 2015. It chopped the sovereign to RD from CCC, assigning 11%-30% recovery prospects to the 2012s and 2030s, 31%-50% on the 2015 and 51%-70% on pars and discounts. Fitch sees a bigger loss on the 2012s and 2030s since the government deems them “illegal” and “illegitimate.”
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Other Sovereigns Unlikely to Follow Ecuador
Despite concerns that an Ecuador default sets a dangerous precedent for other sovereigns whose willingness rather that ability to pay is in question, analysts do not expect others to follow. “Investors will remain largely unconcerned about default risk in Brazil, Chile, Colombia, Mexico and Peru. Investors will likely continue to worry about Argentina and Venezuela, given their weaker institutional frameworks. However, we expect that both of these countries will continue to service their debt in 2009,” says Credit Suisse. It adds that Ecuador has been a LatAm trouble spot for a long time and is relatively small, with 1.3% of regional output and 2.5% of total population. “Collateral economic damage from the default should be small, as well as the demonstration effect, as most other countries in the region probably will not even consider the default route,” Credit Suisse adds. “No other Latin American country will follow the Ecuadorian default,” Barclays chimes in. Credit Suisse notes that defaulting LatAm governments have run into political difficulty and that not paying the debt could have negative implications for Correa’s reelection in April. Credit Suisse says some investors will likely try to take action against Ecuador in US courts, possibly also seeking to attach Ecuadorean assets abroad. Only 2015s have collective action clauses, which should complicate the restructuring process. Others are not so sure the impact is contained. “This default is significant because the country actually had the funds to make the payment but decided against it,” says Merrill Lynch. “The risk here is that other countries, such as Venezuela, may follow,” it adds.
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Fitch Chops Venezuela to Single B
Fitch has downgraded Venezuela to B+ (stable) from BB- amid increased risk of financial and economic crisis due to a tenuous macro policy framework and concerns that a timely adjustment may not be forthcoming, particularly within the context of upcoming electoral events. “Electoral processes in 2009 and 2010 will deter the government from making difficult policy choices to address current macroeconomic imbalances,” says Fitch. It also highlights dependence on oil revenues, high inflation and an overvalued fixed exchange rate. Fitch expects Venezuela to revert to a net public external debtor in 2009, while most BB credits will remain net creditors. “In addition, the country’s international liquidity could fall below the BB median by 2010,” adds Fitch. However, it notes a comparatively low government debt burden and manageable government debt maturity profile, as well as an accumulated $18bn in liquid external financial assets in addition to international reserves of $38bn. “Government debt maturities, at 2% of GDP in 2008, are forecast to decline to less than 1% of GDP over our forecast horizon,” says Fitch.
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Chile to Ease Rates in 2009
Chile is expected to begin easing rates in 2009 as GDP growth slows and inflation drops in tandem with the price of commodities. For the past three months it has kept rates unchanged at 8.25%. While Merrill Lynch expects interest rate cuts to begin in January, Morgan Stanley thinks it would be premature to start so early, but agrees that easing will start in 2009. Merrill forecasts GDP will grow 3.9% in 2008 and 2.3% in 2009. It estimates inflation will drop to 4.2% by the end of 2009 from an estimated 8.0% at end 2008. Morgan Stanley forecasts Chile’s GDP will grow by 4.0% in 2008 and 1.5% in 2009. It estimates inflation will ease to 4.5% by the end of 2009 from an estimated 8.9% in 2008.
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LatAm Equities Seen Recovering in 2009
LatAm equities are poised for a 39% rally next year, according to Merrill Lynch. The shop predicts the region’s 7.0x 12-month forward P/E ratio, an 8.6% discount to other EM equities, leave the region’s indices well positioned for a pickup in coming months. LatAm corporates’ relatively low leverage will also contribute to a faster recovery for the region, says the shop, which recommends an overweight position in Brazil, a neutral position in Mexico and an underweight in Chile equities. Strong macreconomic policies and swift, effective responses to the credit crisis by central banks also bolster the region’s equity markets heading into 2009, says the shop. “Brazil is trading at an attractive 19% discount to GEM’s – back to the levels presented in February 2007 when the country was not investment grade – and presents the strongest case for valuation multiples re-rating to GEMs and developed markets, in our view,” says Merrill. Dedicated LatAm equity investors have lost almost 60% this year, according to Lipper, so the 39% rebound is only a two-thirds retracement. And the region’s markets will likely stay highly correlated to US markets, which look set for further downside as the recession gains pace, so bullishness may be premature.