Market consensus points to an expected 25bp hike in Peru’s policy rate, increasing it to 4.00%. Morgan Stanley says that the central bank will have to continue tightening rates to contain inflation. It expects the rate to reach 5.50% by the end of the year. Barclays, however, expects a 50bp hike, saying that strong domestic growth –of around 10% year over year in February- gives the central bank room for more aggressive tightening.
Category: Corporate & Sovereign Strategy
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Vitro Selling US Assets
Vitro America, the US subsidiary of Mexican glassmaker Vitro, has asked a Texas bankruptcy court to allow it to sell all of its assets to Grey Mountain Partners, a US PE firm. Vitro America is also requesting a $30m DIP financing for BAML and additional $7.5m from Vitro.
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First Citizens to Hire M&A Advisor
Trinidad & Tobago-based First Citizens Bank expects to hire an M&A advisor by the end of May, CEO Larry Howai says. “We sent out requests for proposals a few weeks ago,” he notes. He says there is no certainty that the bank will actually acquire another financial institution, but that it is seeking opportunities. “We would focus on investment grade countries in the Caribbean, but we could look outside of the region too. We could even consider Central America if the right opportunity came along,” he says. Howai says the bank would consider paying between 1-1.5x book value. This is not the first time First Citizens would consider acquiring another bank. Howai says that just before the global financial crisis, the bank worked with Deutsche and BNP Paribas, but that plans were scrapped when the crisis hit.
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Investors Upbeat Despite Subdued Flows
With EM debt seeing slowing inflows and some managers seeing outflows, investors remain positive towards the asset class. EM bond funds posted a net inflow of $2.32bn for Q1 2011, according to EPFR, a shadow of the $11.54bn recorded during the comparable period last year. “There is still a need for income,” says Paul Denoon, head of EM debt at AllianceBernstein. “For fixed-income it is an issue of relocation,” the investor says, explaining that there may be more funds going into products other than straight EM, such as multisector funds with an EM component. The slowdown in flows is not a major concern at this point, he says. “Interest is still high in EM,” says Denise Simon, EM portfolio manager at Lazard Asset Management. She says investors are still underexposed to and interested in EM, and describes the slowdown as “natural” and “healthy.” Alberto Bernal, head of research at Bulltick, notes that many local pensions in LatAm are investing less in EM assets and more in cheap US assets. EM performance is lagging as well. EM external debt has returned just 1% this year, compared to 4% for US high yield, 4% for EM equities and 6% for the S&P 500, according to HSBC. Optimism about a US recovery may be diverting funds away from pure EM bond investment and could pressure the asset class further if it is joined by US rate hikes expected later this year, Pablo Goldberg, head of EM research at HSBC, says. He notes that too little US growth is also unfavorable, as US and China are still key drivers for EM economic performance. All spoke on an EMTA panel in New York Monday. Panelists saw the EM debt benchmarks returning 4%-6% this year, and local currency benchmarks returning about 7%.
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Vale Names New CEO
Vale’s controlling shareholders have named Murilo Ferreira to replace Roger Agnelli as CEO when Agnelli’s term expires next month, it says. Valepar, the controlling shareholder of the Brazilian miner, had indicated last week it would seek a new CEO following months of speculation as the government – holder of direct and indirect stakes – repeatedly criticized Agnelli. The choice of Ferreira surprised the markets somewhat, with Vale Canada head Tito Martins having been the most discussed candidate. Ferreira held various positions at Vale from 1998-2008, most recently president of Canadian operations, and returns after being a partner in Rio de Janeiro-based hedge fund Studio Investimentos. Brazil’s government had argued that Agnelli should invest more in areas such as steel, shipbuilding and fertilizer, in order to create jobs in Brazil. Government-related pension funds Funcef, Previ, Petros and Funcesp own 49% percent of the Valepar vehicle, with other holders including the BNDESpar investment unit of government development bank BNDES. Apart from these stakes, the government also owns 12 “golden shares” in Vale that give it veto powers over certain key decisions including changing the location of the company´s headquarters or its corporate purposes. “This is good news to the company and should affect positively share prices for the moment as it finalizes quickly a process that is key to the company’s businesses,” Banif says in a report. Vale common shares closed up 0.5% to BRL54.40 Tuesday, and preferred shares rose 0.1% to BRL48.30.
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Vene, Ecuador Face Payment Difficulty: Investors
Venezuela and Ecuador are two of the EM sovereign issuers that will face the most difficulty servicing their debt in the future, according to panelists at an EMTA event. Though a default for either is not an immediate concern, the two are seen as facing fundraising challenges. “At some point, it will become complicated for Ecuador to pay their 2015 bond,” says Alberto Bernal, head of research at Bulltick. The sovereign has no access to markets and its dollarized economy makes it unattractive to lenders, as the government has no devaluation option, he says. Venezuela is popular for its high yields and buoyed somewhat by high oil prices, but could run into spending trouble ahead of elections next year. “It’s a crisis waiting to happen, at some point they will run through their balance sheet,” says Siobhan Morden, head of LatAm research and strategy at RBS. Morden does not see a balance of payment or a credit crisis in the next 24 months, but notes clear downside risks. “Our next concern is an over-leveraging in the corporate sector,” says Paul Denoon, head of EM debt at AllianceBernstein, rather than sovereign default. He does not see this as a problem within the next 12-18 months, however, noting only that EM corporates are borrowing at a concerning rate. “There are more high-yield corporate issuers than we have had in the past,” says Denise Simon, EM portfolio manager at Lazard Asset Management. She says not all of them should be borrowing and not all investors are doing their homework. All spoke on an EMTA panel in New York Monday.
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LatAm Equities See Outflows
In the week ended March 30, LatAm equities saw outflows of $80m, according to EPFR Global, the 11th consecutive week of inflows. “Sentiment towards the region’s biggest market shows some signs of thawing with Brazil equity funds posting inflows for the first time since the second week of January as evidence that fiscal discipline is beginning to have an effect brightened the outlook for interest rates,” EPFR says. Brazil equities posted inflows of $7m in the week. GEM equity funds had inflows of $1.5bn. As for performance, Lipper data shows that in the week ended March 31, LatAm equities gained 6.23%, but are still down 1.54% year-to-date. Meanwhile, EM equities gained 6.34% in the week and are up 0.33% ytd. Global small and mid-cap funds are up 4.77% in the week and 3.89% ytd.
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Mexico’s Quintana Roo Downgraded
Moody’s has downgraded the State of Quintana Roo to Ba2 from Ba1 on a global scale and has revised the outlook to negative from stable. The downgrade reflects the deterioration of the state’s financial performance, including sizeable fiscal deficits in the last 2 years, recent increases in the level of debt and a contraction in net working capital. The state faces significant challenges to address its finances in the near to medium term, Moody’s says. The rating could also be downgraded further if the state does not refinance its short-term debt with longer-term debt. The ratings agency also downgraded the ratings of 7 loans given to the state, via Idefin, as the performance of the loans could be affected. Idefin is a quasi-government institution created by the state of Quintana Roo to assist the state and municipalities to access credit. The loans were downgrade to Aa3 from Aa2 on a national scale. The loans total MXP4bn and come from Banamex, Banorte, HSBC, Interacciones and Scotiabank.
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Vale Holders Aim to Replace Angelli
Valepar, the controlling shareholder of Vale, has hired a headhunter to find a new CEO for the Brazilian miner, it says in an announcement Friday. The announcement confirms long-standing market rumors that shareholders were unhappy with current chief Roger Agnelli. Agnelli’s term expires in May, and Brazil’s government has criticized him for not having spent enough on Brazilian projects. Brazil’s government holds direct and indirect stakes in Vale, and has argued that Agnelli should invest more in areas such as steel, shipbuilding and fertilizer in order to create jobs in Brazil. Government-related pension funds Funcef, Previ, Petros and Funcesp own 49% percent of Valepar, with other holders including the BNDESpar investment unit of government development bank BNDES. Apart from these stakes, the government also owns 12 “golden shares” in Vale that give it veto powers over certain key decisions including changing the location of the company´s headquarters or its corporate purposes.
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Funds Flow into EM Bonds
In the week ended March 30, EM bonds saw inflows of $441m, EPFR Global says, adding that this is an 11-week high. “Flows into EM bond funds continue to favor funds with local currency mandates and, from a geographic perspective, those with an Asian focus,” EPFR says. Performance was also positive, with the funds gaining 1.02% in the week ended March 31, and 1.54% so far this year, according to Lipper.