While the Nasdaq Stock Exchange gyrates and the dollar bond market is largely closed even to sovereigns, companies across Latin America are finding they can issue dollar debt to low-profile buyers without difficulty. Corporate issuers are quietly and efficiently selling short-dated paper that hovers below the radar screens of most banks and investors.
The private placements market is as strong now as it has been at any point since the 1998 Russia crisis. Private placements are far removed from the turmoil of the public Latin bond markets, where the Mexican 2026 global bond plunged 20 points in a few short weeks between Moody’s upgrade and the US Justice Department’s attempt to break up Microsoft. After all, it’s hard to have any sort of turmoil when it comes to private placements since the secondary market is nonexistent.
The typical private placement is about $50 million in size, carries a one-year maturity, and yields 9%-10%. Because it is likely to be unrated, and certainly won’t have an aftermarket, it’s automatically off-limits to the vast majority of institutional investors, which have to mark their positions to market. It’s also of no interest to any investor who wants to be able to exit before the paper matures.
That leaves a handful of specialist hedge funds and a large number of private banking clients who generally like to keep a very low profile. Most are Latin American themselves, reinvesting maybe 20% of their portfolios in assets issued by borrowers from their home countries.
Latin America has always had a large number of wealthy families which generally have a very different perception of country risk than western institutional investors. Private placement deals are primarily a function of the private banking market, where bankers around the world persuade their Latin clients to take on certain credits.
Lower Relative Risk
Turmoil in Latin America can even boost the market for private placements. Countries like Brazil and Ecuador suffer enormous capital flight when their currencies crash; that capital often ends up in bank accounts in Switzerland or Panama and has to be invested. And while its owners might not want to be invested in reais or sucres, they see no great risk in dollar-denominated paper of local companies with strong balance sheets.
In fact, says Felipe García, head of Latin research at IDEAglobal.com in New York, “corporates may not be as bad as the sovereign.” García points out that in cases of devaluation, exporters can benefit greatly. While wealthy individuals from Latin America are looking for a place to put their money, Latin corporates are desperate for funding.
The credit crunch might have loosened up a little bit since the height of Brazil’s devaluation, but real interest rates in the region are still prohibitively high, and local banks often have little interest in lending to anybody other than their own governments. The private placement market insulates investors somewhat from the oscillations in their tech stock accounts in the US.
And while the Latin bond market has been closely correlated with Nasdaq lately, there’s no such worry with private placements: the only risk there is is default. Garcia says that “even if tech stocks get killed, commodity prices will continue to go up. The recovery will continue in Asia and Latin America.”
Corporates and Banks
The market in Latin private placements is roughly evenly split between real-economy companies, often exporters and utilities, and financial concerns. Bank finances are generally more transparent than those of corporations, and retail investors find it easier to understand the business.
Brazil’s Bic Banco in May issued a one-year, $25 million tranche at 10.25%. Also in May, Mastellone Hermanos, a leading Argentine food producer, executed a one-year, $30 million private placement deal at 11.33%. And Avianca, a Colombian airline owned by the beer company Bavaria, recently placed a $30 million, one-year deal with a 9.25% coupon.
Buyers of private placements like the way in which they have more control over their investments than they would if they were buying a plain-vanilla bond. They generally spend more time researching the credits in which they are investing, and can sometimes dictate structures to the issuer.
“Our client base likes financials more,” says Peter Wallin, senior vice president at private placement specialist Standard Bank in Miami. Banks are also usually financially sophisticated, and open to reverse-inquiry deals specially structured to the needs of these investors. “You have investors looking for alternatives,” says Walter Molano, head of research at BCP Securities. “There’s been a lot of diversification in our market away from the plain-vanilla structures we saw in 1997.”
And although private placements are usually not cost-efficient for the big investment banks, which dominate the primary market in eurobonds, occasionally even they get involved. UBS Warburg, for instance, lead-managed a $275 million deal (later upped to $300 million) for Mexican telecommunications company Maxcom at the beginning of March. The seven-year notes carried a 13.75% coupon, as well as coming with 5% of the company’s equity attached.
And so long as companies need money and investors need a place to put it, people like Standard’s Wallin will be able to make a solid living by bringing the two together. “We’ve done over $1 billion of deals in the last 18 months,” he says.