Latin companies are returning to the equity markets this year with the largest issuance volume in years. Unfortunately, few of the region’s stock markets will get much of this business. Even in Brazil and Mexico, the only two countries with reasonably large markets, most of these listings will be offshore.
Deregulation, looser capital controls and the rise of the Internet have made access to the global markets for investors and issuers alike much easier. New York trades more Latin American stocks than anywhere else in the world. And nearly all the region’s biggest companies are listed in the United States and often trade more actively on the New York Stock Exchange or on the Nasdaq Stock Market than they do at home.
There are so many advantages of an international listing over a local one that the day may come when only the smaller, less liquid, less well-known names will retain a local following. For the big, liquid stocks that have a high international profile, there may well be no reason other than sentimental attachment for them to remain listed at home. Local investors need not necessarily be short-changed by this process, since it is just as easy to trade stocks in New York as it is in Santiago through online brokerages.
In fact, the larger capital-hungry companies have little choice but to look for new shareholders overseas. A New York investment banker says “there is not enough of an indigenous financial system left in Latin America to fund companies. There is tremendous dependence on external [capital] sources. Companies have to bypass their local equity markets.”
Only Two Really Count
And there really are only two markets that count: the New York Stock Exchange and the Nasdaq Stock Market, each offering lots of options for listed companies. As the investment banker says: “once you are in New York, you can do everything: equity, high yield, convertible, debt issues. Everyone wants access to the US markets. We get a lot of our business from London accounts.”
Companies can list in the US either directly or by issuing American Depositary Receipts. The ADR program is flexible because it allows companies to select one of three levels, each of which requires increasing levels of financial disclosure. Listing directly on a US market imposes the even more demanding standards required of all US companies.
Depositary receipts are issued by US commercial banks and represent the shares in non-US companies that are listed on their home stock markets. ADRs are priced and pay dividends in dollars, and allow American investors to trade foreign shares just as they do for US companies. Nearly all Latin companies listed on NYSE do so in ADR form – only three Panamian companies and a Peruvian bank have listed ordinary stock on the exchange.
The creation of Latibex as a new market tailored especially for Latin stocks in Madrid and the merging London and Frankfurt markets provide companies with access to the consolidating European capital markets and the possibility of trading in a new time zone.
However, few are under any illusion that these markets can supplant the US equity markets, the deepest in the world. Latibex lists eight companies and daily trading volume this year averaged Eu160,000. The NYSE has 106 Latin American companies and recently listed Brazil’s mining company Cia. Vale do Rio Doce, which turns over more than all eight stocks do on Latibex, where the company is also listed.
There are many advantages to an international listing. One is that companies gain access to a wider pool of US and global investors. The decline of country equity funds, which are being replaced by global and regional funds, has made it all the more important to list in a major international market. Another reason is that the highly liquid US markets can easily accommodate an equity issue that would swamp even the larger Latin markets.
Meanwhile, a US listing is becoming obligatory for larger companies that need regular access to American and international capital markets. Listing in the US confers a stamp of respectability, since it requires a company to submit to high standards of disclosure and transparency. Only one new technology company, Brazil’s IdeiasNet, has so far listed on a local market. Most Latin investors are uncomfortable with the idea of backing a loss-making start-up. The Nasdaq has made it a mission to list new, high-growth companies from the US and overseas.
Another reason for listing in the US is that it is essential for a company planning to acquire businesses outside its home market through stock deals. Only US-listed stock commands sufficient credibility to make stock deals work. Once rare, payment in stock has become fashionable in Latin America’s world of Internet finance, imitating its success in the US.
Many of the advantages of raising equity capital away from home are well known, but there are plenty of drawbacks too. Even companies considered sophisticated at home lack some of the skills required to manage a stock listing. This goes beyond initial contact with investors at roadshows, to maintaining an effective investor relations program. Petrobras, the Brazilian oil company planning a $4 billion local and international secondary share offering this year, has only just created an investor relations department.
It is a lot harder to keep investors abroad interested in a company than at home, where the local business press follows its progress closely and the investing public needs no introduction to the larger names. In the US, even the large-capitalization Latin companies are usually classified as risky small- or medium-cap stocks. Interest in these companies beyond the emerging market and Latin fund managers is episodic and scarcely forms a dedicated investor base.
In any case, there is little chance that the medium-cap companies that predominate in the local markets can ever aspire to a listing in New York. As for Latibex, custom-made for Latin or Spanish companies doing business in the region, it only accepts the largest and most liquid names. The new exchange has only signed up eight companies since the market launched in December 1999.
Yet there is no reason to write off all of Latin America’s stock markets. The stock exchanges in Mexico and Brazil are adopting more efficient trading mechanisms and linking up with markets around the world (see story page 45). Both countries have large and rapidly growing domestic pension and investment funds.
The dire situation of Argentina’s equity markets, which have fallen on hard times as liquidity shriveled and companies delisted, could be reversed if the government relaxed investment controls on the country’s pension funds. The government currently prohibits pension funds from investing in all but the very safest shares. And if the region’s economic recovery continues, the prospects for equities should start to improve as well.