The transformation of Brazil from emerging markets demon to safe haven LatAm proxy in just six years may be a red light on the dashboard, but now at least global traders will find it much easier to express a view. Starting in September, BM&FBovespa products will be cross listed on 100,000 terminals globally as part of a link up with the CME. A tsunami of liquidity is expected.
Some Brazil traders will be burned by aggressive US quants rushing in. But longer term, a strong positive jolt should be given to trading, the link missing from most Latin domestic capital markets.
Brazilian domestic trade has thus far been limited to government bonds, which set valuable but neglected benchmarks. Lack of real secondary flow blocks the way forward, both for companies that need to access to longer-dated funds in their own currency and domestic investors accumulating more cash than ever before. A glut of foreign capital may be the only way to break the vicious cycle, ossified by a culture of buy and hold.
Everyone stands to gain from the hot money injection. Overseas investors are more willing to take risk through longer tenors, lower rated debt and active trading. Infant secondary markets should welcome the business as a means to acquire a trading culture. State of the art technology will also give Brazil an important edge when it comes to competing for global liquidity.
And the flow is not one-way. There is a large amount of cash building in Brazil, and not all of it can be invested at home. Brazilian investors, typically comfortable with risk, are basking in a strong currency and can now play all of the CME’s products with greater ease. Brazilian corporate issuers should also benefit as plethora of long dated and liquid hedging options open up.
Many locals will be caught with their pants down as more experienced and, in some cases, automated foreign traders scoop up inefficiencies and there will be short term pain. For Brazil’s open outcry traders, a leap into global markets spells the end of an era. But longer term, these changes mean Brazil should set the pace for domestic capital markets still missing a vital piece of the puzzle.
Cash rich private equity investors are shunning Mexico in favor of what they claim are less corrupt LatAm markets, like Colombia and Peru. Meanwhile, one of the region’s biggest steelmakers, AHMSA, is well into its ninth year in default on almost $2 billion in debt.
The two may well be connected.
The AHMSA saga is the stuff of Hollywood blockbuster, including fugitives from justice, overseas arrests, allegations of tax fraud and a northern Mexican town that is little more than a steel works. But most markets participants have lost interest as both company and creditors are distracted and unlikely to make progress short term. The Calderón administration has bigger fish to fry, but it should be aware that capital markets would greatly benefit from a resolution.
Poor corporate governance is a major factor retarding the development of Mexican debt and equity, including an expansion of the issuer universe and broadening of foreign investor participation. Family run firms tend to be reluctant to open themselves up to competitors and share information or even decision making within the company.
AHMSA recently unveiled its best quarterly results ever and made vague reference to advancing the restructuring process. As the raw materials prices hold firm and global giants like Vale scout for assets outside Brazil, there is a good chance for the controlling Ancira family to exit for a fat profit.
Dealing with a restructuring from a grandfathered bankruptcy regime is complicated and unpredictable, but there must be some willingness from the debtor to put a deal on the table. Having twice pitched a solution and failed to agree – including a 2002 proposal that was jilted at the altar – it is hard to get too excited about an AHMSA resolution. And if a major problem before was lack of creditor leverage, they have even less now that the main Mexican banks are out and the other main drivers of the process are distracted by bigger events abroad.
April 2009 marks the tenth anniversary of the steel company’s default. All sides – in particular Mexican capital markets – have much to gain by ensuring AHMSA is unable to celebrate it. LF