By Michael Fitzgerald and Taisa Markus, Partners, Milbank, Tweed, Hadley & McCloy LLP
Despite recent ups and downs related to the global credit crisis, Latin American equity capital markets have grown explosively in the last two decades. There is a strong sense that Latin American equity capital markets are in the process of decoupling from U.S. financial markets even if regional economies remain to a great degree affected by the U.S. economy.
There are a number of events and developments that have come together to support this trend. Growing economic liberalization and sound fiscal and monetary policies in most countries in the region, the economic expansion in the region, globalization, the emergence of China and other Asian economies as important trading partners in addition to the United States, the recent run up in commodity prices, relative political stability and an improved regulatory climate are perhaps the most important factors. The region and investor interest is markedly different than twenty years ago. What were considered “exotic” or high risk investments twenty years ago are now mainstream investments. Possibly for the first time ever, investors are beginning to view Latin American markets as a safe haven from the economic uncertainty in the United States. The IMF stated recently that the region was better placed than in the past to absorb a sharp slowdown in global growth, partly because of the continued stability of local financial markets. The very recent designation of Brazil and Peru as investment grade countries provides additional confirmation that Latin American investment risk is viewed very differently than in the past.
Just as deal volume has risen so has the sophistication of regional markets and players. The focus of the disclosure and documentation in equity offerings has shifted from a pure U.S.-centric approach to a balance between U.S. and home country market and legal concerns. The first equity offerings out of the region in the early 1990s were for the most part fashioned as full blown SEC registered offerings of ADSs listed on a U.S. exchange (typically, the NYSE) which traded in U.S. dollars and paid dividends in dollars reflecting investor expectations and comfort levels. Similarly, disclosure documents contained U.S. GAAP financial information. Typically, there was a very small or no local tranche in the global offering. Because of the ease and formidable size of the Rule 144A Qualified Institutional Buyer market, increasing convergence of accounting and disclosure standards and higher comfort levels of analysts and investors with local markets and accounting principles and regulations, many equity offerings and most IPOs are now done as public offerings in the home country with no SEC registration or U.S. listing. Home country GAAP is generally accepted now.
From a market perspective, typically, a sizable tranche of the deal will be placed locally, often to retail investors, in addition to the U.S. institutional tranche. In these deals, the securities are no longer offered in the form of ADSs but directly so that investors hold securities that trade locally in local currency and pay dividends in local currency.
Significant securities reforms in many countries in the region, most notably, Brazil and Mexico, and increased liquidity in the local markets have been important developments in recent years. Disclosure standards and periodic reporting requirements have moved closer to U.S. requirements in many jurisdictions. In Mexico, new rules allowing local pension funds to invest more heavily in shares drew US$650 million in new money into the market in March. Latin American companies have been at the forefront in recent years in marketing hybrid securities, many of them being “perpetual securities”, that combine the tax, accounting, ratings and other benefits of both debt and equity securities.
These structural developments in the region have led to significantly increased levels of activity for Latin American investment banks and local law firms. Experienced lawyers and bankers in these cross-border transactions keep in mind that multiple markets, disclosure standards and regulatory regimes are involved and must be coordinated and sometimes reconciled to ensure successful execution.
Brazil and Mexico have been at the forefront of equity issuances during the past five years, with Brazil accounting for the lion’s share of the IPOs. Other countries in the region that have been significantly involved in capital market issuances include Argentina, Colombia and Chile, with an increased number of issuances from Central America and the Caribbean.
Latin American capital markets slowed significantly immediately after the credit crisis started last summer, but experienced a rebound in late spring and early summer. Two Brazilian IPOs priced in late April, two Mexican IPOs (the Mexican Stock Exchange itself and Genomma Labs) priced and closed in June and a number of Brazilian and Mexican debt offerings have recently closed. The medium to long-term trends in the region continue to be very positive from an economic, political and social point of view. n