Argentina’s descent into default, an energy crisis in Brazil, a slowing United States economy and the terrorist attacks made financing Latin American governments and corporations last year an increasingly difficult and expensive task. “It was a textbook succession of shocks,” says Daniel Gleizer, the outgoing international director at the Central Bank of Brazil.
Investors demanded higher prices for financing even the soundest economies and businesses. Bond issuers and their bankers reacted by offering more sophisticated products to mitigate risk. And to reduce their financing costs where possible, Latin American companies turned to bonds with political risk insurance or future flow securitizations that isolated hard currency receivables offshore. Credit enhancement and risk mitigation will continue as key themes this year as the region faces uncertain and unpredictable access to world markets.
The economic outlook is not promising. The US is in recession and foreign direct investment to Latin America has slowed. The Institute of International Finance says foreign direct investment in Latin America has declined for four consecutive years, to $44.6 billion last year from a high of $98.7 billion in 1998. The IIF estimates a further decline to $42.7 billion this year. Even so, Latin America surpassed Europe, the Asia-Pacific and Africa and the Middle East as the biggest recipient of foreign direct investment in 2001. The Asia-Pacific region was second with $38.1 billion in FDI last year.
The decline in foreign direct investment accounts for much of the slide in merger and acquisitions activity. According to Dealogic, an investment banking research company, M&A transactions in Latin America dropped by more than half to $50.5 billion and 602 deals last year compared to $118.2 billion and 747 deals in 2000. Latin American companies were targets for 566 deals worth $48.5 billion in 2001, down from 717 deals worth $99.1 billion in 2000.
Latin America’s financial markets have become more aligned with the global markets, mirroring their trends. “In 2001 we saw a distinct slowdown in M&A, equity activity and debt financing globally,” says Brian O’Neill, JP Morgan’s chairman for Latin America. “We saw the same in Latin America.”
European companies, the keenest acquirors of Latin American assets in 2000, all but disappeared as buyers. Acquisitions by European companies fell by 75% to $13.4 billion and 171 bids last year from $53.2 billion and 267 bids in 2000. But investment by US companies in the region actually increased to $17.1 billion in 2001 from $14.9 billion in 2000, although the number of deals dropped to 94 from 165. Citigroup’s $12.82 billion acquisition of the Mexican banking group, Grupo Financiero Banamex-Accival, in May accounted for 74% of US investment in Latin America last year.
Brazilian companies fell out of favor with acquirors. Concerns over the country’s energy supply, the volatile exchange rate and sudden deceleration in the economy all made the environment too risky for most investors. Brazil felt much of the heat from Argentina’s crisis all year. Investors also worried about how Brazil’s energy crisis would affect economic productivity. Real GDP growth slowed to 1.6% last year from 4.5% in 2000, which negatively affected the country’s currency. The real lost more than 40% of its value by September although it staged a rally in December. Consequently, M&A deal volume in Brazil plunged to $15.9 billion from $46.6 billion in 2000.
In Mexico, the dollar value of corporate acquisitions actually rose last year. Mexican companies were targets for $18 billion worth of transactions, up from $16.1 billion in 2000. The size of the Citigroup-Banamex merger however overshadowed the fact that the number of bids for Mexican companies dropped to 89 last year from 122 in 2000. Still, Citigroup’s momentous acquisition of Banamex was a further confirmation that international investors are convinced of Mexico’s growing economic integration with the US.
Latin American acquirors accounted for $16.1 billion, or 32% of total M&A transactions last year. But the volume of transactions they entered into dropped way off as well, down from $24.5 billion in 2000. Although there has been less financing associated with M&A activity, banks are still winning advisory mandates, says Carlos Guimarães, head of Latin America investment banking at Citigroup. But he says many large and mid-sized family-owned companies are resisting pressure to sell at depressed prices. “The decline in valuations means that a lot of local sellers will think twice before selling at these valuation levels,” he says.
There are relatively few companies left in Latin America that are large enough to interest multinational companies but they can interest pan-regional companies such as Telmex, the Mexican telephone company or Bimbo, the Mexican bakery. Brazil’s Gerdau, a steelmaker, has also quietly expanded its presence across the region for years. Even so, local buyers faced more difficulty throughout the year raising financing for acquisitions, says Guimarães.
Equity Stumbles
Equity markets suffered badly in 2001. Market indices in Chile, Brazil and Mexico were all down an average 3.56% in dollar terms, according to Economatica, a Latin American financial markets database. In Argentina, the Merval index lost over half its value by November, before recovering in the final weeks of the year. Investors in Latin American equities shifted their money into cash or the fixed-income market. “Fund flows moved out of equities into more liquid instruments and that led to the ability of certain sovereigns to access the markets,” says Stephen Cunningham, managing director and head of Latin American investment banking at Morgan Stanley. According to Dealogic Latin American equity issuance plunged to $1.4 billion and three issues last year from $9.8 billion and 11 issues in 2000.
The IIF estimates a $6.4 billion net outflow of Latin American portfolio equity last year, more than the $4.9 billion that left the region in 2000. However the IIF expects the retreat from Latin American equities to ease this year, forecasting a net outflow of $900 million.
No truly Latin American company dared to launch an initial public offering. Bunge Ltd, the US-domiciled grain trader that was once headquartered in Buenos Aires, raised $281.6 million when it floated 21% of its total capital in August. CSFB and Morgan Stanley led the deal. There were three secondary equity offerings for Latin American companies in 2001. Morgan Stanley helped the Brazilian aviation company Embraer raise $652 million by selling American depositary receipts and preferred shares in June. Citigroup led a $696.2 million institutional offering of secondary shares for Brazil’s national oil company, Petrobras, in July. Bankers doubt there will be much of a revival in the equity markets this year. “I would not expect to see a big snap back in primary issuance,” says JP Morgan’s O’Neill. “But we will see some successes with good value as we did this year. It is important that deals have the premise of being liquid. If a deal promises liquidity in the right industry at the right point in the cycle, it can get done,” he says.
Brazil’s new corporate law, which strengthens minority investor rights, has yet to revive the equity markets, which remained stagnant for much of 2001. But there were signs of revival after September. Even the Buenos Aires Stock Exchange’s Merval index staged a late rally in December as Argentines bought the stock of companies with American Depositary Receipts to hedge against confiscation of their assets and devaluation. The Merval rose 17.5% on December 20, the day Fernando de la Rúa quit as president. But bankers doubt the Latin American equity markets will make a comeback before the US economy starts growing again.
Bond issuance continued to dominate capital markets activity in the region. Latin American borrowers raised $37.7 billion through new debt issues in 2001 according to Dealogic Bondware. Sovereign issuers accounted for most of the issuance, selling $22.1 billion in bonds down from $24.8 billion in 2000. Argentina’s near absence from the bond market contributed to the decline.
Borrowers had to make the most of brief and infrequent openings in the markets. Sovereigns issued $7.1 billion in the first two months of the year, when Brazil, Mexico and Panama managed to complete large dollar deals. Even Argentina placed a ¤500 million six-year bond in February, with a coupon of 10% through CSFB and JP Morgan Securities, following a $39.7 billion rescue package in December 2000 led by the International Monetary Fund.
The attitude of the US government and IMF toward Argentina confused investors. Although the Fund backed Argentina by leading successive emergency rescue packages totaling nearly $50 billion, the US government, the most influential voice on the IMF board, opposed further support. US Treasury secretary Paul O’Neill in August signaled the Bush administration had run out of patience. “We’re working to find a way to create a sustainable Argentina, not just one that continues to consume the money of the plumbers and carpenters in the United States who make $50,000 a year and wonder what in the world we’re doing with their money,” he said at the time.
Yet it was only in November that both the Fund and the US Treasury refused further loans to Argentina. This confusion, not to mention the dramatic decline in the country’s economic fundamentals, drove international investors to sell Argentine bonds all year, mainly to local investors who were more comfortable with Argentina risk.
The erratic state of the market meant other sovereigns had to issue bonds whenever investor anxiety eased. “The lesson has been to pre-finance whenever you have the chance,” says Brazil’s Gleizer. “Make sure that you don’t need to go to the market when they are not benign. It is prudent to use windows of opportunity.” Brazil and Mexico had completed most of their 2001 financing needs by August.
Fears that Argentina’s slow-motion collapse would affect its neighbors were quickly disproved. Argentine bond prices began climbing steeply in February, leaving Brazil far behind. Investors showed a willingness to differentiate between well-managed economies and countries in Latin America. The decoupling of the rest of Latin America from Argentina accelerated in December as investors seemed convinced that Argentina’s deepening recession was not affecting the region as a whole. CSFB estimates that Argentina’s economy contracted 3% last year but Brazil’s grew by 1.6%. Chile’s economy grew by 3.1% and Ecuador’s rose 5.2%. Mexican economic growth receded alongside the US economy as it slipped into recession and contracted by 0.3%.
Mohammed El Erian, fund manager at Pacific Investment Management Company, which is the biggest buyer of emerging market debt, says he bought bonds of Latin American countries that could react quickly to external events and had flexible macroeconomic policies and substantial international reserves. “We had a view that certain countries would be able to navigate the more difficult international environment,” says El Erian. Pimco bought Brazilian bonds even though they took a battering all year. “We saw the main problem as being technical. It wasn’t an issue of the country’s policy regime. We deemed that to be strong and it wasn’t an issue of external funding.” El Erian says some investors used Brazil as a hedge against Argentina. “People stuck in Argentina and unwilling to sell at seemingly distressed levels, hedged by selling Brazil short.”
Investors have confidence in Brazil’s economic policies even though its indicators are weak. Its fiscal deficit rose to 7.4% of GDP in 2001, up from 4.5% of GDP in 2000. Inflation was up to 7.4% at the end of the year from 6% in 2000. And Brazil’s debt-to-GDP ratio rose to 41.8% in 2001, from 36.4% the year before.
As Argentina’s financial disintegration gathered pace, a succession of infrequent issuers capitalized on growing investor appetite for credits unrelated to Argentina. These included Chile, the Dominican Republic and Guatemala. Chile issued a $650 million, 10-year Yankee bond led by Citigroup and JP Morgan last October. Heinz Rudolph, director of international finance and capital markets at the Chilean ministry of finance, says Chile wanted to differentiate itself from the rest of the emerging market asset class. “It is crucial for us to show investors that we have a strong economy and we have good macroeconomic policy to face this turbulence,” says Rudolph. Chile needed $250 million to top up its copper stabilization fund. Citigroup’s Guimarães says the succession of bond sales from these issuers proves that the capital markets “recognize and react positively to strong economic fundamentals. In the worst of times fiscal responsibility and [having] well managed economies pay off.” Even Colombia, with its intensifying guerilla conflict has seen the spread on its bonds narrow all year largely because it returned to growth and began implementing the sound fiscal policies that Argentina has systematically failed to deliver.
Euro and Yen Revival
The region’s principal economies – with the exception of Argentina – were active in several markets last year. Latin sovereigns issued $14 billion in dollar bonds, $5.8 billion in euro-denominated paper and $2.7 billion in yen-denominated bonds. Michael Corbat, head of emerging market sales and debt origination at Citigroup, says 2001 marked issuers’ rediscovery of the European and Japanese markets. Monetary union in Europe changed the way its investors view Latin American issues, he says. European money managers could no longer bet profitably on currency and interest rate convergence. The arrival of the euro forced them to look for new opportunities. In Japan, retail investors facing negative real interest rates were happy to buy a limited amount of Latin American paper. Uruguay and Colombia issued in yen, but the Brazilian government and its BNDES development bank were the most active, raising $3.2 billion.
Colombia was probably the most active sovereign in diversifying its currencies of issuance. It issued five bonds last year totaling $1.27 billion in euros as well as a debut ¥20 billion ($160 million) four-year Samurai issue with a 5.5% coupon led by Kokusai Securities and Merrill Lynch. Colombia tapped the dollar market several times after April, raising $2.7 billion through six bond issues. “Colombia was in a difficult process of moving down from an investment-grade credit and having to reestablish itself among a group of buyers,” says Corbat. Investors in the dollar market wanted to see Colombia recover from its 1999 recession, its first in 70 years, when the economy contracted by 4.5% and the budget deficit reached 7.3% of GDP. Colombia also lost its investment-grade credit rating that year. Yet Colombia became increasingly popular with investors in 2001 as it demonstrated its commitment to disciplined monetary policy. In July it presented its $27 billion budget to Congress aimed at reducing the budget deficit and stimulating growth. It also executed a local market debt exchange totaling 5.64 trillion pesos ($2.5 billion) which consolidated 57 separate issues into three larger, more liquid bonds and stretched out the average life to 4.5 years from 3.4 years.
Brady Retirement
Debt exchanges were more frequent last year than in 2000 with Argentina staging three swaps in an abortive attempt to avoid financial collapse. Other Latin American sovereigns, mainly Brazil and Mexico, issued new global bonds to retire expensive Brady bonds.
Brazil issued a $2.15 billion ‘par-for-par’ exchange targeted at international banks holding Brady debt on their books that had previously had no incentive to exchange Bradys because of accounting constraints. The structure was so successful that Mexico followed a week later, retiring $4.7 billion in Bradys with a $3.3 billion 2019 global bond with an 8.125% coupon. Citigroup and Credit Suisse First Boston led both exchanges.
Mexico, Brazil and Colombia used exchanges to improve their debt profiles while simultaneously raising money with new issues. Argentina’s debt exchanges, on the other hand, were no more than desperate attempts to avoid default. Last February Argentina exchanged $4.2 billion in short-dated and peso-denominated bonds in a transaction led by Goldman Sachs and Citigroup. The sovereign managed to push its short-term amortizations out beyond five years and save $3.6 billion in debt payments over a four-year period. But June’s $29.492 billion megacanje, led by Banco de Galicia, BBVA Banco Francés, CSFB, HSBC, JP Morgan, Citigroup and Banco Río was a feeble effort to execute a market-friendly restructuring. Argentina delayed debt service on $16.05 billion of local and international debt until 2005. But it also added $2.25 billion to Argentina’s debt burden pushing it up to $132 billion. Argentina was back in the swap markets again in December, converting $55 billion in bonds held by local investors into loans.
Bankers expect liability management deals by more creditworthy sovereigns such as Mexico and Brazil to be a lucrative source of mandates this year. If Mexico and Brazil have already financed a good chunk of the year’s funding needs they can focus on managing their liabilities. Gleizer says Brazil could raise a maximum of $5 billion in 2002 to finance its fiscal deficit, relying on foreign direct investment, its local markets and loans from multilateral lenders like the IMF and World Bank to provide the bulk of its financing requirements. Alonso García, Mexico’s general director of public credit, says Mexico needs to raise $2.6 billion this year but had raised $1 billion of that by the end of November. A large US investor approached Mexico wanting to buy $700 million in Mexican sovereign debt. JP Morgan managed the deal and invited a handful of investors to participate in a $1 billion reopening of Mexico’s 2031 issue with an 8.3% coupon. “With the $1 billion we issued we now have $1.6 billion in funding needs for [2002], which leaves us in a very comfortable position,” says García.
Richard McNeil, head of Latin American debt capital markets and global liability management at Goldman Sachs, expects liability management deals to become a standard tool in the years to come. “With the exception of Argentina’s last two exchanges, transactions have focused on retiring Brady debt,” he says. “But increasingly I expect issuers will use liability management more generally to improve pricing efficiency along their yield curves.” There could be activity from other issuers such as Peru and Venezuela. Peru announced a planned a debut $700 million bond issue at the end of 2001 and Venezuela returned to the markets at the end of the year. Both countries have Brady debt they could retire.
Looking for Enhancement
Latin American corporate issuers had a tougher year than sovereigns. Corporates had to offer credit-enhanced transactions to attract investors. According to Dealogic Bondware, corporate bond issuance dropped by nearly 60% in 2001 compared to 2000. Latin companies issued just 12 plain vanilla bonds totaling $3.5 billion in 2001 compared to 77 issues worth $13.43 billion in 2000. The bulk of the 2001 plain vanilla issues were euro-denominated offerings. US investors only showed interest in Latin America’s strongest credits. Mexico’s fixed-line operator Telmex issued a $1 billion five-year global bond in January with an 8.25% coupon led by JP Morgan and Merrill Lynch and returned to the market in May with a $500 million bond led by CSFB. Mexico’s Corporación Durango, a paper and pulp company, was the only other issuer to tap the dollar market for a $180 million plain vanilla bond led by Morgan Stanley last January.
It became harder Latin American companies to raise financing with each passing month last year. This meant issuers had to offer more security to reduce the cost of borrowing money. A select group of blue-chip Latin American banks and corporations received a boost in June when the rating agency Moody’s Investors Service changed its policy to allow some of them to be rated above their country’s sovereign ceiling. Moody’s subsequently upgraded foreign currency bond rating of Pemex, the Mexican state oil monopoly, Pemex’s to Baa2 from Baa3 in August and that of Petrobras, the Brazilian oil company, to Ba1 from Baa1 in September.
Pemex acted quickly on Moody’s June announcement, reopening a $500 million 2010 bond though Lehman Brothers for a 9.125% coupon with an 8.87% yield to maturity. emex then exercised the call option on a $1 billion floating rate bond pegged to Mexico’s 2007 bond in August, and issued a $600 million 2005 international bond with a 6.5% coupon led by Lehman Brothers. “It was a good opportunity to take it out of the market, as the yields between UMS and Pemex tightened significantly,” says Mauricio Alazraki, associate managing director of finance for Pemex. The spread at launch was 230 basis points over five-year US Treasurys compared to Mexico’s $1.5 billion ’06 issued in July 2000, which was priced at 241 basis points over five-year US Treasurys.
Brazil’s Challenge
Brazilian companies had a particularly tough time. Brazil’s sovereign spread was far wider than Mexico’s, which made financing very expensive for most companies. “In many cases it is not something that is particular to their own situation,” says Citigroup’s Guimarães. “The slowdown in the US economy, the problems in Argentina and the consequent flight to quality has made the access to capital very difficult.” Brazilian companies could tap their large and liquid local market but as short-term interest rates rose, this became an increasingly expensive strategy. Brazil’s Selic benchmark interest rate hovered around 19.05% for most of the year, up from 15.85% in January. It made sense for Brazilian companies to borrow in the international syndicated loan market if they could.
Although syndicated loan volumes also fell last year, it bridged some of the gap left by the bond markets. Latin American corporations borrowed $37.7 billion in 228 syndicated loans in 2001 compared to $44.5.7 billion in 269 deals in 2000. “The syndicated loan market continues to be very efficient in the five-year and under category, whereas the bond market is more efficient in the five-year plus category,” says JP Morgan’s O’Neill. There were 17 loans totaling $3.7 million to finance acquisitions, compared to $3.7 billion and 12 such loans in 2000. Brazilian companies borrowed $9.6 billion with 54 loans but they typically could only borrow with maturities of up to three years. Mexican companies were the most active borrowers, raising $11.3 billion through 54 deals. Pemex’s Alazraki says although Pemex was offered good rates in the bond market it continued using the syndicated loan markets. “It helps us diversify our funding to go the bank market and we usually use it for shorter tenors, up to five years, as we achieve good rates.”
There were few new-money transactions for Argentine companies. “Argentina typically represents between 18% and 20% of the market,” says Mario Espinosa, Citigroup’s head of syndicated lending for Latin America. Few Argentine companies could raise fresh debt and most focused on refinancing. According to Dealogic Loanware, 20 of the 41 deals totaling $4.3 were refinancings and 11 loans $1.27 billion were project finance transactions. Banks extended a surprising number of loans for trade finance and standby credit lines of credit – 16 in total. Argentine companies sought out their relationship banks to get them through the difficulties with refinancing debt. “There is pressure on financial institutions to use their balance sheets to bridge the current situation,” says Guimarães.
Argentine oil company Pecom Energía, a subsidiary of Pérez Companc, managed to raise a $220 million four-year unsecured contingent oil payable floating rate note through lead arranger Deutsche Bank and five other banks. It paid 9.3% for the loan, 0.2% less than its usual 9.5% cost of capital. Luis Sas, director of finance at Pecom Energía said at the time, “It was a fantastic deal for us both in terms of price and support, the kind you expect from your relationship banks.”
Insurance Grows
The higher cost of capital and investor anxiety that Argentina’s troubles would spill over to Brazil meant companies wanting to issue debt with maturities longer than five years had to secure investment-grade ratings. The only way to achieve this was to buy insurance coverage or use some other form of credit enhancement or risk mitigation. Investors wanted to be protected against political risk events – inconvertibility, transferability, devaluation or expropriation events that would prevent a company from servicing its debt payments. Political risk insurance accelerated the crossover of US high-grade investors into emerging market assets toward the second half of the year. The US government’s Overseas Private Investment Corporation was the first insurer to provide a policy to protect investors against devaluation and inconvertibility risk in Brazil for the Comphania de Geração de Energia Elétrica Tietê hydroelectric project.
Private insurance companies were in demand for the rest of the year, writing policies for political risk insurance on Brazilian bond issues. Petrobras issued the first plain vanilla bond with political risk insurance in May protecting investors against inconvertibility, transferability or expropriation events for up to 18 months. The $300 million seven-year 144a issue with a 9.875% coupon raised $800 million from investors and Petrobras closed it at $450 million. Moody’s rated it six notches above Brazil’s sovereign credit rating of B1 and priced it 368 basis points inside Brazil’s benchmark ’09. Without the insurance, Petrobras could have expected to pay a premium above Brazil’s sovereign paper, which was trading around 800 basis points above US Treasurys at the time.
Brazilian banks and companies issued several PRI bonds in the second half of the year. Although they are popular with issuers, bankers question their sustainability. There are only two private monoline insurers that provide PRI insurance, XL Capital Assurance, a subsidiary of Bermuda-based XL Capital Group and Sovereign Risk Insurance, a subsidiary of Ace Group, and both have country limits. Political risk insurance could dry up or become very expensive unless new private entities with fresh country limits come to the market. Still, only companies with local currency investment-grade ratings can issue these bonds, and there is only a limited number of such names.
Securitizations Popular
Companies that removed their country risk by isolating hard currency revenues could also issue bonds at an affordable cost if they securitized these cashflows. Venezuela’s national oil company Petróleos de Venezuela (PDVSA) issued a $500 million 10-year global bond led by CSFB and Goldman Sachs in November. Petrobras issued a $750 million securitization of bunker fuel receivables this January. Brazilian banks were the most active and innovative issuers of future-flow securitizations. Banco do Brasil issued a $300 million five-year bond led by Merrill Lynch, backed by future flows of electronic remittance payments from Brazilian workers in Japan. S&P rated the deal BBB+. Although these deals have provided much needed financing for Latin America in a risk-averse environment, the downside is that they are an added cost and don’t offer liquidity in the secondary market. They are typically placed with buy-and-hold investors.
There were also innovations in the project finance market last year. Jonathan B. Lindenberg, Americas head of project and structured trade finance at Citigroup, says his bank did the first collateralization bond obligation of project loans in August. Citigroup sold the $350 million three-tranche bond to investors in Europe. Lindenberg says he expects other banks to securitize their project finance loan portfolios. “CLO’s enable banks that may have cross-border constraints to get some of their exposure off their books which should create more liquidity,” he says. Investors are showing more interest in project finance assets in Latin America. Citigroup created the first blind pool of project assets for TCW Global Project Funds, owned by Los Angeles-based Trust Company of the West.
It was a quieter project finance market though on the whole compared to 2000. According to preliminary data from Dealogic Projectware, Project financiers only signed 37 deals worth $16.7 billion in 2001, way down from 80 deals worth $27.74 billion in 2000. Brazil was the most popular destination for project financing with 11 deals totaling $4.78 billion. Mexico signed five deals worth $1.5 billion. But a few key oil deals were signed in Venezuela and Ecuador thanks to strong support from multilateral agencies.
Bankers signed a $1.1 billion loan for the $3.5 billion Hamaca oilfield project in Venezuela at the end of September. Although lead arrangers BNP Paribas and Royal Bank of Scotland syndicated a $470 million 14-year term loan, the bulk of the financing was made up by a $628 million 17-year guarantee facility from the Export-Import Bank of the US. Ecuador also financed its oil pipeline project Oleoducto de Crudos Pesados (OCP) at the end of July. Arrangers WestLB and Banco Bilbao Vizcaya Argentaria syndicated a $900 million 17-year term loan.
The region’s local capital markets are becoming an important source of financing for corporate issuers. Several international issuers raised financing in a local market for the first time last year. The World Bank, Uruguay and international hotel group Hilton Hotels all raised peso-denominated bonds in the Chilean market. Mexican interest rates have fallen below 10% and tenors lengthened to seven and 10 years on udibonos inflation-linked local bonds. JP Morgan’s O’Neill welcomes the evolution of the local market in Mexico. “It allows the higher quality local corporates and investors to disintermediate the commercial banking system, which is a very healthy development in Mexico,” he says.
Brazil’s large and liquid financial markets have also enabled local issuers to raise financing at a time when international markets were largely closed. The cost and maturities involved make real-denominated financing a viable long-term proposition. Although the government is the biggest borrower, it has tried to make it easier for private-sector companies to raise capital locally. Last year saw some very large deals, such as a R$1.8 billion ($1 billion) financing for Marlim, an offshore oil exploration and production project.
Project financiers elsewhere in Latin America also sold bonds into some local markets for the first time. Citigroup sold the first project finance bond in Peru, where local mutual funds and life insurance companies bought the $45 million, 12-year, three-tranche bond issued to finance the Río Chillón water project “It helps a project immensely to have a local currency portion because a large part of the construction cost is in local currency,” explains Citigroup’s Lindenberg.
The immediate challenge for Latin American companies is to cope with refinancing risk. According to Dealogic, Brazilian companies have $5.4 billion in bonds and $6.7 billion in loans maturing in the next couple of years. Mexican companies have $7.9 billion maturing in the international bond market and nearly $16 billion in debt coming due before 2003. Mexican companies have lower financing costs because Mexico is an investment- grade country and conditions in their local market are attractive because interest rates are low and the peso is strong. Brazilian companies are less fortunate. They have to live with a volatile exchange rate and high interest rates. But borrowers, such as exporters and some banks, with access to hard currency revenues can raise asset-backed financing internationally or buy PRI coverage. Others can always raise short-term debt until the international markets reopen.
At least five Brazilian companies approached investors to ask them to waive their put options on long-term debt, says Sandy Severino, a director at Deutsche Bank Securities. Not all were successful though. Investors turned down Brazilian utility Cemig’s 7.5 basis point premium for a waiver on a $150 million call option in September. Weaker companies that have trouble refinancing could be forced into drastic restructuring. “Some Latin American companies will face difficulties refinancing, which provides for purchasing opportunities,” says Peter Getsinger, head of Latin American corporate finance at Deutsche Bank.
In spite of the global economy’s downturn and hostile financial markets, bankers are cautiously optimistic about a revival in the region’s fortunes in 2002. “Assuming there are no other [terrorist attacks], I think 2002 is going to be a much stronger year than 2001,” says Citigroup’s Guimarães. A combination of low interest rates in the US, Europe and Japan, low oil prices, depressed equity valuations and pent-up liquidity in the debt capital markets could set the stage for a rebound in the second quarter of this year. A resolution to Argentina’s crisis would further help recovery. “A resurgence of US growth will carry Latin America with it. With that I see an increment of activity in fixed income, equity and M&A,” says Guimarães.
JP Morgan’s O’Neill agrees. He anticipates a Latin American new bond issue market in the range of $30 billion to $40 billion (excluding exchanges) and, as in 2001, dominated by sovereign and sub-sovereign issuers. Investors are also upbeat. Jerome Booth a portfolio manager at Ashmore Investments, says he expects a rally in emerging market debt next year. “We are rushed off our feet coping with institutional demand for our products and we are a seeing a lot of demand from the US.” Even though sovereign issuers such as Mexico, Colombia and Brazil had financed a good chunk of their 2002 needs by December, Booth says he is confident there will be a good supply of opportunistic liability management deals and issues from rarer names in Latin American and the Caribbean. “There is not going to be a shortage [of paper]. The demand will create the supply,” says Booth.
In spite of an improving macroeconomic environment, Latin America is bound to face considerable uncertainty next year. Argentina is likely to face a continuing political crisis as it tries to reconstruct its economy and negotiates with creditors. Although Brazil looks fragile, it has managed to keep growing unsteadily since 1999. Yet the real is unpredictable, local interest rates are high and 2002 is a presidential election year. Nevertheless, Brazilian issuers proved remarkable imaginative and resilient amidst weakening international confidence.
Many of last year’s most impressive deals came from Brazil. Its Central Bank led by example, executing some the region’s most skillful transactions. Daniel Gleizer says, “The key words [in 2001] have been policy, institutions and pre-financing.” Brazil has worked hard to reduce uncertainty in an election year by “institutionalizing” policies to ensure a degree of continuity between governments. Congress signed a Fiscal Responsibility Law to ensure continuity between a change in government last May. The government also hopes to lay the ground for growth in 2002 with new corporate governance laws. Perhaps more importantly, the government has run an aggressive fiscal policy and met its IMF performance targets.
Colombia also demonstrated its commitment to its fiscal policy and rehabilitated itself with international investors. Investors like to see governments implement policies. They are laying the ground for growth and confidence.