Four years before the Dominican Republic issued its inaugural $500 million, five-year sovereign bond in September 2001, Tricom, the country’s second-largest telecommunications company, issued a $200 million, seven-year bond in the European market. Tricom was also the first Dominican company to list on the New York stock exchange in an initial public offering in 1998 that raised $74 million. “Tricom set an example in the Dominican Republic and has shown that transparency pays off, says Ramón Tarragó, chief financial officer of Tricom. “More companies in the Dominican Republic are now looking at the issue of transparency.”
Private sector companies from the Dominican Republic have borrowed only $500 million since 1990, according to Dealogic Loanware, a database. But Tricom and the private airport concession company Aerodom are the only companies that have borrowed on the international markets. Medium and long-term lending is only available from international development agencies. So financing typically takes places within the comfort of discreet banking relationships. It is no surprise then that financial transparency is such a new and unappealing concept to most corporations in the Dominican Republic. Indiana Jones, head of treasury at Banco de Reservas, a public commercial bank, says the array of corporate financing options in the Dominican Republic remains very limited. “Maturities are 90 to 180 days so most commercial loans are rolled over on an evergreen basis,” she says.
Things may begin to change if the Dominican Republic signs free trade agreements with Canada and the US. Open economies mean competition from larger, better-capitalized companies with access to cheaper financing, forcing Dominican companies to diversify their financing sources beyond the local bank market. Ignacio Jasminoy, Citibank’s corporate business head, says, “Companies issuing debt will have to be more transparent. In the last couple of years bank financing averaged 24%. More openness will widen the access to term funding generated by the pension funds system. If companies gradually open their books to the public it will generate more trust and will lower interest rates.”
The privatization early next year of the country’s pension funds should also stimulate the local market because private pension funds will be seeking long-term investments for their accumulating assets. If local companies want access to this money, they will have to open up their books to large groups of investors. The Dominican Republic’s pension funds currently invest in short-dated commercial paper with maturities reaching 180 days, although some have bought minority stakes in local companies. Companies relying on bank lending only disclose their financials to the lending bank, and most companies are loath to disclose information for fear that it will benefit their competitors. Under the new Stock Exchange Law, companies will have to get a credit rating from rating agencies, which also entail disclosure of financial information.
Debt First
Local companies are likely to warm to issuing long-term debt locally before they issue equity since selling bonds does not require companies to cede management control. Reservas’ Jones thinks it will take three to five years before companies will be able to tap the local capital markets for long-term debt. The government will need to start building a yield curve in the local market, in the same way that Mexico has successfully done. The Mexican government has steadily consolidated its messy local issues into tidy reference points and Mexican companies can now issue debt with maturities up to 10 years. It is something local banks are striving towards. Luis Espinola, head of international financing at Banco Popular, says, “We are already working on developing new products for our corporate clients with the local capital markets in mind in our strategic plan for 2005.” However, even if companies opt for long- term debt issuance as they have done in other markets such as Mexico, it is unlikely that they can skirt the issue of transparency for long. The regulatory authorities in the DR are already making progress in improving transparency. One resolution approved in 2001 that came into effect in 2002 requires banks to lending more than RD$ 3 million to a company to require proof from their clients that their financial statements have been filed with the tax authorities.