Karina Robinson reports from New York where she spoke to the heads of investment banking for Latin America about upcoming trends.

Corporates are issuing locally

“The development of local capital markets in Brazil, Mexico and Chile is helping domestic corporates to fund themselves locally, making them less dependent on foreign funding,” says Carlos Guimarăes, head of Latin America investment banking for Citigroup.

Chile has the most advanced financial markets because its pension reform preceded that of the others.

“There, a corporate can fund itself locally for 15 years, and it is moving that way for Mexico and Colombia,’’ Mr Guimarăes adds (see The Banker May 2003, on Colombia).

Since the middle of last year, no Mexican corporate has had to issue internationally. Indeed, last year local corporate bond activity reached almost $4.4bn, while this year a record $5bn looks achievable (see The Banker June 2003, on Mexico).

“An interesting side effect is that international funds exposure is becoming increasingly sovereign – as these still need to access international capital markets – and less blue-chip corporates, as these are funding themselves locally,’’ says Gabriel Bochi, managing director for Latin America debt capital markets at JP Morgan.

Brazil’s issue in the spring was seven times oversubscribed because of the search for yield and the country’s absence from the markets from April 2002.

Collective Action Clauses

Brazil’s sovereign issue had a Collective Action Clause, as did Mexico and Uruguay. CACs aim to make agreement to restructure a bond easier to achieve. If developed countries had them – as countries in Eastern Europe might – that would close the debate and make them par for the course, say bankers. So far, having them on a bond has not made any difference to the pricing. “[Eventually] everyone will have a CAC on their bonds,’’ says Steve Cunningham, head of Latin America Investment Banking at Morgan Stanley. “Not just sovereigns but sovereign control corporates as well.’’

Mexico as the next conversion play

On the 10th anniversary of the North American Free Trade Agreement, more and more new institutional investors are buying Mexico, which has just retired all its Brady bonds. Conservative European pension and insurance funds are realising that for an investment grade rating they are getting higher yield.

“The investor base for Mexico looks a lot more like the investor base for a US corporate than for an emerging market issuer,’’ says Michael Schoen, head of Latin American debt capital markets at Credit Suisse First Boston. “If you are a high-level corporate in Mexico now, the sky’s the limit in terms of access to capital.’’

However, he adds that investors are wary of second-tier corporates because in Mexico many of the deals done between 1996 and 2003 have defaulted.

“It is not worth dabbling in second-tier corporates. Investors say: ‘Didn’t I fall for this stupid thing before?’ and they will think again,’’ says one banker.

Dearth of corporate convertibles

There are a number of reasons why corporates are not issuing convertibles even though they are flavour of the month in the developed world. Most corporate treasurers see their current equity prices as low. Considering the funding they can get locally with straightforward bonds, they fail to see why they should give up any of the upside on the equity. Also, most buyers of convertibles want to have a large free float of shares and a lot of liquidity, according to Mr Cunningham, and this is not the norm for most Latin American companies.

Mergers & acquisitions

The trend is for more inter-Continent deals, such as Mexico-based Coca Cola Femsa’s $3.6bn acquisition of Panamco, which made the combined company the largest Coca Cola bottler in Latin America. Restructuring is also a major theme, such as Spanish bank BBVA selling its local unit to Brazilian bank Bradesco, or less healthy Mexican companies that are busy with fire sales. Thomson Financial says if current trends continue, intra-regional Latin M&As should be over $15bn, down from $21bn in 2002.

International equity issues

The multifarious requirements of the new US Sarbannes-Oxley law have caused “a number of families who were thinking of listing their companies to think twice”, says one banker. Low valuations are also a disincentive.

“There have only been two IPOs of any real significance in the past seven years, TV Azteca and Asur, and these were in 1997 and 2000,’’ says Nic Millward, managing director of equity capital markets at UBS Warburg.

Bankers do not see 2003 as any different. In fact, a proposed change in a tax that gave Mexican corporates incentives to keep a listing may well mean the delisting of at least six companies with a minor free float and no liquidity.


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