Bond bearers: Colombian companies expect to grow in 2005, and bonds are the tool of choice to do it.

Colombian businesses appear to be gearing up for a year of investing in 2005, and well they should. The economic indicators indicate that this is the year for fresh capital spending. Exports should grow as the country's second-largest trading partner, Venezuela, recovers from a disastrous strike in 2003 that crippled the economy there. The Central Bank meanwhile has pledged to control inflation, and analysts hope that security will continue to improve.

During the third quarter of 2004 the economy grew 2.5%. While positive, it threatened President Alvaro Uribe's goal of 5% economic growth for 2004. Nevertheless, the United Nations Economic Commission for Latin America and the Caribbean is forecasting 3.3% growth, which is not bad considering that many analysts fear that unemployment rates sticking stubbornly in the double digits will dampen domestic consumer demand.

Perhaps the optimism lies in politics. Uribe's policies on most things tend to be hard-line, and that has apparently been good for business. Security is improving in many parts of the country, with the national homicide rate down one-fifth even as attacks by leftwing guerrillas known as the FARC have tripled under his administration, compared with his predecessor AndrOs Pastrana. In February 2002, as peace talks between the FARC and the government finally collapsed, about a fifth of the companies participating in a poll by the National Association of Industrialists (ANDI) at the time cited security as a major concern. By the end of last year, the figure had fallen to just less than 3%.

The World Bank recently commended Colombia on making investment easier in Latin America's fifth-largest economy. The multilateral lender said that improvements in labor flexibility and contract enforcement made Colombia the second-best improving country in the world and the best in Latin America. The number of registered companies grew 16% in 2004 compared with the previous year, and the time it took to start a business fell to an average 43 days from 60 a year earlier.

All this good news means business, and more of it. President Uribe has said that sustaining economic growth was the way to solve the country's rampant crime and the civil war. Banks and businesses agree that it's time to be confident, to go out and spend in 2005, and bonds appear to be the method of choice to grow.

The recent ANDI poll showed that over 60% of Colombian companies were preparing to invest in the coming year, one of the most optimistic poll results in five years. Of those companies planning on investing, another 60% said their money would be used to upgrade technology. Some industries in particular seem poised to invest more in 2005 than others, such as tobacco and beverage companies, which were unanimous in their desire to spend this year, according to the poll.

Brewer Grupo Bavaria, Colombia's largest private company, is one of those. The beer giant is looking to invest US$150 million in Colombia and abroad in 2005, and its preferred method of financing is through bonds. "Bonds are what the big companies are looking at because demand is so high in the market, with demand between two and four times what is really offered," says Tomas Gomez, an analyst with the brokerage firm Inversionistas de Colombia.

Bavaria has been diligent in the past years issuing bonds to fund its financing needs for this year, selling $300 million in Colombia in 2004 and $500 million in the United States the year before that. The company has $1.10 billion in bonds in circulation. "We can use these funds to finance debt and investments we need to do in 2005," says the company's president, Ricardo Obregon. "Because we've met all of our financing needs for the year, this gives us room to relax," he says.

Bavaria, the world's 10th-largest beer maker, is planning to upgrade its production plants in 2005 and will build a new facility in Bucaramanga, in western Colombia. It also plans to modernize a plant in Ecuador and consolidate recent takeovers in Panama, Ecuador and Peru. Bank loans, meanwhile, are not that tempting for Bavaria. "Bonds are much better for us, because unlike loans, we have much more flexibility," said Obregon. "With our need for financing, we would tap out the [domestic] banks very quickly, while the bond market is much more developed and deeper," says Obregon.

Big gains. Colombia's stock market has been one of the best performing markets in the world, gaining 300% over the past three years. Yet things should calm down this year, market watchers say. "It looks to us that stocks will take a rest in 2005, just because we've seen huge growth in the stock market over the past three years," says Felipe Gomez, who helps supervise Colombia's largest pension, Porvenir, which manages $3.50 billion. Among those companies polled by ANDI, less than 1% said they would be issuing stocks to cover their financing needs for the coming year.

For all of the stock market's gains, many companies feel that stocks are a bad deal compared to bonds. Bavaria's management believes the company's shares are undervalued considering its earnings. According to Bavaria, company shares trade at a price-earnings ratio of four times, which means investors would be willing to pay $4 for each $1 of current or future earnings. The company feels that figure is too low and points out that in other countries the figure is closer to eight times, which is what other beer companies are reporting, Obregon says. In other words, the multiple is too low to go to the stock market to raise money. Other companies apparently agree. Fifty-one percent of those polled by ANDI say they will invest in the coming year by relying on in-house financing. "There really needs to be greater information out there for these companies on different forms of financing, because what we are seeing is a lost opportunity to invest by drawing on this financing and, as a result, growing larger," says Imelda Restrepo, director of economic studies at ANDI.

Some companies are going to multilateral lending agencies for money. ISA, the largest cross-border energy transmitter in Latin America, wants $365 million to finance its businesses in 2005. It hopes a large chunk of that will come from multilateral lenders, such as the Andean Development Corporation (CAF). "Basically we look for a mixed portfolio of our debt," says Javier Gutierrez, ISA's president. According to the company, its biggest project involves an ongoing development of a $300 million deal to connect power grids in central Colombia with those in the Caribbean coast.

The equities market will be quiet this year but not utterly dead. Unlike most companies in Colombia, ISA will see some action in the domestic stock exchange. The Colombian government will sell 8% of its ISA shares, reducing its stake in the company to 51%.

BEER MONEY

Bavaria grows by leveraging itself.

                  AMOUNT IN
YEAR   CURRENCY    MILLIONS

1999    Pesos       150,000
1999    Pesos        40,000
2002    Pesos       700,000
2002    Pesos       370,000
2003     US$            500
2004    Pesos       438,200
2005    Pesos       561,800

SOURCE: Bavaria

TOBY MUSE--BOGOTA