Bull run: Latin American capital markets are awash with money, some for the first time in a long time.

There's money to be made in Latin America. All the major stock indices rose by double-digits during 2004 except for Colombia, which shot up more than 116%. Banks are underwriting bond issues with record-long maturities. Pension funds, once stuck investing in safe but boring government bonds, are buying stocks in global markets. Across the region, a dozen companies carried out initial public offerings last year, compared with only two a year earlier.

Smoking-hot Asian economies are devouring commodities from Latin America. Demand for copper, fish-meal, iron, steel, soy and other resources has pushed the prices of those commodities sky-high. It's also pumped billions upon billions of dollars into the economies in the region. Gross domestic product grew in every major Latin American economy in 2004 and is expected to do so again in 2005. Commodity prices have risen and fallen in the past, but this time around Latin American governments are better equipped to handle the ebb and flow of money. Foreign debt levels are low and spending is in check, for the most part. Wise fiscal policy has kept the region's currencies at healthy levels.

As a result, countries are able to get money on better terms. Colombia issued a sovereign bond denominated in pesos, a sign of foreign-investor willingness to take on foreign-exchange risks. "This is a new benchmark which a lot of corporates are going to look at," says Walter Molano, a partner at BCP Securities in New York. Ideally, companies begin by issuing short-term debt and then sell longer-term bonds once they establish their reputation in the markets. Then, equity financing becomes an attractive option. That was the case for Gol, the low-cost Brazilian airline that launched an initial public offering (IPO) in both Brazilian and U.S. markets last year. Equity markets are growing in some countries, like Chile and Mexico. Pensions funds in those countries can invest in equities both at home and abroad, since regulators feel newfound liquidity means personal savings are less likely to be wiped out, Molano says.

The good news doesn't stop at the larger economies. Banco Cuscatlan, a Salvadoran financial institution, manages banks and investment vehicles in Panama, Costa Rica, El Salvador, Guatemala and Honduras. Looking to grow, the bank took advantage of a new trend in financial flows: remittances from the United States. In 2002 and 2003, it sold US$275 million in bonds backed by the money it makes managing remittances sent home by Central Americans living in the United States.

"Many international banks have been eager to buy these bonds," says Mauricio Samayoa, president of Banco Cuscatlan. The bank is traded on El Salvadoran and Costa Rican stock markets as well as on the Latibex, a stock exchange in Madrid where Latin American companies can list equity in euros. Banco Cuscatlan wants to grow even more, including with American Depositary Receipts (ADRs), packaged emerging-market stocks that trade in New York. "We believe working with ADRs would be a second step," Samayoa says.

For larger companies, ADRs have long been the financing tools of choice. Grupo Televisa, a Mexican media giant that operates across the hemisphere, has listed equity on Spain's Latibex, but the depth of the exchange is not yet that of major international markets, says Alfonso Angoitia, Grupo Televisa's vice president for finance." Volumes haven't been that spectacular for Mexican companies listed there, but it's a good alternative to be close to European investors," he says. Televisa posts sales of over $2 billion a year, which makes it a big company in need of big money in order to grow. And those deep pockets work on Wall Street. "In Televisa's case, the majority of the volume generated is in New York," Angoitia says. "To give you an idea, approximately 75% of our shares trade on the [New York Stock Exchange] and only 20% to 25% in the Mexican Stock Exchange. I think that being in New York gives you obviously a much larger number of investors."

Little guy. Not everyone, however, runs a multibillion-dollar company surrounded by potential financing. Drillco is a family-run company in Chile that makes drilling equipment for the mining sector. It is trying to grow into an engineering-applications provider. Its proprietary technology allows the company to make customized drilling solutions for clients worldwide. Drillco founder Rolando Carmona says his company exports about 60% of its products from Chile, mainly across the Americas and to Europe.

The $20 million-a-year Drillco is studying ways to grow and needs financing to do so. But, as any mid-sized company in the region would point out, doing so can be difficult in a small country. "It's a typical limitation for a medium-sized company," says Carmona. "Selling shares or debt is difficult." There are always private backers, but corporate valuing models accepted in Chile are not tailored to meet the needs of smaller companies. "There is no reference in the market," says Carmona. "Companies tend to be undervalued."

Carmona says businesses should keep costs under control above all else. Many of Chile's smaller companies, he says, start out trying to grow too aggressively. Growing at a more modest rate keeps cash flows healthy, which could lead to financing from more conservative lenders. Fast growth, meanwhile, is better for a company looking for venture capital, which looks for annual revenue increases of 50% or more, at least in Chile, Carmona says. That's not Drillco. "Venture capital is not an option for my company because it looks for rapid growth in what it invests," says Carmona. "One success has to cover the losses of another nine. We are still studying which path to take."

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In other parts of Latin America, governments are working to improve things for smaller companies. In Brazil, Congress earlier this year approved a new bankruptcy law. The law did away with arcane regulations that had divvied up assets to employees first, then to the government and finally to creditors. The new law gives creditors greater control.

Some see money to be made now that the law has passed. "Between 1% and 5% of [companies] that run into trouble in Brazil actually survive," says Jose Diniz, managing director of Alvarez & Marsal, a consultancy that specializes in turnaround management. "There will be $60 million to $70 million a year in fees being paid to companies like our companies during the next three to four years."

Bankruptcy aside, big healthy companies in the region had no problem flirting with international investors over the last two years and this year should be a good one too, observers say. Lukewarm returns in the United States have given investors around the world a little more taste for risk. Healthy economic fundamentals in the region have also meant improved sovereign-debt ratings, and that has trickled down into the corporate sector, says Don Baker, a lawyer with the White & Case corporate law firm in Sao Paulo who handles cross-border business transactions. Besides Colombia's sovereign peso bond, Banco Votorantim, a Brazilian bank, sold the equivalent of $75 million in corporate bonds denominated in reals in the international markets late last year.

"It shows the appetites of U.S. investors to buy into Brazil," says Baker. That combination of sound economic fundamentals in Brazil and U.S. demand for more risk should continue, Baker says.

Law firms are raking in new business, thanks to financing needs in the region. The Hunton & Williams law firm recently managed a $50 million loan for Independencia Alimentos, Brazil's third-largest meatpacker. The company does not raise cattle but buys them to process and export. Big banks can stick with big companies, but the mid-sized companies need to look around for other sources of money.

"Increasingly there will be opportunities in international capital markets for mid-sized companies," says Allen Moreland, a lawyer at Hunton & Williams in Miami. "They may, however, have to look to smaller investment banks in order to identify institutions that can allocate resources to their financial needs."

Cooling off. In the financial world, there are always clouds on the horizon and Latin America is no exception. Most of the major economies today are fundamentally sound. Debt levels aren't too high, spending is in check and inflation rates are not out of control. But, as after any rally, profit taking ensues and money is off to seek other markets.

"Latin American equity markets from the end of 2002 to end of 2004 went up 125% in dollar terms," says Geoffrey Dennis, managing director for Latin American equity research at Citigroup. "We think there was excessive euphoria."

While share prices aren't likely to go much higher, Dennis says, debt also isn't likely to get much cheaper. Furthermore, U.S. interest rates are expected to rise this year, which prompts global investors to shift investment out of emerging markets like Latin America and into less-risky U.S. Treasury bills. Higher interest rates in the United States also make Latin America's dollar-denominated debt more expensive to service.

Finally, the engine behind the region's economic growth has been commodity-hungry China. The Asian giant's currency has been accused of being artificially weak, and anything strengthening it would make Latin American exports to China suddenly less competitive. "We believe that China will continue to be a major source of volatility in 2005," Dennis says.

For Beagle Partners, a hedge fund that manages $14 million, Latin America remains attractive, says David Manuel, a partner in the fund. Launched in August 2004, the U.K. fund invests in all emerging markets, including in Latin America, Asia, Eastern Europe, South Africa and the Middle East. "Some of the liquidity that is available in these markets is looking for other things besides government bonds," Manuel says. "For the larger corporates, raising money domestically has become an attractive thing to do." The ability for a company to finance at home has improved. But for investors like Citigroup and Beagle, the clouds on the horizon are the same.

"To try and have an estimate of what absolute returns would be, you've got to grapple with quite significant unknowns in global capital markets," says Manuel. What's the U.S. dollar going to do, for instance, and how fast will the U.S. Federal Reserve raise interest rates? The world will also watch how the United States manages its weakening dollar. Adjustments should come gradually and not shock the global financial system, Manuel says.

Asian economies, which thrive on exporting to the United States, should continue to invest in U.S. bonds, bolstering the greenback. But the Far East also will continue to make headlines in Latin America through 2005. "The development of the Chinese economy, and how the Chinese manage their economy over the next year, is going to be quite important," Manuel says.

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Some say that Latin America is going to enjoy another prosperous year. Rate hikes in the United States would do far less damage to Latin American economies because the region is less leveraged than it was in the late 1990s, says Joydeep Mukherji, a sovereign analyst at Standard & Poor's, a U.S. ratings agency.

Back then, governments financed themselves on short-term domestic debt at high interest rates. They also relied heavily on dollar-denominated debt, which made bondholders more sensitive to rising U.S. interest rates. Today, higher liquidity, especially in markets like Mexico, gives governments and companies financing alternatives to Wall Street, hedging them from shockwaves that could come from pricey foreign money. "You are less vulnerable if you have different sources of financing," says Mukherji.

China will continue to see capital inflows from exports, as well as more foreign direct investment this year. Whether the Chinese economy has peaked or not, any landing should be a soft one, Mukherji says. "China's hard landing would be a growth rate that is quite high by Latin American standards," he says.

FORREST JONES--MADRID