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Fresh air: no banks? No problem. Businesses in Argentina are doing just fine on their own.

Money is back in Argentina. It might not be coming from foreign banks and creditors, but it's back. With the fall of the one-to-one dollar-peso exchange rate and the subsequent economic implosion that the country suffered in 2002, getting access to financing sources soon became a difficult task for many Argentine companies. But it appears things are turning around as companies, largely exporters, are growing in line with a recovering economy. The country's gross domestic product in 2004 grew 8.1% and analysts expect that in 2005 it will grow 6%. Argentina's currency is much cheaper now and that makes its goods and services more competitive overseas. With fresh revenue, companies are finding that they can finance themselves by using their own assets as collateral.

After a banking crisis sent stock-market operations dwindling, companies were forced to look elsewhere for money. They found it. Currently, it is more feasible and cheaper for companies to finance themselves by selling corporate debt or financial trusts that are guaranteed by assets. The financial trust--an agreement through which a company declares an asset as collateral to a financial institution in exchange for a loan--was one of the most popular instruments in 2004 and will continue to pay a key role in Argentina's corporate finance scene in 2005. This financial tool allows companies of all shapes and sizes to go to the capital markets or private funds without having to go to banks. The market for these trusts began in Argentina in 1996 and grew slowly but has since accelerated because of the economic crisis. Since 2001, the Buenos Aires Stock Exchange approved US$3.80 billion in trusts.

Financial trusts have met with particular success among exporters. As Argentine goods have become more competitive abroad, many exporters can offer those goods themselves as collateral instead of having to borrow at higher interest rates. Asian demand for Latin American commodities such as Argentine soy has pumped serious money into the economy here. Export-oriented businesses are doing okay on their own now that trade revenues are trickling in. Some don't even need trusts and can go at it on their own.

"The best tool for financing has been our own resources, now that the company has reached virtually zero levels of indebtedness, which is the level where it needed to be," says Rosana Negrini, CEO of Agrometal, an agricultural equipment manufacturer. In 2004, Agrometal invested heavily to expand and upgrade its manufacturing facility in the Cordoba province. "The company didn't need anything from the capital markets," Negrini says.

Industry experts say self-financing and trusts are here to stay through the medium term, or at least through 2005. Those who don't have assets to offer for collateral will probably rely on their internal resources instead. "They will continue to be important, above all else, as long as the recovery of the banking system doesn't occur," says Alberto Marcel, director of corporate finances for the Southern Cone division of consultancy KPMG. "Certain institutional investors such as private pension-fund managers (AFJPs) and insurance companies have a clear need to deal with healthy investment alternatives to add into their investment portfolios." That, Marcel says, will eventually improve the depth and quality of the domestic capital markets.

The shortage of banking credit almost obliterated investment projects carried out by Argentine companies. According to a poll of S00 small businesses nationwide by the Argentine Chamber of Commerce, seven out of 10 are financing themselves while just 1% even took the time to ask for a bank loan. One of these self-financed companies is Grupo TN & Platex, one of the largest textiles mill in the country. Teddy Karagozian, company CEO, says that in the coming years, the majority of Argentine businesses are going to do things on their own. "There are no long-term funds at reasonable rates," says Karagozian. According to the Fundacion Por-Tejer, an association of textile-industry companies, 82% of the sector's businesses are operating without credit and purely on their own resources.

Overall economic recovery and Asian demand for Argentine goods are all well and good, but the government must do its part, market watchers say. "With the arrival of economic stability and growth with a fiscal surplus, and a will to control tax evasion, we can then hope to develop new and significant projects with medium- and long-term investments that will require the participation of institutional investors, and not only local ones but foreign ones as well," says Luis Corsiglia, head of Corsiglia, a stock brokerage.

Deep pockets. Borrowing with financial trust instruments will continue, and such loans will come with longer terms and at lower rates, Corsiglia says. Better lending terms will help finance many different types of infrastructure projects and deep-pocketed institutional investors will be more likely to invest in the country's railroads, ports and highways. Institutional investors figure big in Argentina's financial landscape. Of the $51 billion managed by the country's pension funds, 1.5% is invested in long-term corporate debt instruments and 0.3% in short-term paper, while financial trusts take up just 0.29% of the funds' total investments. Analysts predict that in 2005 institutional investors will diversify their portfolios more aggressively and participate more in private-sector financing.


That makes Luis Planas, managing director at Deutsche Bank in Buenos Aires, optimistic. "In the second half of 2005, the capital markets will be rejuvenated, especially because there is going to be a lot of interest from local and foreign investors to participate in the financing, be it [stock] or debt issues, for Argentine companies," says Planas. Throughout this year, too, bank credit will improve, although not for larger companies, says Planas. "These are companies looking for credit to finance long-term projects and the banking credit available is unfortunately only lent on short term," he says. Terms will improve somewhat in 2005 but not hugely so, Planas says.

The stock market itself, meanwhile, is also hoping for a brighter 2005, says Adelmo Gabbi, vice president of the Buenos Aires Stock Exchange. "The stock market will play a greater role in terms of financing and the real economy," Gabbi says. Initial public offerings are also expected on the horizon.

The president of the exchange, Hector Bacque is also bullish on Argentina's capital markets.

"We expect the trend in 2004, which was marked by key increases in trading volumes and by interesting profit-averages in the fixed- and variable-income markets, to maintain in 2005," Bacque says. Many companies were able to refinance their debts in 2004 and are now looking to go back to the markets to grow. "I think this is a good starting point to be optimistic with respect to the slow return of companies to the market," says Bacque.

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Title Annotation:ARGENTINA
Comment:Fresh air: no banks? No problem. Businesses in Argentina are doing just fine on their own.(ARGENTINA)
Author:Tomas, Juan Pedro
Publication:Latin Trade
Geographic Code:3ARGE
Date:Apr 1, 2005
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