Turning the corner: Latin America Inc. must capitalize quickly on high commodities prices and willing investors.
Awash in good news, corporations are beginning to rake in fresh capital. After years of doldrums triggered by Brazil's devaluation of the real and the subsequent Argentine crisis, capital markets are regaining strength. "Latin America is starting to become a place where we have opportunities and chances to work again in corporate finance because we have started to have a more positive environment in many economies in the region," says Guillermo Tagle, director of Santander Investments in Chile.
Nevertheless, politics still counts when it comes to foreign investor trust. "You may see two different worlds within Latin America, and those different worlds are divided," says Tagle. "In the one case there is Mexico, Brazil and Chile, and in the second case there is the rest of Latin America."
In Chile and Brazil, for instance, mergers and acquisitions are on the rise and stock offerings are back in fashion. Even retail investors have joined institutional investors in participating in new stock offerings, such as Chile's second-largest department store, Bipley, notes Cristian Moreno, head of research at Santander. Pension funds also have been important to financing, particularly for Chile's biggest companies, though the private pension funds are near their legal limit for equity investments.
Energy company Enersis is one Chilean firm that has boosted financing due to the improved economic climate. "The good stock market conditions and the greater stability of the Chilean currency" have been crucial in adding to Enersis' value, says Ricardo Alvial, chief investment and risk officer for Enersis, noting that the market capitalization of Enersis increased 78%, to US$6.89 billion from $3.87 billion, between June 2004 and June 2005. "Enersis' corporate finances have been positively affected, as reflected by the lower risk premium for our corporate bonds," Alvial says.
Mexico, meanwhile, has become a regional darling in corporate finance, in part due to the swarm of foreign financial giants that flocked to the country in recent years and propped up local banks. They now control 80% of the market. "The foreign banks cleaned up their [domestic unit] balance sheets and injected a lot of capital into the Mexican banks, so during the last two or three years we have seen a boom in credit," says Federico Hernandez, director of corporate finance for KPMG Mexico. "Bight now we are seeing a lot of liquidity in the Mexican market,"
Large corporations only need to prove cash flow and demonstrate a decent financial condition to get financing as a result of the incoming investment, Hernandez says. "In the last two or three years there has been a lot of interest in banks to finance corporations and individuals," he says.
Not surprisingly, Mexico's stock market has skyrocketed, while the peso has appreciated 5% in 2005 through early August. Meanwhile, country risk fell to a five-year low. Part of what is fueling market liquidity, too, is the $16 billion annually in remittances sent by families overseas to Mexico, which now represents the country's second leading source of income after petroleum.
Mexico's pension system has become an increasingly important source for corporate finance. The system's assets now account for 6% of GDP, says David Madero, general coordinator of economic studies for Consar, Mexico's pension-fund regulator. In the next three decades, the funds are expected to match 30% of GDP. Yet these funds have been directed almost exclusively toward bonds; just 1% goes to stocks. The pension system at the start of 2005 got permission to invest in stocks and can now boost its equity exposure to 15%. That should bolster share prices even more as retirement cash enters the market.
Corporate finance is getting a lift in Mexico from low interest rates, too, and a much more predictable monetary policy from the Central Bank. "It's just getting more civilized in the financial markets south of the border," says Madero.
Brazil has become more attractive for corporate finance, with economic output climbing 5% in 2004. In the 12month period leading to June 2005, Brazil's exports hit a record $107 billion and Brazilian workers living abroad sent home $5.6 billion in 2004, fueling consumption, growth and investment.
To the hot list for finance some might add Colombia. The country saw domestic credit grow approximately 15% through July of this year, while foreign credit increased 30%. "There is a great flow of funds into Colombia," says Jaime Velasquez, vice president of finance for Bancolombia. "Colombia is passing through an exceptional situation compared to the rest of the region. And this is related to all of the confidence that the country has generated due to what it has overcome in the last three years."
Flush. Colombian companies have been flush with cash due to low interest rates and the booming local stock market. Velasquez says Bancolombia has served as an example of the confidence in investing in Colombia. It is Colombia's only bank listed on the New York Stock Exchange, and investors have strongly supported its shares trading in New York. Colombia also has seen brisk mergers and acquisitions activity, particularly in the financial sector, while foreign investors have plunged into the country for new assets. In July global brewer SABMiller agreed to buy Colombia's largest brewer Bavaria in a $7.8 billion deal.
No outlook is flawless, however. Chief among concerns is that political instability could roil even the healthiest markets across the region, undermining corporate finance. Chile has a presidential election in December and Mexico's is next year. Already. political scandals have damaged Brazil's economy. "You have the political crisis in Brazil and people aren't really sure where that's headed, and that gives international investors some pause," says Alejandro San Miguel, a partner in the corporate and Latin America practices of international law firm Chadbourne & Parke. "When you look around the region, there still are a lot of places where companies face an investor climate that is concerned about the political situation."
Another concern for Latin American corporations is that U.S. interest rates now at basement levels could continue to creep tip, drawing investments toward the United States and away from Latin America. Consequently, Latin American companies must be more proactive in getting financing. "They need to spend much more time on road shows marketing themselves, showing they have strong management and showing they have plans to grow the business--not just nationally, but also internationally," says San Miguel. Mexico's Grupo Bimbo and Telmex are emblematic of firms that have aggressively expanded abroad, rather than being content with domestic growth.
For exporting countries, turning high commodities prices into cash is the trick. "In Argentina you can probably count on one hand the number of corporations that have been able to get financing in the capital markets," says San Miguel. "But if companies are exporters they are able to get financing by doing securitizations of their export receivables or other types of deals because they have a commodity export that has a clear value and people are able to finance those exports."
For that reason, San Miguel says, the finance climate is tough for companies in Argentina that are dependent on the local economy, such as real estate concerns or cable providers like Multicanal, while companies like Aluar, which has a strong export product, aluminum, can finance their businesses. Still, at least for foreign investors, viewing Argentina and some of its neighbors as a juicy investment prospect is looking at the glass as half-full.
"One of the reasons that the Latin American markets have done so well is that investors are looking for returns," says San Miguel. "U.S. interest rates are extremely low, and there usually is an inverse relationship between U.S. interest rates and the performance of foreign stock markets." Not only are institutional investors focused more on Asia and Russia, he says, but also researchers and analysts are overlooking Latin America, obscuring the region's prospects.
Exceptions. An additional concern is that Mexico, Chile, Brazil and Colombia will remain regional exceptions rather than the rule, since many other countries across Latin America are mired in political and economic blight that pose stiff challenges to corporate finance. Venezuela's President Hugo Chavez has spooked investors with his anti-capitalist rhetoric, Ecuador's credit rating is South America's worst, and Argentina's President Kirchner has made numerous populist overtures.
"The Argentine government is worried about inflation and is trying to get agreements with some sectors or producers to keep prices down," says Carola Sandy, an economist who covers Latin America for Credit Suisse First Boston. "Some of those that do not agree to freeze prices are threatened with higher export taxes. And this reduces incentives for foreign and domestic companies to invest in Argentina."
Apart from politics, companies across Latin America face other financing difficulties, among them the fact that Asia has foreign investors tickled pink. As the number of so-called emerging markets increases--and China is suddenly a big one--the amount of cash available in the world's investment portfolios for them does not necessarily keep up.
Despite the good news of late, Latin American companies are still paying a kind of guilt-by-association premium just for being in the same hemisphere as Argentina, where a historic economic collapse at the end of 2001 wiped out decades of prosperity and plunged 60% of the country into poverty overnight. High commodities prices--as well as a huge write-off on foreign bondholders that is still unraveling--have meant tough times in any country with unbalanced books and high debts. While some foreign companies, particularly Spanish behemoths like Telefonica, Repsol and Endesa, are firmly entrenched in Latin America, others such as Italy's telecommunications company Telecom Italia and French energy firm EDF have balked on regional expansion. French retailer Carrefour, among others, is heading for the exits.
Experts don't expect many foreign companies to rush into Latin America. China and India are more economically dynamic, leading global corporations to instead form regional strategies with those countries as their nexus. This has impeded Latin American corporate finance in many ways. For instance, China's export strength has crimped Mexican exports, as both flood manufacturing exports into the United States.
Also, the fondness of foreign investors for new markets is a double-edged sword for Latin American corporate finance. While Latin American corporations are less likely to receive direct foreign investment as a result, they are nevertheless enjoying ravenous demand from India and China for raw materials as the Asian giants industrialize. This should keep prices for some commodities, and local currencies, from spiraling downward. Further plaguing corporate finance, analysts note, is the regionwide tendency for big companies to be family-owned. Absent an independent board of directors, such firms will continue to struggle to get funding until they are institutionalized--and professional management replaces cozy family relationships in the front office.
The price strength of commodities has nevertheless helped blow wind into the sails of corporations in more troubled countries. For instance, Peru, a major copper exporter, has benefited, while Venezuela, as the world's fifth-largest oil exporter, has enjoyed astronomical oil prices. So too has Argentina, and the country's farm exporters have continued to obtain increased financing since the peso-dollar peg was removed, while prospering from greater exports to neighboring Brazil. Turning that good fortune into cash for growth will take quick thinking.
DANIEL JOELSON * WASHINGTON, D.C.
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|Title Annotation:||CORPORATE FINANCE|
|Comment:||Turning the corner: Latin America Inc. must capitalize quickly on high commodities prices and willing investors.(CORPORATE FINANCE)|
|Date:||Oct 1, 2005|
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