It doesn't get much tougher than this in Latin
American markets. The year was book-ended by the two events
that had been most feared in 2001 - a massive sovereign
default in Argentina, then a presidential victory in Brazil
by Luiz Inacio Lula da Silva.
But even with Argentina out of the markets for the
foreseeable future, and Brazil's benchmark C bonds trading as low
as 44 cents on the dollar at one point, capital markets in Latin
America did not close completely. Rather, a new paradigm emerged.
The days when New York debt capital markets teams could make
enormous amounts by lead-managing sovereign bond issues from the
big-three Latin countries are long gone. Argentina is bankrupt,
Brazil has no access to markets, and Mexico's financing needs are
minimal. Total Latin bond issuance in 2002 will barely reach half
of 2001's $32.5 billion, and the $15.7 billion seen so far this
year (to November 25) is less than 28% of the $56.6 billion in
bonds that came from the region in 1997.
The big mandates have also disappeared from M&A: at the height
of the emerging-markets boom it seemed that there was a huge new
privatization almost every month. This year, there were two major
announced M&A deals: the acquisition of Pérez Companc by
Petrobrás and of CSN by Corus. Only one was completed, and
Petrobrás stumped up little more than $800 million in cash.
(Citigroup's Banacci acquisition last year, by contrast, was worth
$12.8 billion.)
Even so, Latin American investment bankers are keeping busy. The
fees might not be what they're used to; it will be a very long time
before they can once again expect to claim their fair share of $30
billion a year in foreign direct investment flowing into Brazil
alone. But bankers are just as happy to help chastened Europeans
and north Americans retreat, burnt, from a region that has proved
just too volatile for them.
Many international players have decided to cut their losses.
"Telecom Italia and France Telecom feel that it's time to retrench
and refocus, to go back to their home market," says a high-profile
banker. One of 2002's keynote deals involved Bell Canada and SBC of
the US doing much the same. And one of the big equity-market
pipeline deals for 2003 is likely to be the sell-off by Spain's
Santander of a minority stake in its Chilean operations.
Meanwhile, Latin companies, historically much more used to managing
volatility, are seeing opportunities all over the place - even in
Argentina, where Brazilian companies have bought not only Pérez
Companc but also brewer Quilmes.
Ultimately, what's going on is arbitrage between strategic risk and
market risk. Spreads are so wide that future cashflows, discounted
at market rates, are almost worthless, and foreign shareholders
have no interest in Latin businesses. Meanwhile "Latin players are
realizing that the market is penalizing our Latin companies more
than it should do," says Adolfo Rios, head of Latin M&A at
Citigroup. "With all this volatility, it's easier for locals to
assess risk."
So the deals these days are smaller, and more likely to be
international yet intra-regional. And the number of corporate
restructurings is rising steadily as foreign investors lose any
desire to buy or bail out money-losing Latin concerns. Business for
bankers is still there: they're just likely to be working harder
for less money.
Argentine bond
Pan American Energy
Size: $20.4 million
Date: April 2002
Adviser: JPMorgan
Pan American Energy, the result of a merger between the
south American operations of Bridas and Amoco, is the
second-largest oil and gas exploration and production company in
Argentina. Now owned 60% by BP and 40% by Bridas, it has operations
in Argentina and Bolivia.
When it wanted to come to the local market in Argentina for the
first time, however, its timing could hardly have been worse: no
inaugural issues have ever been attempted just a couple of months
after a major sovereign bond default.
The Argentine government's default, as well as its freezing of bank
accounts, had caused a systemic banking crisis and very tight
liquidity: no-one with money was much interested in lending.
Even so, Pan American Energy decided to issue a 7.5% $20.4 million
obligación negociable due in 2004. The coupon was astonishingly
low, considering that interbank rates at the time were in the
region of 100%, and 180-day dollar-denominated central bank paper
issued on the same day came at an interest rate of 19.95%.
The big selling point for the deal was that Pan American Energy was
quite happy to borrow pesos, since as an Argentine company it had
local expenses. But as an oil company, with dollar-denominated
revenue streams, it could contract to pay back interest and
principal in dollars. What's more, those dollars were payable
abroad, protecting them from any further conversion into
pesos.
So local investors essentially got paid for a foreign-exchange
hedge, while Pan American Energy raised money very cheaply. The
deal was the first local capital markets transaction in Argentina
after the default, and the first time the delivery-versus-payment
method had ever been used in Argentina.
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