Latin America: Boom times for investment banks
EXACTLY A YEAR ago, Merrill Lynch CEO Stan O’Neal asked Jim Quigley to take charge of the bank’s Latin American business. It was both a statement of intent and a recognition that things needed to be shaken up in its Latin American franchise. Quigley is a Merrill Lynch stalwart who has spent his entire career at the bank and is one of its senior executives.
He set about overhauling a global markets and investment banking business that was relatively successful in the region but limited in its scope. The firm’s standing in debt capital markets was well established. In May 2005 it was one of the international advisers on Argentina’s record-breaking restructuring of its defaulted debt. The bank was one of the pioneers of securitizations, subordinated debt and perpetual bond deals. From a geographical standpoint, Merrill Lynch was competitive in Brazil and Mexico. But beyond these core products and markets, the US bank lagged behind certain rivals that had a much more comprehensive investment banking service. It was, for example, missing opportunities in principal finance, real estate and even equities and M&A.
Quigley engineered a big reorganization of the bank’s Latin American business. He split it into two parts: on the one side, debt and equity capital markets, derivatives, structured finance and, on the other, private equity, principal finance and M&A.
The restructuring, according to Quigley, not only enables his bankers to capture traditional capital markets business but also to spot opportunities that are under the radar screen – private equity, principal finance, infrastructure and tax.
Quigley admits that some of these areas will take time to reach their full potential. However, he claims that "no other investment bank is as comprehensively focused on Latin America as we are".
Buoyant markets
Quigley’s rivals would fundamentally disagree with his claim. Merrill Lynch might have undertaken a more thorough reorganization than other banks but it is far from alone in directing more resources to its Latin American interests.
Morgan Stanley, for example, following John Mack’s return as chief executive, has demonstrated a greater commitment to the region. In February 2006, it appointed Guillermo Jasson to become the bank’s first regional head for Latin America. Then, in mid-April, it created a Latin American group, headed by Diego Ferro, within its global capital markets division. These moves are paying off, propelling Morgan Stanley to the top of the debt capital markets league tables after what seemed like two or three years in the wilderness.
Other banks have taken a more radical route in building their interests. Last May, UBS paid up to $2.6 billion to buy Brazil’s Banco Pactual, and in July HSBC spent $1.77 billion on Panama’s Banco Banistmo.
Others still are taking a more piecemeal approach. Goldman Sachs, for example, is building an equity brokerage business in Brazil. Citigroup did something similar last June and is now turning its attention to Chile. Santander is building a regional debt capital markets franchise.
These are just the stories that have grabbed the headlines. There’s so much more going on. Talk to the leading international banks and almost all have big plans for growth ranging from new hires in New York and in the region to opening more local offices to the possibility of tie-ups with niche institutions.
The reason is simple: Latin America is booming. Of course this is not the first time that the region has been in the throes of a bull market. But this boom is unprecedented in that it spreads across all financial products. Debt, equity, M&A – all are buoyant.
Just three years ago, the story was very different. Then Latin America was in the first phase of its recovery from Argentina’s and Brazil’s financial crises of 2001/02. There was debt issuance but it was mainly from top-rated sovereigns and blue-chip companies, such as Cemex. The M&A market was active but volumes were about one-fifth of present levels. As for the equity market – well, what equity market?
"Today, it’s a completely different environment," says Steve Cunningham, head of Latin American investment banking at Deutsche Bank. "Countries are opening their local capital markets, the pension funds industry is developing throughout the region, companies are strengthening their balance sheets and we’re seeing increasing levels of cross-border business."
It’s not just that deal flow is much greater. What makes the investment banking landscape so exciting is that the character of the business in Latin America is changing so fast. "The way the Latin American markets are changing is incredible," says Dan Vallimarescu, head of the Americas debt business at Santander.
Before, banks focused most of their efforts on executing dollar bonds for sovereign and quasi-sovereign issuers, advising on relatively straightforward mergers and acquisitions and, if the environment allowed, taking the odd Latin company to New York to get a listing. Investment banking services to the region were pretty basic, largely because the demands of their clients were also pretty basic.
Now, for a number of reasons, Latin America is beginning to resemble the more mature financial markets of Europe and even the US. A benign economic environment, improved corporate governance standards, a growing pool of local and international investors, deregulation of domestic capital markets, and smaller fees in the traditional debt capital markets business, mean that corporates and investors are demanding – and banks are pushing – a whole host of products and services.
High yield, hybrid bonds, bank tier 1 capital structures, private placements, derivatives, local currency debt and equity issuance, hostile takeovers, infrastructure finance, real estate finance, LBOs, principal finance – the region is seeing more regular examples of all of these products, even if some of them are at a nascent stage of development.
"The market is a much more sophisticated user of financial products than it has ever been, be it in debt, equities, M&A, FX, derivatives and so on," says Cunningham. "Latin American companies are completely consistent with and comparable to their counterparts in the US, Europe or Asia."