Paraguay special report 2014: Capital attraction: raising the profile

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Paraguay’s two recent capital markets deals succeeded both in securing much-needed funds for infrastructure investment and in raising awareness among international investors.

Further reading
Paraguay opens for business
Paraguay has identified attracting foreign capital inflows as the basis for its ambitious domestic agenda. The government can be pleased with progress made already. The country closed its second foray into the international capital markets in August with an impressive $1 billion, 30-year transaction. This followed a hugely oversubscribed debut $500 million, 10-year deal in January last year.

Foreign direct investment is also picking up. The lead time for these corporate decisions is longer than those of international debt capital market investors but deals have begun to be announced. Already, some financiers are raising questions about the country’s capacity to accommodate potential demand for FDI – the 7 million working population is certainly finite. But, even though the president of the central bank, Carlos Fernández, says that Paraguay is a boat ready to sail and investors should embark soon because "there are only a few seats left", there is still time for companies to make an orderly entrance.

The capital markets trades served a dual purpose. The first was to raise much-needed funds for infrastructure investments but the second has been to boost the country’s profile in the international financial community. The two deals succeeded on both counts. Fernández says the 30-year tenor of this year’s transaction sends out a particularly strong message: "This transaction not only consolidates the success of the first deal, but it sends out a huge signal to physical investment – for those companies thinking about establishing factories, which need time for return on investment – that we are being trusted by the markets with debt for 30 years. That means other long-term investment can come."

Autoparts companies such as Yasaki and Fujikura have already established operations, using the low-cost base to integrate with the auto industry in neighbouring Brazil. Brazilian agribusiness companies have also come to Paraguay, with Bunge establishing a $200 million joint venture with Louis Dreyfus to process soy beans. Brazilian beef company JBS has also bought two local slaughterhouses and plans to invest $100 million.

Positive feedback

Eduardo Felippo, president of the local business confederation, the UIP, says the country will increasingly benefit from a positive feedback loop: "Companies are going to invest in Paraguay because of our high growth rates in the region," he says. "With other countries slowing, Paraguay offers growth potential, which will draw in foreign capital that will further drive growth. The country’s medium-term trend growth should comfortably be between 7% and 8%."

As well as strong growth in the near term, the macro-economic simplicity and stability will attract capital that will help sustain the country in the event of a regional slowdown, according to Gustavo Leite, minister of industry and commerce: "A competitive base is always good when times are not so good," he says. "Paraguay is getting ready not just for growth in the short term but also to sustain headwinds when they come – the world is very changeable these days and we have to be prepared."

Leite says current levels of inward FDI are about $400 million a year but his ministry is targeting $800 million-1 billion, and a key part of reaching that will come from publicizing the international capital markets transaction. "We are marketing Paraguay to the world through this deal," he says. And the news surrounding the transaction is certainly positive.

Asunción skyline
Asunción skyline

The $1 billion deal priced at par to yield 6.1%. Initially the sovereign had sought to raise $650 million but, along with bookrunners Bank of America Merrill Lynch and JP Morgan, it upsized the deal. As well as generating better headlines with which to capture the world’s attention, the size of the deal also qualifies the trade for inclusion in more emerging market indices. The liquidity will also benefit any future return to the market. The country also has a new law that strengthens investors’ interests and defends private property rights. This is not in response to any specific current legal weakness but rather to counter the country’s past poor reputation in the observance of the rule of law.

This transaction was the first by the sovereign since it was raised to two notches below investment grade by S&P in June. The yield, at 6.1%, is lower than the average of 6.29% for other BB-rated countries, pointing to market expectations that the country will win further rating improvements in future. For one investor, however, it was the performance of the 2013 deal that convinced him to participate. The yield on the 2023s was 4.625% at launch but is now around 4.45%. "The country speaks very well to international investors," says the investor. "It had very strong growth last year and it has a clear strategy and the use of proceeds from these deals which is also very positive. Even after this deal the total outstanding debt is just about 14% of GDP and so we are very comfortable that the upside potential outweighs any risks, despite the fact that it is already priced very aggressively to its peer group."