Seizing the moment

If 1995 was the year that Latin American corporates tentatively dipped their toes into the international debt and equity markets, this year they waded in up to their waists. With memories of the Mexican devaluation slowly fading and most Latin economies beginning to stir from the general slumber of 1995, several companies began to reconsider raising fresh capital.

Latin American corporations may not have been able to match their hyperactive governments in the pace of borrowing, but of the $44 billion in Latin bonds issued by the end of October 1996, $14 billion, nearly a third, was corporate debt, according to Salomon Brothers. In Brazil, corporates accounted for just over 40% of new issues, while all $970 million in Chilean debt issues came from private companies.

Equity issues were more sluggish, but in the first half of 1996 about $650 million was raised by Latin companies through eight American depositary receipt (adr) placements, according to a report by Bank of New York. This represented a big increase over the single $58 million issue in the same period of 1995, but was not yet back to the heady days of the early 1990s.

“You’re certainly seeing a pick-up in pace, but as we’ve seen from the recent postponement of some deals, it’s not plain sailing yet,” says David Roberts, head of Latin American equities at Salomon Brothers. “If a year ago the equity markets were at three out of 10, now they’re at about five or six out of 10,” he says.

Peru

Of the big deals in 1996, analysts were almost unanimous in singling out the Telefonica del Peru flotation in July, which raised nearly $1.25 billion. The international portion of the sale was coordinated by Merrill Lynch and the seemingly ever-present jp Morgan. “In Latin America, by far the most significant corporate deal of 1996 was Telefonica del Peru,” says Cesar Miranda, senior vice-president of investment banking for Latin America at Daiwa Securities, one of the co-managers for the international launch. “It was a fantastic success worldwide. It was five times oversubscribed and sent a signal to the market that Latin American issues were back.”

The sale of 26.6% of Telefonica, which was privatized in 1994, provoked great interest among us investors, who took up 54%. Europeans bought 18%, with the remaining 28% going to Peruvians under the citizens’ participation in privatization programme. The international portion was raised through a level-three offering of 29.2 million American depositary shares, with each ads representing 10 common b shares.

The Peruvian telephone company is controlled by Telefonica de Espana, which paid a fraction over $2 billion for a majority stake in the original 1994 privatization. Peru has one of Latin America’s lowest ratios of telephone lines to inhabitants, leaving plenty of room for expansion.

Of the July flotation, Miranda says: “If you talk to everybody involved ­ from the seller, which was the Peruvian government, to the banks, to the buyers ­ everybody was very happy with the issue.”

Jorge Mariscal, chief equity strategist for Latin America at Goldman Sachs, agrees that the Telefonica placement was the most important and one of the best handled of the year. “It created a benchmark for Peru and a liquid asset to a market that had enjoyed a radical economic and political turnaround,” he says. “It was perceived as a very well administered issue. It did very well in the after-market and was well placed. It didn’t take advantage of the scarcity of the paper and generally left a very good flavour.”

Mariscal believes that this good reception should help other Peruvian companies to tap international equity markets. “The history of Latin equity issues has always begun with telephone companies,” he says, pointing to Argentina’s privatization of Entel in 1991 which began a three-year avalanche of new issues.

Roberts agrees that the Telefonica flotation could make way for other Peruvian equity issues, such as the forthcoming Luz del Sur adr listing. “When you get a major corporation from any country listed on the New York Stock Exchange it adds respectability to other potential issuers and sets a yardstick,” he says.

For Roberts, what was interesting about the Telefonica sale was that it attracted institutional buyers not normally associated with Latin America. The fact that the deal was so heavily oversubscribed shows that the range of institutional investors willing to buy into what is a relatively minor Latin market is widening.

The successful Telefonica issue has also cleared a path for the eagerly awaited sale of most of the Venezuelan government’s remaining 49% stake in telephone company cantv. The multi-tranche issue was joint global managed by sbc Warburg and Lehman Brothers.

“cantv will double Venezuela’s liquid market capitalization,” says Mariscal of the sale, which analysts were expecting would raise between $900 million and $1 billion. “It will put Venezuela on the map at a time when it is showing signs of developing an economic responsibility,” he says. “It will be a watershed for the lesser markets and it is an issue worth watching closely.”

Chile

Of all Latin American companies, it is those from Chile that enjoy the easiest and cheapest access to international markets. That is not surprising given Chile’s economic fundamentals, which include nearly 15 years of growth at an annual average of roughly 6% and minimal reliance on capital inflows.

As a result Chilean electric utilities such as Chilgener, Empresa Electrica del Norte Grande and Empresa Electrica Pehuenche were able to issue this year at spreads ranging from a modest 90 basis points to 150bp for eight-year to 10-year paper. By comparison, Argentine utility Central Puerto y Central Neuquen had to be content with paying a spread of 414bp for a $100 million, five-year note in an issue led by Bear Stearns.

Chilean corporate spreads can go even tighter than that. Compania de Telecomunicaciones de Chile (ctc) raised $200 million at 83bp over us t-bills in a 10-year yankee placement organized by jp Morgan.

Moctar Fall, head of Latin American capital markets at Salomon Brothers, says demand for Latin corporate paper is such that smaller companies, as long as they have “a good story and strong balance sheet”, should be able to tap into international liquidity. “Companies don’t have to be large like ypf or Petrobras for the investors to do the credit work and really pile into it,” he says.

A case in point, says Fall, was a Salomon-led issue by the Chemical Mining Company of Chile (Soquimich), which produces specialist fertilizers and iodine. The September issue raised $200 million in the yankee market, at a spread of just 100bp for 10-year paper. It was Soquimich’s first time in the debt market, but such was the interest that the issue was “substantially oversubscribed”, resulting in about $1 billion in orders. Although the issue was priced aggressively in comparison with other bbb rated Chilean groups, the spread tightened in the secondary market during October to 93bp.

Brazil

Brazilian groups were the busiest corporate issuers of 1996, with a total of $4.2 billion of debt placed by the end of October. “Brazilian corporates were very active this year, which was not the case in 1995,” says Fall.

Much of the corporate debt was issued by banks, more than 30 of which placed notes in the first 10 months of 1996, raising a total of about $2.5 billion. Most of this money was for on-lending, taking advantage of the large disparity between Brazilian and international spreads.

“Brazilian banks have done an excellent job in issuing,” says Joe Cunningham, assistant director for new issues at anz in London. Many analysts do not regard banks as true corporates, but such niceties do not alter the fact that investors continue to have a healthy appetite for bank assets, says Cunningham. He points to a three-year, $50 million issue by Banco bmg, led by anz, as an example of how even second-tier Brazilian banks enjoy access to the international capital markets. “It’s no longer just a market for the top-name banks,” he says.

Of the non-bank issues, the first big deal was that of state-owned mining conglomerate Companhia Vale do Rio Doce (cvrd), which launched a $300 million, eight-year Euronote in March. Chase-Chemical was the lead manager for an issue that attracted much attention given that cvrd is expected to privatize early in 1997. The issue was priced to yield a spread of 400bp. The privatization is likely to be one of the biggest ever in Latin America.

“cvrd was the only large issue we had seen from Brazil at that time,” says Fall of the March deal. “It came when there was a lot of speculation about the privatization of cvrd itself, a situation that should become clearer in January of next year.”

Brazilian president Fernando Henrique Cardoso recently reaffirmed that the cvrd sell-off, which international traders had been hoping for in 1996, would go ahead early in 1997 despite opposition in the senate.

The privatization is due to take place in February with a block sale of between 40% and 45% of voting shares, to be followed immediately by the offer of 10% of cvrd’s total capital to staff. In June, there will be a public offering of the remaining shares on domestic and international markets. The government owns 76% of cvrd’s voting capital, equivalent to 51% of the company’s total capital.

Miranda of Daiwa Securities says this pattern will be repeated in several other privatizations due next year. “What the Brazilians do when they privatize is to sell to a strategic investor who knows the business, and then bring an international offering to market several months later,” he says.

Issues of non-state-owned Brazilian corporates this year included a $150 million eight-year Euronote from retail chain Lojas Americanos, which was placed privately by jp Morgan. The issue carried a coupon of 11%, representing a spread of 450bp.

Globo Participacoes, on behalf of the Globo media group, issued a $100 million, eight-year note, with the deal managed by Chase Investment Bank. The issue carried a spread of 395bp and was followed up with a $50 million, two-year bond priced at 297bp and managed by Citibank International. Globo also launched a $33 million, eight-year Eurobond denominated in Portuguese escudos.

Cunningham says the Globo $100 million note stands out among the year’s corporate bond placements in that it was “a fairly large issue that has gone down well at a reasonable spread”. These type of deals “lay the foundation for future issues, not just for the company concerned but for others,” he says.

Mexico

Of the $18.2 billion of Mexican bond issues in the first 10 months of 1996, a little over $3 billion was corporate issuance. Some Mexican companies rode on the coat-tails of their issue-happy government and emulated the state by tapping international funds in order to stretch out debt maturities and resolve potential amortization bunching problems.

In 1992 and 1993, many Mexican companies had issued three- to five-year paper, much of which is about to come due. Many of those companies that enjoy fairly fluid access to international financing took advantage of the market’s receptiveness to longer-term paper to stretch out their yield curves.

In May, broadcaster Grupo Televisa placed $970 million in notes and debentures to help smooth out its repayment schedule. Morgan Stanley led three private placements of seven- to 10-year paper totalling $600 million into the yankee market.

Cemex also restructured about $1.3 billion of its debt, pushing the maturities out. “The paper they were assigning in 1995 and in the early part of 1996 was very short term paper and these companies need to be capitalizing with longer-term paper. That is their goal,” Saboni Warner, Bear Stearns construction analyst, said at the time of the deal.

The Cemex restructuring included the placement of two Eurobonds of $300 million each. Goldman Sachs led the issues of four-year and 10-year paper, which carried spreads of 425bp and 587bp, respectively.

Grupo Industrial Durango also said it would use the proceeds of a $250 million, seven-year yankee issue to refinance a portion of its debt and related expenses. Lead-managed by Chase Securities, the note was priced to yield a spread of 592bp.

Another deal highlighted by analysts was that of Petroleos Mexicanos (Pemex), Mexico’s state-owned petroleum company, which issued two $300 million Eurobonds this year. The first, a two-year Eurobond priced to yield 190bp over us treasuries, was led by Deutsche Morgan Grenfell and jp Morgan. The second, managed by ubs, was priced at 175bp.

The two deals highlighted the tightening of yields that took place for much of 1996 and showed that corporate issues can be priced at tighter spreads than those of their sovereign state. Mexican debt issues generally fetch significantly wider spreads. “Investors are now focusing much more on the [risk of the individual] credit than on the sovereign issue,” says Fall.

Some analysts believe this trend is flawed and that a corporate credit should never trade at tighter spreads than the relevant sovereign debt. “Sovereign risk is more difficult to understand, whereas accountancy-minded analysts can easily come to grips with a company’s balance sheet,” says one sovereign debt analyst of a us asset-management fund. “But can a corporate credit ever be less risky than the ambient sovereign risk? The ultimate risk of any corporate is expropriation… There is a strong argument that all [emerging market] corporate debt is simply too expensive.”

Argentina

Less than a fifth of Argentine debt issues by volume so far this year has been made up by corporates ­ a total of around $1.95 billion. Such is the voraciousness of the Argentine state’s appetite for borrowing, fuelled by pressing refinancing needs, that many companies have been squeezed out of the picture. In any case, few Argentine companies are in a hurry for fresh funds given that the economy is only just beginning to pull out of last year’s recession.

“A danger here, especially in the case of Argentina, is that the government is crowding out the private sector,” says Cunningham of anz. “Credit lines are only so deep, so if a government is continually issuing, buyers will usually go for the sovereign credit above the corporate one.”

Some Argentine corporates did manage to break through the saturation barrier. Among them was debt-laden, energy-based conglomerate Comercial del Plata, which in February issued a two-year, $100 million Eurobond, lead-managed by Paribas Capital Markets. The effect of sovereign overkill in the markets was manifested in the spread Comercial was obliged to pay ­ a hefty 560bp.

A few months later Comercial was back, again with Paribas, this time with a $125 million, four-year private placement priced to yield 525bp over t-bills. Comercial was also considering a New York ads listing, but abandoned its plans when the group’s share price took a heavy knock.

Other Argentine companies to issue bonds in 1996 were mainly utilities, including Metrogas, Transportadora Gas del Sur, Transportadora Gas del Norte, and Hidroelectrica Piedra del Aguila. Also oil and gas group Bridas, which is bent on international expansion, launched two private issues totalling $175 million. Both deals were led by Chase Investment Bank.

In the semi-corporate category, state-owned mortgage bank Banco Hipotecario (bhn) launched two mortgage-backed bonds worth a total $80 million. The bonds, with maturities of 3.4 years and 1.6 years, were both priced to yield spreads of 175bp. The deal was managed by cs First Boston.

One trader from a rival bank described the spreads on the bhn deal as “ridiculous”. In the case of default, the trader asked, were investors really going to go to Buenos Aires to take possession of their collateral?

The trend towards asset-backed issues has nevertheless taken hold, with the Province of Mendoza in August issuing a $150 million bond backed by oil royalties that it receives from five concessions. Lead manager in that deal was Lehman Brothers.

In late-October, the gas-rich province of Neuquen announced that it was about to launch a similar royalty-backed deal, collateralized by payments made to the province by privatized hydrocarbons group ypf.

Salomon Brothers says an Argentine corporate deal that did stand out in a fairly lacklustre year was one it lead-managed for Siderar, a steel group controlled by the Techint conglomerate. The $80 million ipo, which was sold via Rule 144a, was the first Argentine industrial company to list internationally.

The deal also marked what many analysts hope will be a growing trend in Latin America ­ the participation of domestic institutions, mainly pension funds, in issues. Of the Siderar offer, 47.8% was bought domestically, reflecting the fact that local private pension funds (afjps) were allowed to participate in a global offering for the first time.

“This transaction has effectively opened the domestic market for international offerings,” says a report from Salomon Brothers. “Local participation from institutional funds will become an important and powerful vehicle for development of the domestic capital markets.”

“The us equity business has been built up mainly on selling us stocks to us investors, while the European market tends to sell European shares to European investors,” says Salomon’s Roberts. “But Latin American business has been built up by selling Latin American stocks to anyone but Latin Americans. This is beginning to change … We are starting to see serious [local] institutional buying.”

Roberts thinks this trend, only properly established in savings-rich Chile, will start to become more evident in Mexico following the start of a private pension fund programme there. Other countries will follow as cash-strapped governments shift from pay-as-you-go pension schemes to private plans based on individual capitalized accounts.

Looking ahead to next year, Mariscal of Goldman Sachs believes opportunities for Latin corporate issues will grow. “The percentage of funds allocated to Latin America [by us and other institutions] is likely to edge up,” he says. “The bulk of equity issuance in 1997 is probably going to be in Brazil, with a lot in the utility industries.” Mexican companies are also likely to become more active. Some of the forthcoming Brazilian equity issues will be “mind-boggling” in size, he says.

Nevertheless, “investors are likely to be very selective and will only pick companies with very strong balance sheets,” he cautions. “The memories of Mexico are likely to linger on for a few years yet.”