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Argentina’s domestic capital market has rarely looked so healthy, with 1998 set to be a banner year for new issues. The government is extending its successful programme of treasury bond auctions, a large number of corporates are launching bond offerings and there is likely to be heavy issuance into the local equity market. Such a high level of activity could hardly have been imagined only a few years ago, when the local Argentine markets were just beginning to stabilize, and were recovering from the era of hyperinflation which had all but wiped out domestic savings. But progress has been more rapid than anyone had dared predict, and the pool of domestic money looking for fixed-income and equity investments is now providing an important complement to strong demand from international investors for Argentine assets. Leading the way are the local pension funds (administradoras de fondos de jubilaciones y pensiones – AFJPs) which now have $8 billion in total assets under management. More surprising than the well documented rise of the AFJPs has been the sudden emergence of the mutual fund sector, which during 1997 has become an important part of the investor base. Most of the big mutual funds are run by the commercial banks, which have been aggressively marketing fixed-income and equity funds to their customers as an alternative to certificates of deposit. One investment banker estimates that during the second half of 1997, as much as $250 million a month has been flowing into these funds. This build-up of locally-managed assets is making a significant contribution to the capital needs of local companies. “The AFJPs are hungry for higher yields and want to increase their holdings of corporate bonds versus sovereign bonds,” says Pablo Ganame, head of debt capital markets at Deutsche Morgan Grenfell. Deals of $50 million are easily absorbed for the right credit, he points out. Some issuers are also doing deals with combined domestic tranches and placements in the US 144A market in order to broaden their investor base for future offerings. One such recent issue was from the provincial government of Tierra del Fuego, which went to market in mid-October with $55 million of amortizing notes with a final maturity of six years. The notes were collateralized by oil and gas royalty payments which allowed the notes to obtain an investment-grade rating. “It was a good opportunity to introduce the credit to the international market,” says Ganame. “They could have placed all the paper locally, but Tierra del Fuego wanted to prepare for a possible future international issue.” During the course of 1997 demand has been so high for many Argentine issues that underwriters have had to make difficult decisions about how to apportion fixed-income paper and equities between local and international investors. “An important percentage goes abroad, and a lot of local demand goes unsatisfied,” notes Roman Chlapowski, commercial director at Cohen, a Buenos Aires broker. For example he notes that in the October equity offering from Banco Rio de la Plata, local brokers were not allocated any stock for their retail clients; the underwriters preferred to sell to pension funds and mutual funds. Chlapowski was not surprised by the magnitude of the demand for the Rio issue, since investors “need another big high quality bank” for their portfolios. In spite of the growing demand from domestic investors, the biggest and best known Argentine issuers will continue to access the international markets. The Republic of Argentina will remain one of the biggest emerging markets borrowers during 1998, and is expected to issue in a wide variety of currencies. In addition, many corporates are likely to access the Eurobond markets next year. “In 1998 you have a high concentration of bonds maturing, since many major issuers went out in 1993 with five-year bonds,” says Guillermo Ivanissevich, vice-president of corporate finance at Citibank in Buenos Aires. He notes that at that time five years was the longest maturity available in the Euromarkets for Argentine and other Latin American issuers. “The top names can access the international markets without any problems, and can do as much as $500 million or $700 million in one issue,” Ivanissevich explains. Meanwhile, the domestic capital markets can absorb $100 million offerings from less well known companies. In addition there is a private placement market for unrated paper, where deals of up to $50 million are feasible. Lorna Martin, director at IBCA Argentina Calificadora de Riesgo, notes a trend towards structured issues. For example, earlier this year, the agency awarded a single A local rating to a $50 million offering from Aerolineas Argentinas, in which it sold bonds backed by future payment flows from ticket sales to holders of its Aerocard credit cards. Meanwhile the local market for mortgage-backed securities is already the most developed in Latin America. The biggest issuer has been Banco Hipotecario Nacional, which has so far securitized around $400 million of mortgages, split evenly between peso- and dollar-denominated offerings. Next year, auto and consumer loans may be securitized too. It has already been a record year for Argentine corporate offerings, with total issuance for the year set to top $8 billion, but the biggest companies will continue to go direct to the Euromarkets. The appetite of international investors has been sharpened by Argentina’s improving rating: in April Standard & Poor’s upgraded Argentine sovereign issues from BB- to BB. And, more controversially, the agency also raised 15 banks and corporates to investment grade, for the first time ignoring the sovereign ceiling. Their new investment-grade ratings will now allow credits such as Banco Frances, Banco de Galicia, Perez Companc, YPF and Telefonica de Argentina to enjoy extremely attractive pricing on new issues, and they will be able to tap the vast pool of institutional capital tied up in US investment-grade accounts. The Republic of Argentina itself must still sell to high-yield accounts, but nonetheless its pricing has improved during 1997 as a result of its one-notch upgrade. During the course of the year the Republic has conducted a heavy borrowing programme, with deals denominated in Deutschmarks, yen, lire, pesetas and Austrian Schillings as well as dollars. Next year will be just as busy. But there will be more emphasis on domestic debt issuance, which could account for 30% to 40% of the republic’s financing needs for 1998. The domestic issues completed thus far have been well received. In December of 1996 the republic placed $550 million of two-year treasury notes known as bontes, and returned to the same sector with another well received $500 million auction in February. During the course of the year the government also placed $1.5 billion of five-year bontes locally. These notes were also denominated in dollars and pay a coupon of 8.75%. There are also regular auctions of treasury bills (letes) which have terms of between three months and one year. Argentina’s pension funds are big buyers of sovereign paper, which makes up around 43% of their total assets under managment. Fernando Gallino, a fixed-income trader at MBA Banco de Inversiones, an affiliate of Salomon Smith Barney, expects to see an extension of the sovereign peso yield curve during 1998. “The market expects that the government will issue five-year bontes,” says Gallino, as part of its extensive series of auctions in 1998. The government estimates that it will issue $5 billion locally during 1998, both in dollars and pesos. In 1998, there will also be more government debt buy-backs, of the type executed by Argentina in September, when it issued a new global bond to replace its bids for Brady bonds and other debt-consolidation bonds. Though not as spectacular as the growth in fixed-income issuance, the volume of local equity offerings is also expected to grow rapidly during 1998. One large issue is likely to come via the privatization of Banco Hipotecario Nacional, and a number of local corporates, such as supermarkets, are also working on IPOs. Bankers are expecting a busy year for equity underwriting, with several billion dollars worth of stock to be sold via both domestic and international offerings. Potential issuers will have been heartened by the reception of Banco Rio de la Plata’s October IPO. Demand was exceptional, with the local tranche seven times oversubscribed and the AFJPs put in for large amounts of stock. Although pension funds are permitted to invest no more than 35% of their funds in equities, they currently hold only around 21% of their assets in this form and are keen to buy high quality stocks. The IPO was also in heavy demand from retail and institutional investors overseas. In the event, lead underwriter Merrill Lynch increased the size of the offering. With pricing at $7.50 per share (with two shares bundled together for the $15 ADRs), some $634 million of stock was sold comfortably. A total of 46.6 million shares were placed in the US, with another 19 million going to Europe and 19 million sold to local investors. Argentina has particularly large capital needs, since its economy is currently enjoying the fastest growth in the region, with GDP forecast to increase by 7% this year. But all the signs are that the combination of international demand, plus the growing domestic institutional investor base, will prove sufficient to absorb the high level of issuance during 1998 and beyond. Chasing the retail customer“The Invasion Of The Banks” was the headline in one Buenos Aires newspaper in October, as it surveyed the changes that have swept through the banking system during 1997, with an influx of foreign owners and new branches and automatic cash dispensing machines springing up across the country. Part of all this frantic activity is the rush by Argentina’s dominant commercial banks to gain critical mass in the local retail market. These banks see low-cost and high-volume business as the way forward, taking advantage of the growth potential offered by the country’s increasingly affluent middle class. But another cause of the dynamism of Argentina’s banking sector is a wave of mergers, acquisitions and disposals. In late October, Bank of Nova Scotia announced that it was increasing its stake in the local bank Banco Quilmes from 25% to 95%. Another recent deal came earlier in the month, when Deutsche Bank took the local market by surprise with the announcement that it was quitting retail banking, and selling its 48 branches to Banco de Boston. Both deals illustrate the increasingly competitive nature of Argentinian banking, where future growth will require heavy investment and long-term commitment. “The game is concentration,” comments Matias Chlapowski, director of international banking relations at Banco General de Negocios in Buenos Aires. “It is difficult to be mid-sized. Either you have to be a niche player or have a very large retail operation.” Those banks working to increase their presence in Argentina include Banco Bilbao Vizcaya, which is present via its controlling stakes in both Banco Frances and Banco Credito Argentino. In October Frances and Credito shareholders approved a merger under the Frances name, along with a capital increase through the issue of 25 million shares. Earlier this year the conglomerate Perez Companc sold a strategic stake in Banco Rio de la Plata to Grupo Santander of Spain. Also in 1997 HSBC became a major player in the local market by increasing its stake in Banco Roberts to make it a wholly-owned subsidiary. Meanwhile Banco Tornquist is 99% owned by the Chilean-Spanish banking group OHCH. For Boston the $250 million Deutsche acquisition has given it added clout in the market, including a particularly strong presence in and around Buenos Aires. With the addition of the Deutsche business, Boston now ranks fourth among the private-sector commercial banks by asset size, with $7 billion in assets. Top of the list is Banco Rio with $9 billion, closely followed by the Argentine-owned Banco de Galicia, which during the year consolidated its acquisition of another local player Banco Sudecor. The combined Banco Frances and Credito comes next in the rankings with total assets of $8.2 billion. Two foreign banks frequently tipped as likely candidates to make more acquisitions are HSBC and Citibank. According to some reports, the US bank was a contender with Santander when Perez Companc decided to sell off Banco Rio. There are still a number of acquisition opportunities. Observers consider Bansud a possible takeover target for one of the bigger banks. Grupo Financiero Banacci from Mexico holds a 70% stake in Bansud, but observers see little reason for it to get involved in Argentine retail banking, and the betting is that Banacci will exit the market after taking a good profit from its 1994 investment in the local bank. Privatization will create further buying opportunities. In October the state-owned Banco de Credito Provincial (BCP) went on the block. And the market awaits the privatization of mortgage bank Banco Hipotecario Nacional which has assets of $4.3 billion. The high level of interest in Argentine banking stocks was illustrated by the October IPO for Banco Rio de la Plata. Rio had been a privately-owned independent bank, part of the Perez Companc group, until a controlling stake was sold to Santander. In early October Perez Companc sold more shares in a simultaneous local IPO and offering of ADRs, and Rio is now listed on both the Buenos Aires Stock Exchange and the New York Stock Exchange. While the rush of M&A deals involving Argentine banks has happened much faster than most observers had predicted, the development of retail banking services is also taking place at a breakneck pace. Banks are competing to open new branches and install cash dispensers, hoping to attract customers who will go on to purchase a broad range of financial products. One trend is to put cash machines in petrol stations, and Banco de Galicia has an agreement with Shell Argentina to install automatic cash dispensers in its gas stations, with 250 to be in place by the end of 1997. Most observers welcome the capital and the marketing know-how brought into Argentina by these foreign entrants. But there are a few dissenting voices. “I’m not convinced that selling everything is good,” says one local broker, who disagrees with the sale of Hipotecario and the rush of local bankers to sell out to foreign buyers. But with foreign institutions rushing to invest in Argentina as fast as the country’s businessmen and political leaders move to embrace economic globalization, such views are in a minority at present. More deals involving foreign buyers can be expected during 1998. |
