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.
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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.
Argentine restructuring
Pérez Companc
Size: $1.9 billion
Date: July 2002
Adviser: JPMorgan
When Argentina defaulted at the end of 2001, one of its strongest domestically owned businesses was oil company Pérez Companc. But Pérez Companc’s financing arm, Pecom Energía, still suffered from an enormous, newly created stock of dollar debt. Pecom brought in JPMorgan to restructure its bonds and loans.
The $1 billion bond restructuring was closed first. Bondholders got an upfront payment, and maturities were extended by three years. The only hold-outs were a few investors in bonds that were coming due just a couple of months away in August 2002. Otherwise the acceptance rate was high. In the end, 92% of all bondholders went into the exchange and the hold-outs were paid in full.
Once the bonds were out of the way, Pérez Companc could turn to the trickier question of the banks. It had $920 million in bank loans. The largest single creditor was Citibank, with about $110 million; it was joined as a lead arranger on the deal by BankBoston, Deutsche, and Santander’s Banco Río.
Eventually, an agreement was thrashed out under which the banks offered to restructure most of the debt into new three-year and five-year tranches, as well as a smaller one-year tranche.
Pérez Companc only agreed to the banks’ offer, however, after it had agreed to be bought out by Brazilian state-owned oil company Petrobrás. The Brazilians’ offer was contingent on the restructuring going through, so there was a lot of pressure on the Argentines. The banks, of course, had no complaints about the company being bought by a buyer with deeper pockets .
In the end, Pecom ended up with a new $599 million loan-style floating-rate note and a $249 million letter of credit facility. It also made a cash down-payment to the banks. By the time Petrobrás took it over, Pecom had managed to finalize the largest corporate restructuring in Latin American history.
Argentine M&A deal
Tenaris
Size: $3 billion
Date: November 2002
Adviser: JPMorgan
This year has been a very bad time to be an Argentine company. Most of them have kept a low profile or looked for ways to become part of someone bigger (and not Argentine). The Techint Group, however, decided to go ahead with the kind of international corporate consolidation that would have been ambitious even if it had not been Argentine.
Techint is an Argentine conglomerate with global operations in the steel, energy, infrastructure, engineering, construction, and public service sectors, and annual revenues of $7.5 billion. It had three subsidiaries that made seamless steel pipe, a key product for the oil industry. Siderca was its Argentine business, Tamsa was Mexican and Dalmine was based in Italy. Each was a listed company, and being the leading steel-pipe maker in its own country, each had shareholders around the world.
Techint decided that it would roll the three subsidiaries into a new company called Tenaris, which would immediately become one of the leading steel pipe makers in the world
So Techint launched a global simultaneous exchange offer in Argentina, Mexico and Italy. It also launched the offer in the US, where ADRs were trading in New York. The relative weights of the three companies were based on their market values in September, and the transaction ended up creating a company with an enterprise value of $3 billion, including debt.
The Mexican and Italian shareholders became part of an Argentine-controlled company but since they were Argentine-controlled to begin with, they lost relatively little while gaining in size. The Argentines might have suffered on a valuation basis compared with international sister companies but they ended up with shares in a company with worldwide operations.
And the new company, Tenaris, not only has access to the markets but, because of its size, has access on better terms than Siderca, Tamsa or Dalmine could have obtained on their own.
The transaction was not particularly innovative conceptually but the multi-jurisdictional characteristics of the Tenaris offer made it one of the most complex ever of such deals. And the fact that the ultimate parent was Argentine added an extra level of difficulty.
Panamanian M&A deal
Central American Beverages
Size: $138 million
Date: October 2002
Advisers: JPMorgan, Salomon Smith Barney, CSFB
The $138 million acquisition of brewery Cervecerías Barú-Panamá (CBP) and bottler Coca Cola de Panamá (CCP) by a newly formed joint venture, Central American Beverages (CAB), has to be one of the most complex small deals ever. It was structured in less than three months after a bid for CBP from Colombian brewery Bavaria was barred by Panama’s anti-monopoly agency, Clicac.
CBP was controlled by the Coke bottler, CCP. The bidder, Central American Beverages, was a combination of brewer Heineken, Coke bottler Panamerican Beverages (Panamco) and Florida Ice and Farm (Fifco), the largest brewer in Costa Rica.
Although all three have stakes in the joint venture rather than in CBP or CCP individually, they will split the workload: Panamco will run the Coke company, Fifco and Heineken the brewer.
The deal was a success for CBP, which ended up getting bought for more than Bavaria had originally offered. It was also a coup for Panamco, which gets leading market positions in Guatemala, Costa Rica, Nicaragua and Panama. And Fifco got itself an important strategic asset in its fight against Bavaria, albeit at a price: CBP sold for 26 times 2002 earnings – huge for a Latin company.
A lot of people are interested in Central American breweries, since Panama’s per-capita beer consumption is among the largest in Latin America, and there are now few independent properties left in the region. Heineken is foremost among those looking to expand there. It bought 25% of Fifco two weeks before the offer was made.
After CAB’s offer was accepted, the joint venture made a public tender for all the outstanding shares of CCP and CBP that it didn’t already control. Bolstered by a capital increase, Central American Beverages now stands as one of the most important beverage companies in Central America, with an unusual combination of beer and Coca-Cola assets. If it can find synergies there (perhaps in distribution), other companies might go down the same route.
Panamanian bond deal
Fortuna
Size: $170 million
Date: June 2002
Adviser: Merrill Lynch
When Empresa de Generación Eléctrica Fortuna issued a $170 million bond in June, it was the first corporate deal ever to come out of Panama. Furthermore, it managed to come inside the interpolated sovereign curve, despite being rated only BBB- by Fitch, compared with a rating of BBB+ for Panama.
Fortuna is a single-asset hydroelectric generator, owned by the Panamanian state, which is a passive investor, and a joint venture comprising El Paso of the US and Hydro Québec of Canada. The money was to used to refinance the company’s liabilities but if the owners had known what was going to happen on the day that they priced their bond they might have looked for other options.
For although Fortuna could tell a great story about historical rainfall rates and the like, it couldn’t do anything about the fact that WorldCom announced its massive accounting fraud on the day the bond was sold. With WorldCom’s bonds plunging to cents on the dollar, all spread products were fair game.
Nevertheless, Fortuna’s deal went very well. Maybe investors saw a certain amount of diversification there, or maybe it was just that the number of investors was sufficiently small not to be swayed by volatility in the broader market. Some of them were local, most were US private-placement clients, and there was even demand in Canada, thanks to the Hydro Québec link.
The bond carries a 10.125% coupon and amortizes over 10 years, although it makes no principal repayments for the first 18 months. The paper is recourse only to the power plant; neither the Panamanian government nor the US-Canadian joint venture guarantees it.
The hardest part about selling the bond wasn’t even the WorldCom news. Rather, the biggest problem sprang from the fact that no Panamanian corporate had ever issued a foreign bond: domestic regulations required that the bond be listed on the local exchange before being sold to foreign investors. This meant that Merrill Lynch had to go through arduous local listing requirements which were not set up for international bonds. And once the bond was listed locally there was always the risk that the local bonds – listed in dollars, Panama being dollarized – would drop in price, making the foreign tranche almost unsaleable. As it happened, the local sale went off uneventfully, clearing the way for further issuance from Panamanian corporates. Maybe next time it will be easier.
Brazilian equity offering
CCR
Size: $125 million
Date: February 2002
Lead manager: UBS Warburg
February’s IPO of Companhia de Concessões Rodoviaries (CCR), a Brazilian toll-road company, was much more than another baby $125 million stock offering. It was the first time a Brazilian company had gone public since 1999; indeed, it was the first IPO in all of Latin America in almost a year and a half. More important, CCR became the first company to list on Brazil’s Novo Mercado, modelled on Germany’s ill-fated Neuer Markt, which carries all hopes for a Brazilian equity culture.
Brazilian stocks are plagued by opacity and a lack of minority rights, and the Novo Mercado, which has stricter regulations than the rest of the stock exchange, was meant to give investors faith in the market. But companies have been slow to list there, mainly because their controlling shareholders have been reluctant to give up that control. There was also a first-mover problem: so long as everybody else was happy not to list on the Novo Mercado, there was little incentive for any given company to be the first.
But IPOs are different, and foreign investors, especially, were emphatic that if any company were to go public in Brazil, they would only touch it if it was on the Novo Mercado.
So although small, the CCR deal was important. Europe took 20% of the shares, 45% went to the US, and 35% to Brazil. And all the new shareholders had the world’s best minority protection.
Since the IPO, things haven’t really gone according to plan. There was one other Novo Mercado IPO, for water company Sabesp, but then Brazilian markets went haywire in the run-up to the presidential election, and the window of opportunity for new stock offerings closed again. But if and when Brazil ever does build a healthy equities culture (and the size of its domestic pension funds indicates that it certainly should), CCR will be the company that led the way.
Mexican M&A deal
Farmacias Benavides
Size: $50 million
Date: October 2002
Advisers: Violy, Byorum & Partners
Some sectors see a lot more M&A activity than others, especially in Latin America. For example, in international industries such as bottlers, steel-pipe manufacturers, brewers, telecoms, cement and mining there’s always a strategic merger to be found. But drugstores continue to be generally confined to one country, and indeed even large chains within countries are quite rare.
Chile’s Farmacias Ahumada is the exception. Long the leading pharmacy in Chile, it had already extended its operations into Brazil and Peru before Violy, Byorum & Partners flew in with an offer to sell it the number-one drug chain in Mexico, Farmacias Benavides.
It wasn’t an obvious acquisition. For one thing, Mexico City is a nine-hour flight from Santiago and there are big cultural differences. For another, Benavides was bigger than its suitor, selling $550 million annually compared with about $450 million for Ahumada.
But Ahumada managed to issue a bond in the domestic Chilean market, and bought 65% of the Mexican operation for $50 million. This made it the largest drug chain in Latin America by far: three times larger than its nearest competitor. That gives it bargaining power with the pharmaceutical companies in a sector notorious for low margins. It also enables economies of scale: new technologies, for instance, only need to be developed once, rather than being paid for separately in each country.
The deal took 18 months to negotiate, during which time discount rates and risk appetite changed dramatically across the region. It was also an unusual deal in that the sell-side company was trying to persuade the buyers to go ahead rather than the other way around. Ahumada had no representation of its own: Benavides and Violy Byorum had to persuade it that the deal made sense.
Chilean M&A deal
Edelnor
Size: $268 million
Date: November 2002
Adviser: JPMorgan
When a Chilean power generator was sold to a Belgian energy company, the deal was struck in a New York court.
Edelnor is the second-largest power generator in northern Chile but was forced into bankruptcy by huge overcapacity and competitors’ introduction of low-cost gas-fired plants. At this point it was controlled by Mirant of the US and so its bankruptcy was organized through Chapter 11 proceedings in New York.
Belgian utility Tractebel was interested in the asset and put in the best bid, via a subsidiary of a subsidiary of a subsidiary. Edelnor was bought by Inversiones Mejillones, which is owned by Inversiones Tocopilla, itself controlled by Tractebel Andino, part of Tractebel.
As well as paying $5.7 million in cash for 82.34% of the equity, Inversiones Mejillones took on $262 million of debt. In doing so, it had to renegotiate Edelnor’s $340 million of debt: it offered creditors the choice of up-front cash equal to 38% of the face value of their debt or new notes at 92.1% of face value. In the end, 69.5% of Edelnor’s debt was exchanged, and Inversiones Mejillones paid $45 million to buy back the rest.
The innovation lay in a Chilean takeover being effected under the Chapter 11 code in New York. Indeed, it seems it was the first time any south American company had ever been bought through US prepackaged bankruptcy proceedings.
What’s more, Inversiones Mejillones didn’t buy Edelnor directly from Mirant: a local Chilean investor had managed to step in and buy the company in the interim for just under $3 million. Also, Inversiones Mejillones isn’t solely owned by Tractebel – it has another shareholder, Corporación Nacional del Cobre de Chile. So the whole transaction was a great deal more complicated than the final $5.7 million purchase price might suggest.
