|• Paraguay opens for business|
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.
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.
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.”
Daniel Correa, deputy finance minister, says communication with the international investment community has been a clear strategy for improving its funding costs. “After being out of the market we have had to spend a lot of time explaining the credit to investors and presenting our case to them,” says Correa. In anticipation of this year’s transaction – and to follow up on the January 2013 deal – officials from the finance ministry have been constantly updating investors on the sovereign’s progress. “Last September we went to New York to visit investors and then again in January this year we went to New York, Europe and Asia to show how Paraguay is developing.”
Correa says the sovereign was keen to take advantage of the benign financing environment currently on offer to Latin American issuers. It took the relatively rare step of issuing in August – traditionally a closed month with North American portfolio managers on vacation – on the advice of the two leading banks. With the US Fed continuing to taper its programme of quantitative easing and an increase in speculation about the timing of an increase in US interest rates, the advantages of securing favourable terms were clear – the deal pricing at 281.6bp over US Treasuries.
Paraguayan government officials have also prioritized communication with the rating agencies as part of their charm offensive. Fernández’s first day at the central bank was 3 October 2013; two days later he went to New York to meet the agencies. “You need to work with the rating agencies to let them know your plans and that you are a serious government,” he says. He declines to say whether he thinks the rating agencies should increase the ratings still further, as some suggest, with the market pricing the sovereign risks as if for a higher-rated country. “We still have some room to improve and we will do what is necessary in order to improve,” says Fernández. “Let’s see where that takes us, but the outlook for the credit is positive.” Ratings, he says, cannot deviate far from the financial sector‘s pricing of risk.
The rating agencies have taken the message on board. In June’s upgrade report, Standard & Poor’s said it was “based on our expectation that the government will make progress in implementing recent legislation designed to boost investment and maintain cautious macroeconomic policies”. The administration of President Cartes, it adds “has embarked on an ambitious plan to spur investment, especially in the country’s physical infrastructure, in order to build and sustain long-term GDP growth and modernize the economy. We expect that the administration will be able to maintain political consensus for its growth strategy and progress on the implementation over the coming three years, setting the stage for gradual economic diversification and reduced economic volatility.”
The sovereign transactions also help other issuers from the country tap the international debt markets. Banco Regional sold $300 million in January 2013. The Ba1/BB bank drew $1.25 billion in demand (upsizing from $250 million) and yielded 8.25%. However, while the sovereign benchmark undoubtedly helps other Paraguayan transactions there are international deals that pre-date the 2013 inaugural transaction, with BBVA Paraguay raising $100 million, Banco Continental $200 million and Telefonica $300 million in 2012 (February, October and December respectively).
Bankers say that the small size of the economy means that there won’t be a rush of new Paraguayan issuers in the capital markets but there will be steady flow of deals from existing issuers and some debuts as economic growth leads to more of the leading local companies gaining sufficient scale to issue international deals. The pipeline may be modest but the financing terms on offer for Paraguay’s credits in the future should only improve.