Local currency bonds: An invaluable source of funds

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Latin America's debt markets are proving their worth in financing big projects.

by Leticia Lozano

When the world’s second-largest copper miner, Phelps Dodge Corp, recently announced plans to issue $250 million over the next two years in Peru to help to pay for the $850 million expansion of its Cerro Verde copper mine, no one raised an eyebrow.

Such issues have become almost commonplace in an Andean country that is bulging with energy and mining opportunities but lacks government funding. Indeed, companies ranging from Chilean department stores chain Falabella to Peru’s electricity provider Edegel have issued corporate bonds denominated in both dollars and Peruvian sols this year. They have a developing market that has benefited from the country’s fast economic growth and a strong demand by local pension funds – limited by law in their investments abroad – for bonds over the past four years.

It took a small water project in 2001, that of Río Chillón, and a huge gas project in 2004, that of Camisea, to show the way, sending a signal that Latin American capital markets have the potential to be an important source of financing for companies and development projects.

Chile has also made progress in deepening its local market. This year, companies ranging from French construction company Vinci, which placed about $135 million in local, peso-denominated and inflation-indexed bonds, and the Santiago Metro railway, which placed $93 million in local bonds, have been raising money for infrastructure projects. Vinci placed the 11.5-year bonds in two tranches to fund construction of three prisons in Chile.

Colombia has also had several notable local bond issues this year, including brewer Bavaria’s $238 million issue of 10-year bonds. Telecoms company Comcel plans to issue $218 million in bonds in the coming months.

But jails, mines, water and energy are not the only areas in need of financing. Brazil, for instance, is lacking investment in its road network as it tries to make its economy more competitive. Brazil’s National Transport Confederation estimates the country needs $3.2 billion to repave its 58,000km of main highways, far higher than the government’s total transport budget this year of $2.6 billion. It hopes to emulate Chile, where pension funds have snapped up about a dozen bond issues for $2 billion for highways finance in the past five years.