Latin America again looms bright on the radar screens of US investors. While huge privatizations still make the biggest impact, beyond the marquee names a second tier of smaller issuers is emerging. And whoever it is, a burgeoning local investor base is being targeted alongside various foreign contingents, with companies challenged to balance the demands of different investors.
‘In 1994, investors knew they would make money buying large caps like Telmex and Cemex,’ says Alonso Cervera, chief economist at Mexican broker Interacciones Global. ‘Today, smaller companies outperform the big names and attract sophisticated investors.’
Boosting investor confidence has been a priority for any size of company since Mexico’s peso meltdown in late 1994 sent markets south for more than a year. Now Mexico has paid off its $13.5 bn (CHECK) emergency loan from the US, a reformist agenda is sweeping the region, and sustainable macroeconomic prospects are brightening the investment horizon. Latin stock markets are surging in celebration and US interest rate hikes have so far only moderately dampened a Latin allure highlighted by low valuations.
A JP Morgan estimate has Latin equity issuers looking for up to $8 bn this year – and that may be too conservative. These companies covet an abundance of international capital as interest rates in Europe and Asia fall, while US investors seek alternatives away from dizzying valuations at home.
So the limelight is focused again, with privatizations topping the bill: The expected $1 bn deal from Brazil’s Unibanco and the three-stage $6 bn sell-off of mining conglomerate Companhia Vale do Rio Doce (CVRD) will bellwether investor enthusiasm. Meanwhile, Argentina may sell its remaining 20 percent stake in oil company YPF and may also float part of Banco Hipotecario. Venezuela may sell parts of aluminum and steel company GVG, while lots of infrastructure and financial services privatizing remains across the region. Among second tier issuers, smaller companies with a consumer focus abound – retailers, cable TV suppliers, and consumer brand businesses.
All of these issuers face a different financial world than in 1994. While the relative dearth of recent issuance has sparked appetite, investors come to the table having learned a few lessons.
‘We are seeing more experienced, professional and selective investors,’ says Jose Maria Alberu, vice president of institutional equity sales at Interacciones. ‘In 1994, anybody setting up a Latin American fund would get interest. Then, disclosure was not a priority. Today, Latin markets provide far more research.’
New Kids on the Bolsa
Following the peso crisis, cash-hungry Latin companies had no choice but to woo a nascent domestic retail and pension fund investor base. The growing local investment culture is reflected in issues like Telefonica del Peru and Venezuela’s CANTV, which faced major domestic demand while also looking to international sources.
Latin countries have leapt forward with private pension fund schemes since the Mexican meltdown. Most are modeled on Chile’s example and are soon to be major players by anyone’s standards. A Salomon Brothers study shows around $108 bn in Latin American pension funds and predicts that by the year 2011, $600 bn will be under management with some $108 bn in Argentina, $95 bn in Chile, $94 bn in Mexico, $35 bn in Colombia and $20 bn in Peru. About $240 bn alone will be held in Brazilian employee benefit plans.
Already, Chilean pension funds have proven they can help sustain a market facing foreign pessimism. Mainly, governments want less dependence on foreign capital and to shed the fiscal burden of providing pensions. That rationale serves to underline a commitment to restructuring.
Lenient Latin disclosure rules make presentations to local investors different from those to US ones. ‘Nonetheless, 90 percent of the time, a company’s story doesn’t vary between countries,’ says Juanita Gutierrez, a Latin American specialist at New York-based IR firm DF King, which is planning to open a Mexico City office this summer. ‘We’ll bring all our IR capabilities including stock watch,’ adds Gutierrez. ‘I understand both markets. It’s interesting being a bridge between both market cultures which have very different disclosure rules.’
DR Vistas
If Latin issuers increasingly tap home-grown investor bases, don’t count the depositary receipt market out yet. A major plus for Latin companies with ADR programs were cushioned share price declines and less volatility in the uncertain post-devaluation period, according to Georgeson research. ‘Exposure to North American investment added liquidity and moderated market jitters,’ says Richard Wines, a senior consultant at Georgeson.
Since they’re geographically close to the US, Latin companies usually look to the ADR market, while only a handful have tapped the global depositary receipt (GDR) market, including Celesc in Brazil and Uruguay’s Banco Commercial. Emerging markets issuers like GDRs because they are quicker to organize and cheaper than ADRs according to Peter Duggan, global DR product manager at Bankers Trust. ‘Many second tier Latin issuers are choosing a GDR while still accessing the US through Rule 144A private placements,’ says Duggan. ‘The only limit is the US retail market. However, a second tier Latin poultry company’s target audience is not the US retail market.’
Meanwhile, many issuers are looking farther afield – the United Kingdom, for example, which is the traditional base for emerging markets investing.
‘Individual pools of capital are smaller in Europe, but investment knowledge in emerging markets tends to be higher,’ says Ben Laidler, assistant fund manager at Rothschild Asset Management. Laidler gives Latin companies good marks for improving standards and frequency of reporting. However he cautions that if issuers have a good story, they must be prepared to follow through. ‘Many companies sell a strong story, but if they are unable to deliver, they are surprised by the vengeance that dedicated emerging markets investors can wreak on a company.’
Laidler points to Grupo Corvi, a Mexican retailer distributor that issued locally last summer. Its story of growth amidst a booming consumer market caught the attention of international investors who lapped up the issue. But several quarters of disappointing results severely dampened investor enthusiasm. ‘They had stoked investor expectations, but couldn’t deliver,’ says Laidler. ‘Investors in growth stories need management credibility and you only need one bad quarter to deflate the bubble.’
Talking Value and Growth
Following the peso fiasco, the market gradually stabilized as investors sought undervalued opportunities. Now, the IR message is growth as well as value. Latin companies may still trade at enormous discounts compared to international peers, but many have taken great restructuring to bring themselves into line. For instance, Brazilian energy company Cemig declares an increasing orientation toward shareholder value and now trades at around 75 percent of book value compared with 35 percent in 1995. ‘That’s still cheap compared to US utilities,’ comments Ann McBride, president of The Ann McBride Company in New York. ‘Cemig is also a growth play, whereas US utilities offer mostly yield.’
McBride emphasizes that today’s investors judge Latin issuers, industries and countries more selectively. ‘In 1994, issuers didn’t distinguish themselves as individual stories in specific economies,’ says McBride. ‘Today, you can’t sell Latin American equity collectively.’ Nonetheless, Latin companies are still challenged to explain the region. From a macro perspective, the region’s economies are growing rapidly, benefiting from subdued inflation, government deregulation and an improving public debt picture. As growth plays, Latin companies pit themselves against competition from raging Asian economies, so increasing IR sophistication helps win investors. ‘Latin companies are generally more amenable to shareholder communication than Asian companies,’ comments Scott Tagliarino, head of Edelman Financial’s New York-based operations. Like their Asian counterparts, many Latin companies must face a cultural change to woo foreign capital. Privatized bureaucracies and family-owned companies, once discrete with financial information, now must be generous.
Since their splash into international equity markets, most first-tier telcos and financial services firms are getting accustomed to US analyst and portfolio manager expectations. Their drive to create perceptions that lead to an attractive share prices is paving the way for those that follow.
‘US investors judge companies as much on the expectation of good information as on financial ratios,’ states Peter Firestein, managing director at Georgeson and Co. Firestein says issuers must understand the portfolio manager’s world. Should unforeseen market events occur, a manager must have sufficient information to justify the ‘buy’ decision. ‘Companies must establish a record of supplying information that responds to analyst and portfolio manager needs,’ says Firestein. ‘That attracts long-term investors.’
Big Three
How times have changed. Mexican companies may bring up to $3 bn in equity to international markets in the next year. Export-oriented firms led last year’s roster of 23 domestic and international issuers. This year, Mexican consumer products companies will tout a stabilizing economy to attract investors. That may be a hard sell given unexpectedly poor Mexican consumer demand. First off the block was corn flour company Grupo Minsa which raised $28 mn with an LSE-listed GDR. Other new names may include steel company Hylsamex, chicken producer Bachoco, hotelier Costamex and Televisa’s Cablevision subsidiary. For their part, Argentine issuers, pitching themselves as growth stories, can count on increasing local pension fund demand. Pension appetite clears the way for smaller firms that can issue more cheaply locally than launching ADRs. Banks should lead the issuer roll call while other possibilities include tile-maker Cermica San Lorenzo and construction company Sideco.
Almost like a separate continent, Brazil looms in the distance. Coordinated by the powerful federal development bank, Banco Nacional de Desenvolvimento Economico e Social (BNDES), Brazil’s privatization plan is set to open the gates to the region’s largest economy. So far, the government has relied on agreements with strategic partners, with equity offerings following. A delicate political situation will likely include the push for a broad base of local shareholders.
Investor interest has been stroked by comparisons of Brazil to Mexico, which experienced similar structural change several years ago. A successful CVRD privatization will go a long way toward solidifying investor confidence in the country.
After more than two years, the lessons of Mexico’s financial crisis are clear. Private sector-led growth had integrated the country into the international economy, a remarkable achievement. But the economy depended on short-term capital inflows. In hindsight, any reversal in capital flows was sure to spark an upheaval.
Mexico’s crisis was exacerbated because it surprised financial markets. ‘If information about international reserves and other key variables had been published more frequently and with a shorter time lag… the chances of a smoother adjustment would clearly have been enhanced,’ said Michel Camdessus, managing director of the International Monetary Fund, in 1995.
The current boom in Latin American investment, by contrast, encompasses a broader range of companies with a stronger impetus to communicate with investors. And those investors are a diverse and savvy lot, ranging from domestic pension funds to UK emerging markets investors – all of whom believe lightning cannot strike twice.
Where’s the Bhif?
Bestride the gulf between US and Latin investors, as Neil Stewart reports
Banco Bhif’s IPO last June was a high wire act – an orchestrated feat of delicacy and balance. Delicate, because it was the first Chilean ADR since the Tequila Effect hit. Balance, because the demands of US investors had to be played off against the needs of investors at home.
Few chief executives could have pulled this off with the deftness of Hugo Lavados. As the former superintendent of securities and insurance (the Chilean equivalent of chairman of the SEC), here is a man who knows well the minds of investors. ‘It’s not easy to coordinate a simultaneous placement,’ Lavados concedes. ‘It was a tremendous experience, though, and we wound up knowing what investors think of our company, country and region.’
Two Bhif roadshow teams made the rounds in Chile and abroad leading up to the IPO. Merrill Lynch lined up more than 60 presentations in the US and Europe, while domestic underwriter Bankers Trust led the Chile itinerary. As opening day dawned, US demand determined the pricing – right down the middle of the filing range – and Bhif raised its target $120 mn, half in Chile and half in the US.
As Lavados explains, it’s a challenge reconciling the demands of Bhif’s investor bases. While many growth-oriented US investors lobby for buybacks and prefer growth to dividends, Chile has a long tradition of paying dividends while buybacks are illegal – rightly so, Lavados believes.
One fifth of Bhif’s public float is in the hands of Chilean institutions. The country’s pension industry, launched in the early 1980s, now spans 12 different institutions with $28 bn under management. ‘That’s a huge amount of money in relation to Chile’s $70 bn GDP,’ Lavados points out. ‘And with some 34 percent of their assets in stocks, the pension funds are an important force in Chile – it would have been difficult or impossible to develop the capital market without them.’
However, Lavados believes there’s a problem with pension regulation. ‘Pension funds should be long-term equity investors,’ Lavados says. ‘But they behave as short-term investors because workers can compare performance and switch funds, so fund managers have to compete with each other for short-term profitability. The rules should be changed.’
Of course, Chilean funds aren’t alone in their short-termism: ‘Most US institutional investors put more emphasis than is convenient on quarter-to-quarter results,’ Lavados continues. ‘As a bank, we have to look at longer-term trends. Yes, we have to shift from one position to another – but not from one day to another.’
In New York recently for a mini-roadshow, including a presentation at the Wall Street Forum, Lavados says trust is extremely important to investor relationships: ‘We commit to certain goals and don’t make promises we can’t fulfill. We have been very lucky in fulfilling almost all the promises we have made.’
Lavados concludes by stating that it’s Bhif’s goal to have the best IR program in Chile, headed up by director of corporate planning Camillo xxxxxx: ‘It’s not just a convenience, it’s a necessity.’
Telefonica Takes the Cake
Few Latin issuers have cultivated a local investor base better than Telefonica del Peru. The company’s $1.2 bn offering last July saw over $300 mn placed domestically as part of a citizens’ participation program, and today Telefonica’s IR team keeps tabs with 350,000 retail and pension fund shareholders as well as overseas investors.
Telefonica’s choice of a NYSE-listed ADR was no surprise. The Big Board exposure provided access to a US investor base with a soft spot for emerging markets telecoms. As a proxy for the Peruvian market, Telefonica ADRs are now a core holding in Latin American investor portfolios.
At home, low interest loans to purchase shares spurred domestic appetite. At the same time, shareholders have incentive to hang on to their paper – if all shares are kept for 18 months, investors get one additional share for each 20 they bought. Risso says the listing experience effectively introduced the company to international capital markets. ‘Since listing, several financing institutions have approached us with attractive deals,’ says Risso. ‘Our information is now widely disseminated, and the more investors who know about our company, the broader are our financing options. Today, raising money through a Eurobond would be a relatively simple process.’
Altogether, Risso says the success of the Telefonica placement clears the way for other Peruvian issuers. ‘Companies following our lead will find it easier to tell their story since investors already know about our country,’ concludes Risso.
