Capital Markets At the Latin American Business Conference
Demian Pons, BBA1 dpons@umich.edu
Issue date: 4/16/01 Section: Latin American
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Rachel Hines is managing director of the Latin American Debt Group at JP Morgan Chase Capital Markets. She has been with JP Morgan for fifteen years and her team is responsible for sovereign and corporate debt origination.
Eduardo Pamplona is a UMBS Alumni who received his MBA in 1997. Mr. Pamplona is an assistant Vice President in the Private Equity Group at GE Capital-Sao Paulo, Brazil. He currently focuses on technology private equity investment opportunities.
Mr. Juan Sabater is a senior vice president of the Latin America Corporate Finance Group at Goldman Sachs & Co.
Q: When investing in Latin American markets, do industry trends or macroeconomics play a greater role in your decision?
Panel: GE Capital invests private equity as well as GE’s own private funds. Macro-economic conditions greatly affect private fundraising, especially for long term investments. However, for the company’s investments backed up by GE, macroeconomic conditions don’t play as big of a role.
Currently, government bond underwriting has been responsible for more than 40 to 59 billion dollars in Latin America. However, corporate investment decisions are made by industry sector. We are facing a growing stage from Government bonds, especially in Argentina and Brazil; however, the current risk of economic downturn is affecting corporate funding.
Q: How have recent legal changes that allow global banks to acquire local banks affected Latin American Capital Markets?
Panel: The current conditions in the U.S. (possibility of an economic downturn) are affecting how U.S. banks make their investment decisions. U.S. banks are more concerned with the U.S. market, and current investment decisions are not aimed towards issuing equity and debt to finance investments abroad. We could say that there is stagnation in access to outside capital in Latin America and this is forcing the developments of local capital markets. The entrance of foreign players (international banks) in the local economies is definitely influencing the mentality of local capital markets and also providing a platform for those changes.
With the development of local markets and their integration with foreign ones, pension funds are becoming a good source of investment funds. Moreover, regulatory changes are influencing the way business is being done in Latin America (ex. the increase of lending, mortgages, debentures, notes, etc.). Especially for the “Big Three” (Argentina, Brazil, and Mexico), the development of local markets has facilitated access to equity for governments.
Q: The U.S. is the greatest debtor in the world; however, refinancing the U.S. debt is not a threat to the U.S. economy. Is refinancing Latin American countries’ debt an issue that plays a role in investment decisions for U.S. investors when looking for Latin American opportunities?
Panel: Domestic debt is not an issue for investment decision purposes because local debt is refinanciable. However, the “Big Three” rely a lot on international markets for debt issuance and refinancing.
Q: To what extent is Political and Economic Risk a concern for investment decisions in Latin America?
Panel: There are concerns regarding Argentina’s current ability to refinance its debt. And this is also affecting Brazil to a certain extent. There have been many more concerns regarding political instability in Latin America in the past. However, it has significantly diminished for the “Big Three”. Times have changed (from ‘95’s high inflationary periods) and Argentina is not as much of a global threat as Mexico was during its early 90s crisis.
Q: How can local companies have more access to international money (investments)?
Panel: First, investors must be aware that there are real opportunities in local markets for local corporations. Second, there are problems with information. There has been a lot of development in this area with the introduction of the Internet and the standardization of financial statements regarding the affiliation of these companies. However, this is still a concern. Thirdly, foreign investors are usually looking for larger investments. Hence, mid-size companies have more difficulties in accessing international money. Local partnerships are encouraged to increase the overall size of the deals and opportunities for larger-caliber international investors.
Q: What are your thoughts about the possible dollarization of Argentina?
Panel: Ecuador has dollarized, but we are yet to see its real implications. Argentinean monetary and fiscal policies had been successful for a long time, and this was reflected in past high growth periods. However, the current liquidity of the local market has been an issue, especially regarding Argentina’s ability to refinance its internal debt. For Brazil, dollarization was not an option, and current low inflation rates, expectation of high growth rates, and the current economic stability have proven that the devaluation of the Real was a wise choice. There are also cultural differences among all those countries and what may work for one may not be the best option for another. One of the possibilities right now is pegging the Argentinean Peso to a basket of currencies instead of using only the U.S. dollar as a benchmark. This option may be hard to implement, but in the long run, it may prove to get Argentina out of recession.
Q: Are traditional valuation models currently used in the U.S. market applicable to Latin America?
Panel: In Brazil, comparing similar companies and similar deals is the most used valuation method (similar transactions method). Cash flow analysis is used as a second tool and as a backup.
At Goldman, there has been discussion regarding the applicability of the Capital Asset Pricing Model (CAPM) in markets other than the U.S. This possible inaccurate application of the model could be due to difficulties in estimating beta. Beta, which represents systematic risk, is measured locally. However, how it is translated into U.S. risk has been an issue. Moreover, since local markets are much smaller, and therefore less efficient, the beta may not realistically represent the true risk of certain companies. Currently, CAPM has been adjusted by using regression models to find the true cost of capital locally. There are cultural, political and social differences among all countries and local companies react to events in different fashion. There has been a lot of research done regarding the CAPM equation and its usefulness outside of the U.S. But there is yet to be found a model that fully works everywhere.
The diversity in points of view was a strong part of the fourth panel of the Latin American Business Conference. Market conditions, industry trends and political and economic risks were debated from all angles, including local private investment activities (by Mr. Eduardo Pamplona), larger and more global capital market players (by Ms. Rachel Hines) and by the corporate finance and M&A point of view (by Mr. Juan Sabater). The conference was just a small taste of the immense potential of the Latin American markets. There are a lot of business opportunities in Latin America and this should not be overlooked. The Third Annual Latin American Conference was a success. And it was due to the strong support of the audience, the impeccable organization and the excellence of the panelists.
