IFR Latin America Special Report 2016
One step forward, one step back: While it has been Argentina that has grabbed the bulk of the recent headlines after finally reaching an agreement with holdout bond investors, there is much more to Latin American capital markets.
The sad reality, however, is that there has not been a great deal to cheer for a while now.
It is always a misconception to lump the region’s countries into one homogeneous group – an approach predominantly taken during more bullish markets, when non-specialists jump on a bandwagon they view as offering incremental returns without having to bother too much about forensic investigation.
But the recent past has shown just how critical it is to be able to navigate around the tortuous paths that are the region’s capital markets.
A 50% drop in DCM volumes to US$89.9bn in 2015 compared with the previous year demonstrates how dire the situation has become. And ECM offers no solace, posting US$12.8bn in 2015, as opposed to US$18.4bn in 2014.
True, Argentina could prevent what at one stage had the feel of terminal decline about it, although there is still some way to go as far as syndicate desks’ earnings are concerned. According to Thomson Reuters Freeman Consulting, the total fee wallet in LatAm DCM in 2015 was US$252.21m, compared with US$676.39m the year before. As of the first week of March this year, fees were US$25.1m.
But with Argentina no longer the pariah and likely to make a US$12bn bond market splash following 15 years in the wilderness, it need not be all doom and gloom. And with provinces such as Buenos Aires and corporates such as IRSA, YPF and Pampa Energia adding to the mix, there will at least be some business to be won.
Even as Argentina’s ascendancy is juxtaposed with Brazil’s decline, the latter’s woes could also paradoxically be a source of income. Long one of the region’s market stalwarts, Petrobras is mired in corruption allegations and scandal, meaning it can no longer be relied upon as a major revenue earner as far as bankers are concerned.
On the other hand, the highly leveraged and indebted company needs to address its situation, with one approach being asset sales. It already appears that Argentina’s Pampa Energia could be a beneficiary of Petrobras’ struggles – it is buying some assets from the Brazilian company – with deal-starved debt bankers the third-party beneficiaries.
Meanwhile Venezuela’s situation, for example, is even less than encouraging. The spectre of default looms large and the country’s economy is struggling. Even if the government’s 2015 inflation figure of 180.9% is believed over the IMF’s 700% estimate, things do not look healthy. In addition, the IMF is predicting GDP to contract by 10% this year, following an 8% decline in 2014. State oil company PDVSA is likely to struggle in the markets as a result.
Ecuador also offers an example of how quickly things can change. Welcomed back to the bond market fold just last year after repaying the principal on a maturing issue, it now finds itself at the whim of investors choosing to steer clear of EM credits with high exposure to crude oil.
But there are some new initiatives that could provide avenues of opportunity, a case in point being in Mexico, where the government has passed legislation to introduce the Fibra E – a structured investment vehicle that allows energy and infrastructure companies to cash in on mature assets by contributing them to a trust and selling shares in the trust to investors, similar to how master limited partnerships works in the US.
While a nascent market, it could be sizeable – one estimate being US$10bn in the next three to four years, with possibly US$4n from Pemex alone in the near term.
The region’s multinational development banks are also playing their role in providing funding, with CAF, Cabei and CIFI filling the void left by banks constrained by regulatory requirements.
In spite of a prevailing negative view from the outside, it is clear that opportunities exist. It is just that the favoured players are not necessarily the same as once they were, with erstwhile market darlings now outcasts – and vice versa. All in all, something best left to the experts.