Monday, 22 October 2018

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“Best Case Scenario and Best of Times” is how Mauro Leos, Moody’s sovereign risk officer, described recently to Argentine corporate executives and bankers the context within which Argentina’s economy has been operating over the last four years. Strong global growth, rising commodity prices and a benign interest rate environment coupled with a surge in exports and GDP have helped fish the economy from the depths of the biggest sovereign default ever. Dan Shirai reports.

Argentina has grown at an average of 9% over the past three years, while exports have risen 16%, both from low bases. The recurrence of such strong numbers has given Argentines a new self-confidence - one that is boosted by the fact that they no longer have to answer to outside arbiters of their economic health. The sovereign paid down it’s US$9.8bn debt to the International Monetary Fund in January thus ending a rocky relationship with an institution that some say is already a relic of the past.

“The IMF has lost a lot of relevance for investors because they’ve become an outsider,” said one banker in New York. And government officials haven’t missed the opportunity to take jabs at the Fund while touting Argentina’s performance. One senior minister publicly responded to the Fund’s latest criticism of the country’s price controls - intended to curb inflation - by saying the IMF is 'obsessed' with Argentina and that international investors are more enamored by the country’s performance than ever before.

But not everyone has partaken of the good times.

For one, Argentina’s once vibrant capital markets have seen little beyond restructurings, refinancings and the odd deal from a corporate name with proven export revenues or a strong sponsor. Corporate bond issuance has come in at a relatively unimpressive annual average of US$3.6bn between 2002–2005, according to the Comision Nacional de Valores, Argentina’s SEC.

Restructurings and their refinancing have been the main contributor to deal flow in the past four years, said Daniel Marx, a partner at capital markets consulting firm AGM Finanzas and Argentina’s former finance secretary.

“We’re basically done with those, but you’ll see a bit more because there is a time lag between the agreement between the holders and the actual deals.”

“Many companies view themselves as tied by the covenants of their post-crisis restructurings. A number of those companies are currently able to reshape their financial structure and are in the process of doing so," said Gustavo Ferraro, managing director at Barclays Capital in New York, referring to cases such as Telecom Argentina, which last year shaved off US$1bn in obligations in its restructuring, managed by Morgan Stanley and local boutique Merchant Bankers Associated.

Lack of appetite for funds

But beyond recycled transactions, there appears to be a dearth of new issuance on the horizon. A significant problem is lack of appetite for funds.

“Corporate executives are extremely conservative in terms of their capital structure and haven’t been comfortable taking on debt for growth capital,” says Dario Epstein, president of Buenos Aires-based Sur Investment, which advises domestic issuers and international investors on capital markets-related transactions.

Add to that, a number of the would-be issuers of debt have been enjoying strong cashflows that have reduced their need for outside financing. Transportadora de Gas del Sur, formerly a frequent visitor to the capital markets, has seen a surge in profits thanks to rising gas prices. It recorded a 45% rise in its first quarter income to US$110m and told investors it is financing its activities with cash from operations, which clocked in at US$63m for the period.

"There are Argentine companies, especially exporters, with large amounts of cash on the balance sheet. They're probably wondering if they need to incur the costs of a public bond issue," said Carlos Spinelli-Noseda, a partner at Sullivan Cromwell who has worked with Argentine companies for 12 years.

The availability of cheap money at the short end of the curve has also been a deterrent for public deal flow. For the past two years interest rates in Argentina have been lower than inflation, which allows borrowers access to 30-day money from local banks at rates that investors could never offer.

“They’re taking advantage of this arbitrage that currently exists in the market,” said Gonzalo Noguer, head of fixed-income origination at ABN AMRO’s Argentina office. “The combination of cheap short-term financing with lack of investments is, in part, what explains the low levels of issuance so far."

Noguer sees the gap between inflation and real interest rates narrowing, however, and if the currency remains stable at its current level, the option of capital markets financing will become increasingly more attractive, he said.

Trusts, or fideicomisos, as they are called in Argentina, have also satisfied financing and investing needs of hundreds of companies ranging from small enterprises to large financial firms. These legal entities are set up to securitise financial assets such as guaranteed loans, mortgages, credit card receivables and leasing contracts.

Since 2004, US$3.3bn worth of these trusts have been issued, masking the US$1.65bn of corporate bonds sold during the same period, according to AGM Finanzas.

Window of opportunity

Despite the number of obstacles, there is a consensus that as the US autumn gets under way, issuance volumes will begin to grow substantially. There is a sense among corporates and financial intermediaries that Argentina will continue growing at a healthy pace for at least the next 18 months and this predictability is giving issuers the necessary confidence to plan ahead and consider accessing the market for growth capital.

The settling of a recently turbulent market has already begun to draw some issuers in.

“The market is coming back to Argentina after a month-and-a-half between May and July when things were unstable,” said Ronaldo Strazzolini, head of corporate finance at Citigroup Argentina who in the first week of August helped Pan American Energy price US$250m in 2013 bonds at 7.75%. In March, when market conditions were even calmer, cement producer Loma Negra snagged US$100m with orders coming in for four times as much.

Indeed, if there is one thing that is certain, it is that among foreign investors there is no shortage of appetite for Argentine paper. In the last two years real money European and US pension funds began pouring money into riskier EM credits to find yield.

“There’s a lot of enthusiasm for primary issues right now. We’re seeing foreign investors asking a lot about that,” said Carlos Planas, head of Deutsche Bank’s Argentina office.

The weak link, said Sur Investment’s Epstein, are the financial intermediaries such as broker dealers and investment banks. “I speak to pension funds and hedge funds who are telling me, 'We’re ready to invest but there’s nobody structuring the products in a way to meet the legal requirements of investing'”.

The adviser believes this will change in the coming six months. “You have hungry pension funds and hundreds of projects looking for financing, and as a result there’s a huge opportunity for brokers and financial boutiques.”

A corporate finance banker based in Argentina admits there may be some malaise on the part of intermediaries, but was quick to point to local insurance companies and pension funds that have turned their back on Argentina and reduced local demand for novel deals. Smaller investors agreed.

“The secondary market for equities in Argentina is very illiquid and depends a lot on what the AFJP [pension fund managers] do. Those guys have been buying into Asian funds and aren’t participating in Argentina,” said Santiago Lopez Alfaro, a portfolio manager at Buenos Aires-based Delphos Investment.

Names such as Quilmes, the brewery recently acquired by Brazil-based AmBev, Arcor, a confectioner, publisher Grupo Clarin and Telecom Argentina often come up when bankers speak of candidates for dealflow.

And as existing credit lines expire, those funding needs are increasingly likely to be met in the bond market, said ABN’s Noguer. “Borrowers aren’t likely to rollover those credit lines.” Some of these could come as early as the second half of the year, Noguer estimates. Since the country's financial crisis, over US$3.8bn in corporate loans were taken out by some of the country’s biggest companies, according to AGM Finanzas, which estimates that 65% of those borrowings are denominated in US dollars.

Lending longer

Among the biggest news to hit the corporate market in August was Banco Macro’s announcement of a US$400m bond programme. The move would be among the biggest such programmes, after Loma Negra’s US$500m programme and Edenor’s US$600m shelf filed in the first quarter of 2006, according to the Argentina’s CNV.

“Banks in Argentina are increasingly interested in lending to small and medium sized enterprises, many of which are exporters that earn in dollars,” said Moody’s Latin America’s Andrea Manavella, who heads coverage of Argentine financials in Buenos Aires. Manavella said in the first two weeks of August, her office received an unprecedented number of calls from US investment banks interested in obtaining ratings for banks in Argentina. In addition to Banco Macro, one banker said there are at least two more banks interested in setting up bond programmes.

Banco Hipotecario, a mortgage bank that recently adopted a universal bank model, claims to have paved the way for other banks to come to market. In November, the Argentine bank sold a five-year bond worth US$150m at 9.75% and retapped it in January for an additional US$450m. In April, it raised US$250m, but this time with a 10-year note – the longest corporate tenor issued in Argentina since the crisis.

“Our liabilities have an average life of seven years now and 41% of them are made up of restructured debt,” said Marcelo Icikson, head of capital markets at Hipotecario, adding that while his bank is currently well capitalized, his finance team will be looking at issuance opportunities.

“Funding ourselves at longer tenors will allow us to be more aggressive in the mortgage market.”

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