Download The Development of Latin-American Bond Markets II

IN SEARCH FOR THE RIGHT METRIC
FOR CORPORATE BOND MARKETS
IN ARGENTINA
Primer Seminario LarrainVial de Renta Fija
“Latinoamérica, Renta Fija Local – Una Nueva Clase de
Activos”
Santiago, Chile.
20 de Abril de 2007
Sergio Pernice, Universidad del CEMA
Roque Fernández and Jorge Streb, co-authors
1
Are Latin American bond markets
underdeveloped?
Domestic Bond Markets in Different Regions of the World (in %)
Country
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Latin American average
East Asia average
United States
High income average
Sources: BIS, IFS.
Share of GDP
(1)
4.8
9.6
22.8
0.2
2.5
4.3
7.0
32.0
109.0
40.0
Share of total
private debt
(2)
19
26
27
1
15
15
17
22
72
27
Share of financial
system
(3)
5
13
14
1
7
9
8
13
38
18
2
Firm Size and the Use of Bonds by
Argentinean Corporations
• There is a very small proportion of big firms in
Argentina
• Only Big firm use Bonds as a form of credit
– “…Banks and bond markets, according to conventional
theory, have different natural clienteles. Banks can
economically provide finance for smaller borrowers, while
bond markets, where issues are subject to a substantial
minimum efficient scale, can do so at lower cost for large
corporations with substantial funding needs…”
3
Conceptual Framework:
Modigliani-Miller (M&M) equivalent
proposition [(AB)(-B-A)]
•
If the value of the firm is not independent of its
financing policy (as is empirically the case), then it
must be because the financing policy:
(i)
Must affect taxes paid by issuers or investors, given the
specificities of corporate and personal taxes, or
(ii) Must affect management’s incentives to follow the valuemaximizing rule of investing in all positive NPV projects, or
(iii) Must affect contracting costs (this may include costs of issuing
debt, the probability and costs associated to getting into financial
difficulty or bankruptcy, etc.), or
(iv) Must provide a credible signal to investors of management’s
confidence (or lack thereof) about the firm’s future earnings, in a
context of information costs and asymmetric information
4
Evidence from US Firms
• The second reason --incentive problems-- is by far the most
important determinant of leverage level (Barclay, Smith, and
Watts 1999)
• Proxies: market-to-book ratio and tangibility of assets
• The particular debt instrument chosen, which in turn affects the
maturity of the debt, is also affected strongly by the third reason
--cost of issuing debt-- (Barclay and Smith 1999)
• Proxy: firm size
• We conjecture the same for LA and in particular Argentinean
Firms
5
Taxes
• Taxes (first reason)
– The market for bonds started to take off when
modified in 1991 by Law 23.962 to level field with
bank loans, that had tax advantages
6
Econometric estimates
• Source: Economatica, firms quoted on stock
exchanges
• Bi-annual panel data, 1992-2004
• Tobit specification as in Rajan & Zingales
(1995):
yi = a + b1 sizei + b2 tangi + b3 qi + b4 roai + ui
• Control for year
7
Econometric results
Tobit estimates:
• leverage: size not significant
• share short term debt: size (-),
statistically significant and economically
important
• bond ratios: size (+)
Probit estimates:
• issue of bonds: size (+), big firms issue
8
Effect of size on bond ratios
Bond debt
/firm value
Bond debt
/assets
Bond debt
/total debt
mean* parameter
1.69
1.22
2.64
(mean + 2 s.d.)*
parameter
2.13
1.54
3.31
Effect of treatment
(p.p.)
43.4
31.5
67.5
9
Survey: Sample
Principal Activity
Responses Obtained Original
Sample
Total
N
56
%
100%
%
100%
Minery
Manufacturing
Food, Beverages & Tobacco
Oil, Chemicals & Plastic
Machimery, Equipment & Vehicles
Other Manufacturing
Electricity, Gas & Water
Communications
Other Industries (1)
2
34
11
12
6
5
2
3
15
4%
61%
20%
21%
11%
9%
4%
5%
27%
5%
61%
22%
18%
7%
14%
9%
5%
20%
Our Base: Companies > 200 employees
or > 150MM pesos annual revenues.
10
Question 3: Have you issued Bonds?
Y
Bonds Now
15%
Bonds Past
10%
Bonds Future 24%
Experience
Y Big Y Small
39%
3%
22%
3%
47% 12%
17% 44%
3%
Big firms: assets > USD 200MM
Small: assets < 200MM
11
Question 5: To what extent the following factors represent a
problem for financing through bonds, either domestic or foreign
bonds?
• Fees are cheaper in Argentina than
abroad (reasonable after the
devaluation)
• They have strong scale economies
– While for big firms this seems not to be an
important problem, it is so for small firms
– This result agrees with the standard theory
of bond financing
12
Question 6: To what extent the following factors are a
problem for financing their operations with Domestic Banks and
Domestic Bonds?
Question 6
Y
Y
Big Y Small
NR
NR Big NR Small Y+NR Y+NR Big
Y+NR
Small
Domestic Banks
24%
Maturity
57%
Interest Rate 55%
Minimum Req. 12%
Collateral
27%
Information
18%
Other
6%
Speed
6%
76%
65%
6%
12%
6%
12%
34%
47%
50%
16%
34%
25%
3%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
6%
29%
60%
58%
17%
31%
23%
12%
11%
78%
67%
11%
17%
11%
17%
38%
50%
53%
21%
38%
29%
9%
43%
57%
57%
7%
29%
21%
14%
80%
40%
30%
50%
50%
60%
0%
54%
54%
54%
54%
54%
54%
54%
22%
22%
22%
22%
22%
22%
22%
71%
71%
71%
71%
71%
71%
71%
81%
77%
75%
65%
71%
71%
58%
56%
67%
67%
28%
44%
39%
33%
94%
82%
79%
85%
85%
88%
71% 13
Domestic Bonds
58%
Maturity
50%
Rate
46%
Minimum Req. 25%
Collateral
38%
Information
38%
Other
8%
Speed
Question 6: To what extent the following factors are a
problem for financing their operations with Domestic Banks and
Domestic Bonds?
• Small firms basically do not use bonds
as a form of financing
14
Order, for each
attribute, the
relative
advantages of
different forms of
credit
(1 is best, 5 is
Big Firms
Question 7:
Total Firms
Small Firms
worst).
Interest
Credit
Local C.
Alt. of
index.
Long T.
credit
Non-Int.
Costs
Tax
Poss. of
Reneg.
Costs of
Info.
Size of
Pot.Mark
Order
Instrument
Argentinean Bank Loans
2 4
1
3
4
2
2
2
2
3
Domestic Bonds
4 5
2
1
3
4
3
4
4
5
Foreign Bank Loans
3 2
4
4
2
3
5
3
3
2
Foreign Bonds
5 3
5
5
1
5
4
5
5
1
Credit from Providers
1 1
3
2
5
1
1
1
1
4
Argentinean Bank Loans
3 5
1
5
4
1
4
1
1
5
Domestic Bonds
4 4
2
1
3
4
2
4
4
4
Foreign Bank Loans
1 1
4
3
2
3
5
3
3
2
Foreign Bonds
5 3
5
4
1
5
1
5
5
1
Credit from Providers
2 2
3
2
5
2
3
2
2
3
Argentinean Bank Loans
2 4
1
1
4
2
2
2
2
1
Domestic Bonds
3 5
3
3
1
4
3
4
4
4
Foreign Bank Loans
4 3
4
4
2
3
4
3
3
2
Foreign Bonds
5 2
5
5
3
5
5
5
5
5
Credit from Providers
1 1
2
2
5
1
1
1
1
3
15
Survey to the Demand side (41 answers)
Question 4: main factors that limit the demand for
Corporate Bonds
• Low liquidity of the secondary market was the
most important factor limiting the demand for
Corporate Bonds (80%)
16
Prediction on number of firms
using bonds (2005)
• Number of firms in survey with bonds outstanding: 8
• All but one have:
– More than 1500 employees
– Revenues greater than 219 MM pesos
• Number of firms with bonds outstanding
– 2004: 68
– 2005: 56
• The proportion of firms in the survey that use bonds,
multiplied by the number of firms in the economy that
meet the criteria to be in the survey gives numbers
very similar to these numbers
17
Size of the firms is the relevant
variable to understand use Bond as a
form of financing
• Econometric results and Survey confirm
this
• But there are many different criteria of
“size”, which one is the relevant to
understand Bond Market development?
18
Back of the envelope calculations
on size of corporate bond market
Size of bond markets in USA and ARG
GDP USA/ GDP ARG = 24
(Bond market/GDP) USA = 109%
(Bond market/GDP) ARG = 5%
Ratio GDPs * ratio shares
Size USA BM/ Size ARG BM= 552
Large firms in USA and ARG (more than 500 employees)
USA (1997) = 16,079
ARG (2005) = 300
Ratio =54
19
Firm Size and Bond Market Size
• Bonds as share of GDP is misleading ratio
– Bonds Outstanding is inter-temporal concept
– GDP is one year concept
• Bonds Outstanding / Firm Value is a more
reasonable measure
– Bonds Outstanding = PV debt
– Firm Value = PV cash flows
– Part of these cash flows will be used to pay debt
20
Back of the envelope calculations
on size of bond market
Size of bond markets in USA and ARG
Ratio of bond market USA to bond market ARG = 552
Large firms in USA and ARG (more than 500 employees)
Ratio large firms USA to large firms ARG = 54
Value of large firms in USA and ARG (quoted on stock exchange)
Ratio firm value USA 500 to firm value ARG 10 = 322
Ratio firm value USA 1000 to firm value ARG 20 = 317
21
Are Latin American bond markets
underdeveloped?
Domestic Bond Markets in Different Regions of the World (in %)
Country
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Latin American average
East Asia average
United States
High income average
Sources: BIS, IFS.
Share of GDP
(1)
4.8
9.6
22.8
0.2
2.5
4.3
7.0
32.0
109.0
40.0
Share of total
private debt
(2)
19
26
27
1
15
15
17
22
72
27
Share of financial
system
(3)
5
13
14
1
7
9
8
13
38
18
22
Are Latin American bond markets
underdeveloped?
Domestic Bond Markets in Different Regions of the World (in %)
Country
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Latin American average
East Asia average
United States
High income average
Sources: BIS, IFS.
Share of GDP
(1)
4.8
9.6
22.8
0.2
2.5
4.3
7.0
32.0
109.0
40.0
Share of total
private debt
(2)
19
26
27
1
15
15
17
22
72
27
Share of financial
system
(3)
5
13
14
1
7
9
8
13
38
18
23
Are Latin American bond markets
underdeveloped?
•
Perhaps, but our research points to
another question:
– Why is the market value of firms so small
in Argentina, and Latin America?
24