Download Opportunities for Corporate Finance in Latin American Capital Markets

Opportunities for Corporate
Finance in Latin American
Capital Markets
John C. Edmunds
Professor of Finance
Financial Columnist, América Economía
March 2006
Overview of World Capital
Markets
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Demand for bonds and stocks is very
strong.
Hundreds of millions of people are buying
securities every month.
The dollar value of bonds, common stocks,
and bank deposits now exceeds $150
trillion, more than three times the value of
world annual output.
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Milllones de Millones de Doalres
Value of Financial Assets Relative to World Output
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200
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PIB
Valor de Activos Financieros
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50
0
Ano
Overview, 2
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Latin American companies have issued
corporate bonds recently, but
They have not issued as many as the
market will absorb.
The total amount of private debt securities
outstanding in Latin America was only
12% of GDP in 2003.
Overview, 3
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The total amount of private debt securities
outstanding in Latin America was still only
11% of GDP in 2004.
For those same years, the amounts of
private debt securities in Canada were
38% and 41% and of GDP.
Latin American companies issued more
bonds in 2005.
Overview, 4
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Latin American companies can issue MORE
BONDS. If they issue approximately
US$800,000 million more private debt
securities, the region’s ratio of private debt
to GDP will reach Canada’s.
The collateral exists in Latin America to
support that amount of private bond
issuance.
Overview, 5
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The total amount of private debt securities
in Latin America would then be
approximately $1 000 000 millions.
That figure sounds large but the world
capital market is MUCH larger.
$1 000 000 millions is less than 3% of the
total amount of bonds that exist in the
world.
Private Bonds -- Amount Already Issued as Per Cent of GDP, Latin America and Canada
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$000,000
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Series1
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Amount Already Issued
Amount to Equal Canada
Am ounts in US$ Thousands of m illions
Overview, 6
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During 2005 Latin American companies
were able to place bonds in international
markets and also in local markets.
Total private bonds outstanding increased
approximately US$20,000 million in five
countries.
Local bond markets were VERY receptive
to new issues.
Overview, 6
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Latin American equity markets also
absorbed new issues of common stock.
The strong performance of these equity
markets was due to the capital market
reforms that five countries have put into
effect.
The commodities boom helped but was
NOT the only reason for the rally.
Local Buyers
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The buyers of these newly issued bonds
and stocks include LOCAL pension funds
and mutual funds.
International portfolio investors are also
buying but the local buyers are
maintaining a steady, firm tone to these
markets.
Implications for Corporate
Financing Alternatives
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Historically Latin American companies
borrowed from commercial banks in the
countries where they were operating or
from commercial banks in financial centers
like London.
These loans were short term and often
were denominated in foreign currency.
Implications for Corporate
Financing Alternatives, 2
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In the past, companies in Latin America had
to be very wary of using borrowed money.
The cost of borrowed money was very
volatile.
Companies now have a much better range
of financing possibilities, and should not be
as wary of using debt financing.
Implications for Corporate
Financing Alternatives, 3
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Latin American companies can now more
easily match the maturities of their debt to
the maturity structure of their assets.
The era of financing fixed assets with
short term debt is coming to an end.
Implications for Corporate
Financing Alternatives, 4
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Latin American companies can now create
“natural hedges” for exposure to foreign
exchange risk.
They can borrow local currency and foreign
currency in the proportions that match their
local currency and foreign currency cash
flows.
Implications for Corporate
Financing Alternatives, 5
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Latin American companies can also consider
issuing equity securities in local markets.
There have been many initial public
offerings in Brazil and Chile and many more
are in the planning stages.
Equity markets are functioning well and can
perform a larger role in raising capital for
private companies.
A New Competitive
Environment
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The financial policies of many Latin
American companies used to be very
conservative.
They did not use much debt financing.
They did not list their shares on local stock
exchanges.
These policies now need to be reviewed.
A New Competitive
Environment, 2
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Now the companies that take advantage of
the new opportunities that capital market
reforms have created will have an
advantage.
The amount of capital they can safely use
will be larger than it used to be;
And their cost of capital will be lower.
Conclusion
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The wave of capital market reforms in five
Latin American countries has made Latin
American securities more attractive.
The world’s appetite for Latin American
bonds and common stocks has not been
satisfied.
Latin American companies can issue bonds
and stocks and place those successfully.