JULY/AUGUST 2011 NUMBER 219

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July/August 2011 LATINFINANCE 1

ContentsJuly/August 2011

LatinFinance® (USPS 004-662), (ISSN 1048-535X) is published bi-monthly by Latin American Financial Publications, Inc., 1101 Brickell Avenue, Suite N1200, Miami, Florida USA. Periodicals postage paid at Miami, FL and at additional mailing offi ces. POSTMASTER: SEND ADDRESS CHANGES TO: 1101 Brickell Avenue, Suite N1200, Miami, Florida USA Copyright© 2011 Latin American Financial Publications, Inc. All rights reserved. Reproduction in whole or in part of any text, photograph, or illustration without written permission from the publisher is strictly prohibited. Title is protected through a trademark registration with the US Patent Offi ce.

LatinFinance Roundtables and Special Reports are underwritten by sponsors, although the magazine’s editors retain control over the content of these articles to ensure their objectivity and independence.

Who said that?“Selic is the pea under the mattress. The princess can

feel it but a lot of others can’t.”

See page 27

10 Debt Fund Manager Equity Fund Manager Survey17

21 LatAm Tech Investing Central Bank Policy 26

36 Mexican Renewables Peru Agriculture 39

DEBT FUND MANAGER SURVEY10 Investors are turning to corporate bonds and moving down the ratings spectrum to boost portfolios. Are they weighing credit risk properly? EQUITY FUND MANAGER SURVEY17 Investors hunt for value and diversifi cation away from Brazil. LATAM TECH INVESTING21 The potential for a repeat of North America’s tech boom has some investors salivating, but a lack of exit opportunities remains an obstacle. CENTRAL BANK POLICY26 Faced with an over-valued real, Brazil is relying on a wider set of ‘macro-prudential’ measures to fi ght infl ation. CENTAM ENERGY28 The need to reverse Central America’s reliance on fossil fuels will spur an investment boom in renewable energy. MEXICAN AIRLINES32 In the last three years, eight airlines in Mexico have ceased operations. But those remaining are looking to expand. MEXICAN RENEWABLES36 Mexico’s wind energy market is potentially lucrative. But a lack of government commitment, and insuffi cient transmission capacity could stall its development. PERU AGRICULTURE39 Nearly all of Peru’s long coastal strip is desert, but just add a bit of water and the arid landscape quickly becomes a paradise for farmers. CORPORATE SUSTAINABILITY41 LatAm telecom companies faced a tougher compliance questionnaire this year. Despite improvements, most fell short.

EUROPEAN PRIVATE EQUITY44 European funds are increasingly eyeing LatAm PE in an effort to gain exposure to the growth in middle class consumption.

PARTING SHOT48 Chinese companies want to invest in LatAm, but gaining access to cheap fi nancing can be diffi cult.

2 LatinFinance July/August 2011

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Editor-iN-CHiEF Paul KilbyNEWS Editor Jef Cozza ASSiStANt Editor Ben MillerrEportErS Natalie Feary, Mariana SantibáñezCoNtributorS Vincent Bevins, Lucien Chauvin, Rebecca Conan, Adam WilliamsArt dirECtor Rosa Matamoros-SenseCoVEr iLLuStrAtioN Gary Neill

CommErCiAL dirECtor James NortondirECtor oF buSiNESS dEVELopmENt Teresa AguilarrEGioNAL dirECtor, brAZiL J. Albert Negrón SENior mANAGEr, mEXiCo, CAribbEAN, SoutHErN CoNE Arielle SchradermANAGEr, CENtrAL AmEriCA, boLiViA & ECuAdor Isabella ToroVENEZuELA rEprESENtAtiVEMatthew PerksT +1 718 260-8970

SENior EVENtS mANAGEr Omar SuarezEditoriAL dirECtor, CoNFErENCES & SpECiAL projECtS Michael BrosgartEVENtS proGrAmmEr Cate DoyleEVENtS mArKEtiNG mANAGEr Alex RubinEVENtS mArKEtiNG Audrey Cechinel

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Venezuelan president Hugo Chavez’s admission in July that he was battling cancer will have a significant impact not only on the country, but accounts with exposure to the credit. As sad as such news is for anyone who contracts the disease, investors who have positioned themselves

properly are likely to reap the mother of all windfalls as markets rally on expected regime change. Even before Chavez went public about his cancer and the media was simply speculating that he

might not be able to run for president next year due to ill health, the sovereign’s five-year CDS had already tightened some 200 basis points to around 970 basis points as the news trickled out in late June. More gains could be in store.

Up until then it was difficult to tell how much of the rally could be attributed to bets on a possible win for the opposition and how much was due to the ebb and flow of risk appetite on the back of events like Greece’s debt debate.

But by late June, there was little indication that markets had been pricing in a radical policy shift. The sovereign’s benchmark 2027 bonds were trading at around 75.00-75.50, just a point higher than where they started the year. Domestic investors, who had their ears closer to the ground, were seeking further exposure but not at these levels, preferring to wait for further dips.

Arguably, events in Venezuela mean little to the wider investment and banking communities that are focused on European and US debt problems and would rather concentrate their efforts in other LatAm countries such as Brazil.

This is hardly surprising. Thanks to economic policies that have dampened the spirit of private enterprise, Venezuela offers little in the way of M&A activity, while equity and corporate bond markets, both domestic and international, are essentially non-existent.

For DCM bankers, however, the sovereign and state-owned oil company PDVSA have served their purposes. By clinching mandates for large local dollar RegS transactions, which can be complex but are hardly considered true market transactions, banks have been able to boost their standing in the league tables, much to the chagrin of those competitors that have preferred to keep Venezuela risk at arm’s length.

However, the demise of Chavez as a force in Venezuelan politics is likely to reignite interest in the country if his replacement in the party fails to rally the troops and cannot win the presidential election come December 2012. For now, the news is mostly lifting the spirits of the handful of dedicated accounts who like Venezuela as it provides one of the region’s few high-yield sovereign plays.

There are signs that investors are growing more optimistic about the credit. On the day Chavez announced he had cancer, the sovereign’s five-year CDS tightened another 70 basis points to 915 basis points. Markets reacted similarly when Argentina’s former president Nestor Kirchner unexpectedly died only to see hopes of any radical policy change fade after his wife Cristina Fernandez became the frontrunner for the presidential elections in October partly thanks to a fragmented opposition.

However, Venezuela may be a different story this time. Analysts believe the opposition is now forming a united front, with some having anticipated a Chavez defeat over the medium term even before there was any word about his declining health.

The new generation of politicians, such as presidential candidate Henrique Capriles, is young and therefore not associated with the failures of the old guard that led to so much dissatisfaction before Chavez rose to power. Capriles is also garnering support from the poor, traditionally a population that has been a Chavez stronghold.

If such politicians can indeed steer the country in a different direction, investors stand to benefit. RBS strategist Siobhan Morden believes that an initial 500 basis points tightening in CDS is not unreasonable. In theory there is ample room for more spread compression given that five-year CDS was trading at 150 basis points-200 basis points in 2006 before Chavez won his second term and embarked on the more radical phase of his policy agenda. LF

Front Notes

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Game Changer


People

Chaos at La PolarChilean retailer La Polar reshu� ed its leadership after raising its loan-loss provisions due to unauthorized practices in the management of its credit portfolio. It hired Eduardo Bizama as CEO beginning July 25, to replace interim CEO Martín González, who will return to his previous position of commercial manager. While Heriberto Urzúa was named president after the resignation of Pablo Alcalde, only to step down after only two weeks citing the need for new management. He was replaced by César Barros.

Goldman Beefs UpAlejandro Vollbrechthausen is joining Goldman Sachs as president of its Brazil bank, responsible for managing the São Paulo o� ce across all divisions of the fi rm. He replaces Valentino Carlotti, who will relocate to New York. Vollbrechthausen previously managed the sales, structuring and derivatives marketing e� ort in LatAm and emerging markets sales desk in New York. Goldman has also hired Rodolfo Suarez from Safra as MD responsible for debt fi nancing in Brazil, working on the team headed by Richard McNeil out of New York. “We’re going to substantially increase our investment banking footprint,” says Carlotti, who will remain in São Paulo while Vollbrechthausen transitions into his new role. DCM specialist Marcelo Bernal has also joined Goldman Sachs from HSBC, reporting to McNeil. Bernal, a Brazilian, had been with HSBC’s DCM operation for about 7 years.

Alex Monroy has left Barclays, where he was a LatAm corporate credit analyst. He is heard headed to a similar position at Nomura, as the Japanese bank expands its research capabilities in the region. Veteran EM banker Karan Madan has resigned from Deutsche and will join Barclays as LatAm regional head and head of LatAm fi xed income, currencies and commodities (FICC) trading in August. Madan had only recently joined Deutsche, where he was head of global markets for LatAm, in mid-2009.

Roge Rosolini, Barclays’s head of fi xed income, currencies and commodities in Brazil, is to co-lead fi xed income at Bank of America Merrill Lynch (BAML). Andre Rizzo will also join BAML from Barclays, and head fi xed-income and currency sales in Brazil.

Denis Jungerman is leaving his position as MD in the investment bank at Credit Suisse’s Brazilian o� ce. Luiz Octavio

Lopes, director, has taken over coverage of utilities, energy, oil & gas; and Daniel Bassan, director, has taken over TMT, real estate and fi nancial sponsors.

Standard Chartered has named Julio Rojas as CEO for the Americas, replacing David Stileman, who becomes chairman for the Americas. Rojas is based in New York and will report to V. Shankar, CEO of Europe, the Middle East, Africa and the Americas, and is charged with developing and promoting the bank’s strategy in the region.

Longtime LatAm corporate debt analyst Eric Ollom is heard moving to Citi following a gardening leave. Ollom left Je� eries in April, which he had joined in 2009 after several years at ING.

Antonio Villa has joined Royal Bank of Scotland (RBS) as an MD in the LatAm DCM team, originating bonds and loans, as well as Mexican local market transactions. He comes from Barclays where he was director of investment banking in the Mexico o� ce, and was previously at ABN AMRO in Mexico. He

will report to Charles Achoa, RBS’s head of LatAm DCM. Achoa and Alex Maia were named as co-heads for LatAm in February, as part of the Scottish bank’s e� ort to restart a regional capital markets business.

HSBC has appointed Andre Loes as chief LatAm economist, which is a new role. He will be based in Brazil, and will continue his current role as chief economist for Brazil. Loes will report to Patrick Boucher, head of research for the Americas, and functionally to Stephen King, HSBC chief economist.

Renata Rojas will join the LatAm syndicated loans team at BNP Paribas in June. Rojas will report to Ernesto Meyer, head of loans syndication, who relocated to New York in October from Brazil. Rojas was previously at Unicredit, covering syndicated loans distribution.

Dewey & LeBoeuf has hired Michael Fitzgerald from Milbank, where he had been chairman of the LatAm practice group. Milbank partners Taisa Markus, Joy Gallup and Artur Carrillo from the Milbank LatAm practice group will join him at Dewey. Fitzgerald will be chair of the newly formed LatAm practice group at Dewey.

Luis Miguel Gilpérez has been named CEO of Telefónica Brazil, replacing Robert Lima, who is resigning and leaving the company. Gilperez will manage day-to-day operations and will report directly to the boards of Vivo and Telesp. LF

UPDATE >For daily news on people moves, see www.latinfi nance.com

Debt

4 LATINFINANCE July/August 2011

Junk Jumps, DivesLatAm corporates, and specifi cally high-yield issuance, continued to be the dominant theme in May and June after initial optimism about single B borrowers’ ability to tap DCM quickly faded in the wake of several postponed transactions.

In May, the market welcomed junk names with open arms. Brazilian oil and gas company OGX raised $2.56 billion, marking the fi rst company controlled by magnate Eike Batista to try its luck in the international bond markets. While leads were forced to widen pricing by 100 basis points, the deal was hailed as a victory for single B issuers.

After setting a $2.0 billion size and whispering a 7.5% yield, leads were forced to revise to 8.5% after struggling to build a book among an investor base wary about an E&P operation that had yet to produce and was unlikely to see cash fl ow until 2014.

The buyside jumped at the new price, and demand topped $5.5 billion, allowing for a $563 million upsize. Credit Suisse, HSBC, Itau and JPMorgan managed the 2018 NC4 B1/B plus transaction, the region’s largest-ever issuance from a single B corporate credit, according to Dealogic.

“I don’t know if I’ve ever seen a bond get priced so wide of initial guidance,” said a participating EM investor at the time. “It’s a buyers’ market, and investors were successful in pushing the issuer to widen pricing and improve covenants. That is good for the market.”

Mexico’s Satmex (rated B3) also enjoyed some success earlier in May when it received more than $2.5 billion in orders for a $325 million 2017 bond that put the fi nishing touches on its most recent exit from bankruptcy. The bond’s 9.5% yield surprised many expecting the satellite operator to pay up. Je¤ ries led and provided the exit fi nancing. TV Azteca also followed with a $300 million 2018 RegS only deal that came with a 7.75% yield. BCP and Je¤ eries managed the sale.

Yet by mid-June, markets had become less receptive to corporates lower down the credit spectrum. LatAm oil services provider San Antonio Internacional (B minus/B3) postponed a $500m 7-year NC4 bond after emerging with whispers in the low 11% area. Recent restructurings and the company’s strong dependence on Argentine cash fl ows were seen as negatives.

Deutsche Bank, HSBC, Itau and Pareto Securities were leads.Mexican cement company Cemex’s (B/B+) decision to try

to sell a $650m 8-year NC4 shortly thereafter surprised some rival bankers who thought the timing made little sense, Their instincts proved correct after leads Bank of America Merrill Lynch (BAML) and HSBC pulled the deal.

Jumbo EnergyHigher up the credit scale, Mexican state-owned oil company Pemex came out in what has been a relatively quiet year for sovereigns and quasi-sovereigns. Surprising those expecting a

2021 retap, it issued a new 30-year bond to the tune of $3 billion in orders. The $1.25 billion BBB/Baa1 credit snared a 6.555% yield, about 90 basis points wide of the Mexico 2040. Goldman Sachs, JPMorgan and RBS managed. Pemex’s trading arm, PMI, has closed its three-year $1 billion syndicated loan amendment, upsized from an original $500 - $700 million target. Pricing was expected to be Libor+ 125 basis points. Original leads BBVA, Credit Agricole, Natixis, RBS and SocGen managed.

Another Mexican quasi-sovereign, electricity agency Comisión Federal de Electricidad (CFE), raised $1 billion in its bond comeback, getting $6.5 billion in orders. The Baa1/BBB got a 4.976% yield, landing a few basis points wide of the Pemex curve after wanting to come inside it. BAML, Deutsche Bank and Goldman Sachs managed the sale, CFE’s fi rst in dollars since 1997. CFE, too, was seeking a loan refi nancing, and was heard lining up bankers to replace its $2 billion 3.5-year term loan paying Libor+130 basis points.

The drive to refi nance loans comes after Mexican telecom América Móvil and Brazilian mining

company Vale locked in attractive spreads on revolvers in April. Grupo Votorantim was next up in mid June, seeking a 5-year revolver and 7-year export facility, totaling $2.7 billion.

Japan Still BeckonsUruguay returned to Japan to raise 40 billion yen ($493 million), in its fi rst Samurai since 2007. The sovereign 2021 scooped up a 1.64% yield, after investors demanded 2.2x. Daiwa and Nomura managed the BB/Ba1 sale. Andean multilateral CAF followed with a 10 billion yen 2015 bond, which it says is the fi rst-ever retail-oriented Samurai bond from LatAm. The bond came with a 1.0% coupon. Daiwa managed the sale, rated A+. LF

DCM Rank by Volume, Year to June 22Citi doing the most dollar volume

Rank Bookrunner Value $m # Deals 1 Citi 7,447 352 JPMorgan 7,145 283 HSBC 6,438 434 BofA Merrill 5,946 315 Deutsche Bank 5,223 246 Santander 4,777 287 Banco Itaú 4,399 228 Banco Bradesco 3,005 229 Credit Suisse 2,910 11

10 Banco do Brasil 2,588 14

Subtotal 49,881 141Total 68,679 166

Source: Dealogic

DCM Rank by Fees, Year to June 22JPMorgan takes most of the revenues

Rank Bookrunner Revenue $m % Share1 JPMorgan 36 13.02 Citi 35 12.73 Credit Suisse 34 12.34 BofA Merrill 23 8.45 HSBC 22 7.9

Subtotal 149 54.3Total 275 100.0

Source: Dealogic

Equity


for new acquisitions, refi nancing debt and organic expansion, in Chile and the region.

Another health IPO from clinic operator Cruz Blanca was expected at the end of June. It was looking to raise as much as $200 million through Bice, Celfi n and IMTrust, with proceeds slated to expand facilities. Others expected to debut on the bolsa this year include builder Ingevec, and retailers SMU and Agrosuper.

Elsewhere in the Andes, Colombia’s Nutresa, the food products company formerly known as Nacional de Chocolates, had opened books on a $522.5 billion peso ($295 million)

follow-on, through local shop Bolsa y Renta. Argentina’s Santander Río was looking to boost its liquidity with an ADR sale of up to $1 billion, though the timing was unclear as of mid-June. In Mexico, an IPO through Interjet and follow-ons from concessionaire Ideal and hospital operator Medica Sur were also on the cards.

Brazilians RegroupBrazil was poised for a resurgence in IPO activity in June after an almost two-month lull, and as in other markets, the health sector was leading the way.

BR Pharma, the drugstore controlled by BTG Pactual, raised 465 million reais ($293 million) in its o� ering. Bradesco, BTG Pactual, and Morgan Stanley managed the sale, which followed a successful deal last year from competitor Droga Raia. Peers Drogaria São Paulo and Paguemenos are also tipped for IPOs this year.

Meanwhile, US private equity fi rm Carlyle Group sold down its stake in health plan vendor Qualicorp in an IPO that raised 1.08 billion reais. Bank of America Merrill Lynch, Bradesco, Credit Suisse and Goldman Sachs

managed the sale. Proceeds will be used to fund expansion as part of a strategy to maintain dominance in a market that is already 85% controlled by Qualicorp.

Watchmaker Technos also raised 462 million reais with an IPO led by through Credit Suisse, Goldman Sachs and Itaú. In July o� shore E&P operator Perenco Brasil was also expected to garner 800 million reais, through BTG, Itaú and Morgan Stanley. LF

Chile Chases BrazilBrazilian corporates will almost certainly dominate equity o� erings in the region this year with $8.13 billion already sold through June 15, but Chile is also making its presence felt with several new listings and a growing pipeline. Chilean new issuance volumes hit $3.09 billion equivalent through June 15, up from $575 million in the corresponding period last year.

Among the biggest Chilean deal this year was the government’s sale of 30% of water utility Aguas Andinas, which was part of its post-earthquake privatization scheme to help raise funds. State entity Corporación de Fomento de la Producción (Corfo) raised $979 million equivalent through the follow-on at 250 pesos per share, a 3.8% discount to trading levels, after generating close to $2 billion in demand.

The government will continue to hold a 5 % stake in Aguas Andinas, including class B shares that allow it to retain certain veto powers in major decisions. Banchile, Bank of America Merrill Lynch and IMTrust led. Aguas Andinas is 50.1% owned by Spain’s Inversiones Aguas Metropolitanas.

Chile’s IPO market is also more active. Fishery Camanchaca broke a three-year lull in the IPO space in 2010 and competitors Australis Seafoods and AquaChile quickly followed with their own o� erings during the fi rst half of this year. Cultivos Marinos Chiloé has also registered, and is expected to come this year through Celfi n. The country’s fi sh producers want to raise funds to bring production back to levels seen before a salmon virus hit the industry in 2008-2009.

Australis raised $71 million through a deal that saw some $710m in demand and priced at 185 pesos per share. The company was generally seen as inexpensive compared to listed peers, with analysts calculating the enterprise value to Ebitda ratio to be less than 10x versus 10-15x for competitors. LarrainVial managed the sale. In May, AquaChile raised $374 million through IMTrust after selling 387m shares at 453 million pesos, the lower end of pricing expectations.

Away from the fi sh sector, pharmaceutical company CF Recalcine o� ered investors a play on respected family-owned health care company that is expanding in Chile and abroad. Though the $368 million deal fell short of the targeted $400 million size, shares were up nearly 40% by June 15. LarrainVial, Je� eries and JPMorgan managed the sale, done to raise funds

ECM Rank by Fees, Year to June 22Itaú still dominates the wallet

Rank Bookrunner Revenue $m % Share1 Banco Itaú 68 17.12 BTG Pactual 54 13.53 JPMorgan 44 11.1

4 BofA Merrill 35 8.95 Credit Suisse 35 8.8


Source: Dealogic

ECM Rank by Volume, Year to June 22Itaú keeps the lead

Rank Bookrunner Value $m # Deals 1 Banco Itaú 2,682 182 BTG Pactual 1,910 103 Citi 1,485 94 JPMorgan 1,414 85 BofA Merrill 1,396 86 Credit Suisse 1,276 127 Banco Bradesco 1,158 58 Morgan Stanley 992 69 Corredores Asociados 867 2

10 Larrain Vial 805 4Subtotal 13,985 35Total 19,001 41

Source: Dealogic

For daily ECM news, see www.latinfi nance.com

UPDATE >

M&A


Meanwhile, Petrominerales agreed to acquire a 5% stake in the Oleoducto Central crude oil pipeline, also in Colombia, from Total E&P for a purchase price of $281 million. The deal “helps secure shipment of future oil at an attractive price,” Petrominerales CFO Kelly Sledz tells LatinFinance. Petrominerales used TD Securities as its fi nancial advisor and Godoy & Hoyos as its local legal advisors.

Parex Resources will also acquire the 50% interest it does not already own in four Llanos Basin blocks in Colombia for $255 million. The Canadian oil and gas company is using bought-deal fi nancing underwritten by FirstEnergy Capital, Scotia, Haywood Securities, CIBC, Peters & Co, Raymond James, RBC, and TD Securities.

China FlipsSwiss mining major Glencore o� ered to acquire CST Mining Group’s interest in the Mina Justa copper project in Peru for up to $475 million, marking a rare LatAm sale by a Chinese owner. “This is the fi rst example of the Chinese fl ipping an asset rather than holding on to it,” says Christopher Ecclestone, mining strategist with Hallgarten. CST was able to acquire the project cheaply last year, as the original owner, Chariot Resources, had been unable to obtain the fi nancing needed to move the project forward, Ecclestone adds.

The government of Belize nationalized Belize Electricity Limited (BEL), acquiring Fortis’ 70% stake in the business for approximately $100 million. BEL has experienced fi nancial trouble since incurring an $18 million fi ne in 2008 from the utility regulator for how it raised consumer prices. The

action led S&P to place the B rated sovereign on negative watch. Grupo Mexico approved a tender o� er of MXP50 per share

to shareholders of Grupo Aeroportuario del Pacifi co (GAP). The conglomerate already holds around a 20% stake in the B class shares of the airport operator. Acquiring a controlling stake in the company would likely cost around $1.5 billion, although it has said it is looking to acquire 100%. The o� er represents the fi rst step in the holding company’s plans to consolidate its transportation infrastructure assets, including airport and railroad operations, ahead of a spino� . LF

Colombia Gets BusyM&A deals continue to grow from last year, with 741 deals announced in the year through June 22, beating 2010’s fi gure of 707 deals for the corresponding period, according to Dealogic. Total dollar volume is only half as much, though, with announced deals coming to only $66.7 billion, down from $126.4 billion last year.

Activity in Colombia picked up over the last few months as domestic entities looked to expand abroad and foreign companies sought opportunities in a country that can now boast three investment-grade ratings.

Colombia’s Cementos Argos went shopping for concrete and cement assets in the Southeastern US as it looked to vertically integrate its US operations. The $760 million deal for the Lafarge assets represents an implied EV/Ebitda valuation of 5.1x-6.3x, in-line with other deals in the sector. “It complements their existing activities in the US,” says Mauricio Hernandez, an equity analyst with Corredores Asociados, who describes the deal as a positive one for Argos. Credit Suisse and Skadden Arps advised Argos, while HSBC provided a $200 million bridge loan. Cleary Gottlieb advised Lafarge, which did not use an investment bank.

Foreign acquirers also demonstrated their appetite for Colombian companies. Experian paid $400 million for Computec, Colombia’s largest credit services information provider. The company generated 157 billion pesos in revenue for the year ended December 31 2010. That implies a multiple of around 4.7x revenues, or 17.4x operating profi ts, according to one equity analyst.

Meanwhile, British American Tobacco (BAT) announced it had agreed to acquire 100% of Productora Tabacalera de Colombia (Protabaco) for $452 million. The deal represents an 11.3x EV/Ebitda multiple based on 2010 Ebitda of $40 million on revenues of $110 million. BAT will fi nance the deal with cash on hand. Rothschild advised BAT, while JPMorgan advised Protabaco. BAT had expressed interest in Protabaco in January after Philip Morris walked away from an acquisition agreement for the same amount after facing objections from Colombian regulators. The new combined entity would become the second largest tobacco company in the country, but would still control less of the market than Philip Morris.

M&A Rank by Fees, Year to June 22Little change at the top

Rank Bank Revenue $m % Share1 Credit Suisse 48 19.02 JPMorgan 31 12.23 Banco Itaú 25 10.0

4 Rothschild 24 9.35 BTG Pactual 18 7.2


Source: Dealogic

For daily M&A news, see www.latinfi nance.com

UPDATE >

M&A Rank by Volume, Year to June 22Goldman takes top spot

Rank Advisor Value $m # Deals 1 Goldman Sachs 13,612 152 Santander 13,216 113 Rothschild 10,712 12

4 BofA Merrill 10,384 115 Banco Itaú 10,152 206 JPMorgan 6,656 177 Credit Suisse 6,309 138 Lazard 5,665 69 Citi 5,014 12

10 Banco Bradesco 4,219 8Subtotal 42,295 82Total 66,669 741

MIAMI BEACH-FLORIDA-USAMIAMI BEACH-FLORIDA-USA ZIHUATANEJO-MEXICOZIHUATANEJO-MEXICO

To learn more visit www.brillagroup.com

MIAMI BEACH-FLORIDA-USAMIAMI BEACH-FLORIDA-USA

ELEUTHERA-THE BAHAMASELEUTHERA-THE BAHAMAS

Acquisition of 500 acres2 miles of beachDevelopment plan for 4 hotels/residentialJanuary 2008

YUCATAN-MEXICOYUCATAN-MEXICO

MIAMI BEACH-FLORIDA-USAMIAMI BEACH-FLORIDA-USA BAL HARBOUR-FLORIDA-USABAL HARBOUR-FLORIDA-USA

ST. BARTHELEMY-FRENCH WEST INDIESST. BARTHELEMY-FRENCH WEST INDIES

$1,500,000$13,000,000

ANGUILLA-BRITISH WEST INDIESANGUILLA-BRITISH WEST INDIES

ISLANDIA RESORTS

Loan restructuringMixed-use hotel developmentSeptember 2008

YUCATAN BEACH

$9,200,000Equity investment with AJ Capital Partners in operating resort hotelJune 2009

HOTEL ISLE-DE-FRANCE

Acquisition of operating hotel from Green�eld PartnersSeptember 2009

$10,000,000

THE RALEIGH HOTEL

Debt facility provided by JPMorganDecember 2010

$30,000,000

THE RALEIGH HOTEL

$25,000,000Acquisition of operating hotel and resort from CitigroupJanuary 2011

TIDES ZIHUATANEJO

Expansion of debt facility provided by JPMorganFebruary 2011

$14,000,000

THE RALEIGH HOTEL

Acquisition of multiple condo-hotel unitsFebruary 2011

$10,000,000

ONE BAL HARBOUR

$14,000,000High yield debt facility provided by Brilla GroupFebruary 2011

CAP JULUCA

Brilla Group is a real estate private equity �rm focused exclusively on the luxury beachfront hotel and resort asset class in South Florida, the Caribbean, Mexico, Central America and Colombia. Brilla Group specializes in creating tailored investment solutions for institutional investors, high-net-worth individuals and family of�ces.

THE ART OF BEACHFRONT INVESTINGTHE ART OF BEACHFRONT INVESTING

debt fund manager survey


For fund managers who wish to outperform the index, corporate bonds have become an essential

part of any portfolio now that spread tightening has run its course among large sovereigns and blue-chips. Investors are taking on greater risk as they reach further down the ratings spectrum. So far, funds are largely undeterred from venturing into junk territory in a region that boasts strong fundamentals, but the threats posed by broader problems in Europe and the US are starting to cause some pushback.

“Our outperformance versus the index really comes down to our focus on corporate credit in emerging markets,” says David Robbins, manager of the TCW Emerging Markets Income Fund, which had the highest return among EM debt funds in the three years to May 31, according to Lipper data.

Corporates now dominate new issuance out of LatAm as investors seek higher yields through both dollar and local currency plays. Thanks to the strong economic growth story throughout the region, several debut names now have the scale to tap the dollar markets, offering the buyside the widest spectrum of corporate credits it has ever seen out of the region.

Returns may be lagging US high-yield and some other EM peers, but LatAm corporates have helped accounts outperform their indices while offering a relative safe haven in a wider EM universe

increasingly populated by weaker credits. For nearly two years, LatAm debt

investors have branched out into new areas of risk. In this year’s discussion with the top returning EM debt funds, managers tell LatinFinance why the increased corporate buying likely represents a structural shift capable of withstanding possible upcoming shocks.

Tight conditions among sovereign credits long ago pushed EM investors into the region’s high-grade corporates, quasi-sovereigns and banks. These in turn have become more expensive as well, pushing buyers into high-yielders and debutants they may have rebuffed in the past.

“Spread tightening in the future is going to come from the corporate sector and the higher-yielding sovereign sector,” says Robbins whose TCW Emerging Markets Income Fund enjoyed 17.6% returns over the three-year period versus 9.3% on the EMBI Global index. Sovereigns in the region are fairly priced, he explains, with the spread tightening in EM’s top government credits behind us.

Thankfully, lower-grade borrowers have rushed to market, filling the void and offering investors a broad menu of corporate credits. The region’s corporate borrowers issued $29.2 billion in 70 deals year-to-date through June 1, or $16.1 billion from 40 transactions if FIGs aren’t counted, according to Dealogic.

That means non-government corporate issuers and banks accounted for 61.5% of regional issuance by volume,

Weighing Credit Riskby Ben Miller

Investors are turning to corporate bonds and moving down the ratings spectrum to boost portfolios. This may be part of a strategic shift, but are they weighing credit risk properly?


July/August 2011 LatinFinance 11

a similar amount to the corresponding period in 2010, when corporates and banks represented 63.3% of total volume or $23.3 billion from 56 deals (or $17.0 billion from 37 if FIGs are removed).

Perhaps more interesting is how investors have recently slid down the credit spectrum in search of incremental yields and diversity. Up to June 1, single Bs made up 27% of the broader issuance pie, while over the same period in 2010, corporates with this rating only comprised 8% of total volumes, according to Dealogic. Indeed, LatAm corporate high-yield borrowers represented 50.1% after selling $14.65bn in 43 deals through June 1, up from 41.2% or $9.57bn during the corresponding period in 2010.

The recent flood of corporate names is arguably a natural step in the evolution of the region’s economic advancement in recent years. Sovereigns are less inclined to tap the dollar markets not only because they have developed deep local-currency markets at home, but because they have fewer funding needs after previous crises forced them to improve debt dynamics.

A shrinking pool of sovereign debt in turn creates more demand for corporates, which also look attractive because of the region’s improving fundamentals. They also provide a home for international portfolio managers wanting to diversify away from their own flagging economies and flee rock-bottom rates in the US.

“There is a structural shift in the market overall,” says Anne Milne, head of emerging markets corporate credit research at Bank of America Merrill Lynch (BAML). “The outstanding assets are greater, the growth rates are higher, and the new issuance trend is towards corporates.”

With only about 30% of EM assets outstanding falling into the high-yield category, the LatAm junk market has more scope for growth, Milne says. The trend has already gathered pace with EM new issuance volumes growing on average by 25% each year, versus single digits historically, according to BAML.

Milne notes that issuance among LatAm quasi-sovereigns, banks and pure corporates now represent 93% of total volumes, up from 80% in 2007 and the



debt worries were clearly unnerving investors in mid-June when single B names like Mexican cement company Cemex and LatAm oil services provider San Antonio were both forced to shelve deals even after showing a willingness to concede on pricing.

Unsurprisingly, DCM bankers see this as a temporary setback and believe the buyside’s appetite for yield will mean that more junk names will take to the road in the second half of the year.

“The improvement in sovereign fundamentals has created more opportunity for corporates to borrow, and you have seen heavy issuance this year which we expect to continue through the end of the year,” says David Oliver, portfolio manager at Stone Harbor. Stone Harbor’s Emerging Markets Debt Fund returned 11.9% over the past three years.

Yields may be driving the appetite for corporates, but some crossover investors may be ill-equipped to evaluate the credit risk they are taking in EM. “There are challenges to understand the risks,

highest level she has ever seen. BAML now forecasts a whopping $90 billion in LatAm crossborder corporate issuance for 2011, out of an EM corporate total of $260 billion.

“Yields are pretty low and we’ve used a lot of different sectors to add value: the corporate market, the quasi-sovereign market and the local currency market,” says Howard Booth, portfolio manager for the MainStay Global High Income Fund at MacKay Shields, which saw returns of 11.5% over the past three years to May 31.

Conventional wisdom says that the gradual rebalancing of credit risk poses little danger to portfolios, especially in a region largely following an upward ratings trajectory. Less clear, however, is what happens once US Treasuries rise or other possible exogenous shocks strike an asset class that is still relatively illiquid.

“Most of the issuance is healthy in LatAm,” Milne says. “We haven’t seen a lot of irresponsible issuance.”

True enough, investors have not necessarily been buying paper blindly, and are asking to be suitably compensated

for the greater risks that come with junk names. For instance, Brazilian oil and gas company OGX may have completed this year the region’s largest-ever single B issuance with a $2 billion seven-year non-call four, but not before it was forced to back up 100 basis points on pricing and strengthen covenants to satisfy a buyside wary of a credit that is unlikely to produce any cash flow until 2014.

“When you start seeing lower-quality names and the market stops differentiating, that’s when we see a market correction,” says Cristina Panait, co-portfolio manager of the Emerging Markets Bond Fund at Payden & Rygel. “I don’t think we’re there yet.”

Still, assessing LatAm corporate credit risk has become increasingly complicated as investors and bankers alike try to gauge whether emerging market economies are truly poised for long-term growth or whether exogenous shocks from G7 countries, or a even China, will sabotage such prospects.

Despite corporate Latin America’s improving credit story, US and European

Top EM Bond Funds over Three Years to May 31TCW, Nomura lead the way

Benchmark Launch Fund Value ($m)

Allocation LatAm (%)

Annualized Growth Return (%) 1 yr 3 yr 5 yr

JP Morgan EMBI+ 12.55 9.00 9.30

JP Morgan EMBI Global Diversified 12.52 9.40 9.20

Lipper Emerging Market Debt Classification Average

12.32 8.50 8.80

Manager Fund

TCW Emerging Markets Income Fund 1998 1426.80 24.30 21.40 17.60 13.70

Nomura Emerging Bond Fund 1996 208.30 38.40 22.50 17.60 13.20

Columbia Emerging Markets Bond Fund 2006 115.50 44.40 18.50 12.80 12.00

Federated Emerging Market Debt Fund 1993 119.60 49.20 19.40 12.20 11.20

Skandia Emerging Market Debt 2003 166.20 39.30 15.60 12.00 10.90

PIMCO Emerging Local Bond Fund 2006 4854.00 31.40 19.50 12.00 N/A

Stone Harbor Emerging Markets Debt Fund 2007 746.90 41.90 16.30 11.90 N/A

Pictet-Global Emerging Debt 1999 263.50 34.80 9.00 11.80 11.20

SEI Emerging Markets Debt Fund 1997 933.60 35.20 14.80 11.80 11.50

HSBC GIF Global Emerging Markets Bond 1998 154.40 44.40 13.00 11.70 10.70Source: Lipper



in their own currency. “The big trend over time is going to be local currency corporate issuance,” says Robbins. “We are finding there are very attractive corporate opportunities that are starting to come to market, and that market is in the early stages of development.”

Along with high-yield sovereigns, this is an area where Robbins sees value ahead. He participated in issuances including Emgesa and Empresas Publicas de Medellin in Colombian pesos, and

Banco Votoratim’s inflation-linked real bond.

Investors are also venturing out beyond their traditional comfort zones by buying derivatives to boost portfolios. Often these combine exposure to EM external sovereigns with corporate credits or local currency denominated debt.

“We see a lot more interest in the total return product,” says Guillermo Osses, head of EM portfolio management at HSBC Asset Management, referring to a product combining EM external debt and local currency. HSBC’s fund returned 11.1% over the last three years. “We think this might have to do with clients being interested in proper timing.”

Indeed, timing the market has become more important as flows into EM debt have eased. For instance, EM bond funds saw inflows of $8.82 billion through June 1 this year, with

global bond funds at $28.31 billion. That is a considerable drop from the $20.24 billion that flowed into EM bond funds during the same period in 2010.

With the waxing and waning of inflows into the asset class, Osses sees more and more investors trying to find an optimal point for entry. “The pace of inflows is slower than what we experienced in 2010. People are now attempting to get into the asset class tend to have an approach which puts more emphasis on the timing, than those last year, when they were more concerned with [just] getting exposure,” he adds.

and the volatility,” says Jaime Nicholson, head of LatAm corporate credit at Credit Suisse.

Dan Kastholm, corporate analyst at Fitch, echoes such sentiments. “As credit becomes available en masse, credit standards go down, not just down the credit curve but the strength of the covenants.” For the debut issuers, he says a key concern is corporate governance, which is often difficult to evaluate.

Still, such credits are often hard to resist. Many EM corporates are in the midst of deleveraging programs, providing an opportunity not seen in the US high-yield market, Oliver says. These issuers are paying extra to borrow because they are unfamiliar names. Corporates outperformed sovereigns in 2010, but their lead is even more pronounced this year, he adds.

Off-index exposure is doing especially well, Oliver says, naming Cemex—as a cheap credit that is a play on US recovery—and broad Brazil exposure, including BR Malls, Cruzeiro do Sul, and General Shopping.

The same logic applies to off-index sovereigns such as Central American and Caribbean countries, which according to Booth can not only boost yields but increase a portfolio’s average rating.

Corporate DebutsMore and more debut issuers are coming to the market in the corporate rush. Investors find many quality transactions among this year’s debutants, along with repeat issuers – mostly from the financial sector – and other trusted names.

For instance, Brazilian retailer Hypermarcas, rated Ba2/BB/BB, got more than $6.5 billion in orders for an inaugural $750 million 10-year bond after it priced with a 6.75% yield. Not many Brazilian corporates have been coming with a six-handle yield and investors saw considerable upside for a credit seen as a play on Brazil’s emerging consumer class with investment grade potential.

Panait has found several high-yield first-time issuers that have come at attractive levels, including Hypermarcas and Brazilian sugar and ethanol producer GVO. Her fund returned 11.5% in the past three years, putting it among the top 10.

Earlier this year, even dodgier credits were finding buyers thanks in part to strong crossover interest from US high-yield accounts who cannot find such returns in their own market. Not all LatAm borrowers can necessarily access

the US high-yield market but those from a familiar sector or with a presence in the US have been able to draw crowd.

For instance, twice-bankrupt Satmex was able to raise the $325 million it needed to fund its bankruptcy exit agreement and prepare to launch a new satellite next year that the B3-rated communications company hopes will turn its fortunes around.

After more than a decade away from the bond markets, TV Azteca also got $300 million at the 7.75% yield it wanted.

A reach for yield and the declining worth of the US dollar has also allowed quality issuers to find funding abroad

Corp IG $ 13.7 (27)Corp BB $7.7 (23)

Corp B

$1.9 (6)

Sov/QS $13.6 (18)

Corp non-FIG $17.0 (37)

FIG $6.3 (19)

Sov/QS $18.3 (11)

Corp non-FIG $16.1 (40)

FIG $13.2 (30)

LatAm Corporate Issuance Volume to June 1 ($bn)Banks, single B’s take a bigger piece of the pie

Corporate issuance by rating

Corporate issuance by type

Number of deals in parenthesis Source: Dealogic

Corp IG $14.6 (27)

Corp B

B $6.8

1 (2

5)

Corp B $7.8 (18)

2010 2011

2010 2011

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2007 Again?Ever since LatAm’s double and single B issuers returned to the bond markets in the second half of 2009, a chorus of voices have increasingly commented on the buyside’s short-term memory and whether the market may see a repeat of 2007 when a string of weaker credits hit the market.

The 2008-2009 global credit crisis wreaked havoc on all asset classes, but the proliferation of poor credits bought with little consideration just before Lehman Brothers exacerbated the problem. For now, however, many investors think the underlying credit story is much stronger than in the past.

“It’s a mixture of high-quality companies and lesser quality companies coming to the market. You just have to do your credit work, and avoid the ones you don’t like,” TCW’s Robbins says. “There is enough quality out there, so there are ample securities to invest in. You do get a couple that slip through, but for the most part we find there are still decent quality issues.”

Robbins explains that spreads are still attractive, and the diversity that comes with increasing volumes is a plus. Some of the cheaper EM issuance is coming out of China, where corporate governance is more a concern, making a lot of Latin issuers stand out for their relative strength against other emerging markets.

“Spreads are probably in the middle of the range, and with the market so strong until recently, we’re more circumspect of the flood of higher-yielding issuances that have come out,” says Booth. He says he doesn’t feel this is the right environment to be stretching too far for yield, though he continues to add opportunistically.

Milne points out that use of proceeds is generally more responsible in 2010-2011. LatAm also compares favorably to new issuance this year from Eastern Europe and Asia, particularly China. The emergence of possible irregularities at Sino Forest in June highlight concerns investors have with first time borrowers with little history.

“Looking at global EM corporates, there is concern about quality and structure this year. However, the majority of my concerns are restricted to Asia, and less to Latin America,” says Polina

Kurdyavko, Senior Portfolio Manager at BlueBay Asset Management.

As the credit crisis fades farther into the rear-view mirror, structures are becoming more ambitious. For instance, Chilean bus company Inversiones Alsacia was trading around 95 in early June after

widening yield to get a structured deal done in March. Yet OGX’s decision to tighten covenants shows it may still be a buyers’ market and that investors remain self-disciplined.

“So far we’re not seeing real slippage in the covenants or the structure of these bonds,” says Oliver.

Though there are more high-yield deals this year, Panait says she does not see many that are risky, and LatAm in particular has offered a healthy mix of investment-grade and high-yield transactions.

“We continue to see favorable environment for high-yield issuance, and for LatAm issues in particular,” says Alberto Ardura, head of LatAm DCM at Deutsche Bank. Exogenous shocks would pose a bigger threat to the current new issue window for high-yield corporates, he says.

Ardura says his bank continues to see crossover interest for LatAm corporate issues, and also notes a greater participation from private banks, family offices, and institutional investors based in LatAm, that are also helping to keep demand strong.

The Other Side of 4%The remaining question is whether funds will flow the other way once US Treasuries rise, or when growth in the US and other developed markets picks up. Inflation in the region has certainly made headlines this year, but the main risk for bond investors seems to be a rapid shift in the interest rate conditions that have prevailed since the credit crisis.

As commodity prices dip slightly and level off, Mainstay’s Booth says inflation in emerging market countries is probably peaking.

An increase in US rates could come once developed market central banks move to contain any potential price rises or when growth resumes. However, with a US recovery struggling, the number of observers expecting the US Fed to begin hiking this year has shrunk. Deutsche’s Ardura says that US interest rates aren’t expected to rise for the next three to four quarters.

“There is some concern that the run we’ve had in risk assets has been due to low US interest rates, and now this environment is starting to change,” Osses says. “In six months to a year we’ll find out which risk assets were worth it and which were not.”

Regardless of the timing, the speed of such a hike would be the most important component in terms of sustaining LatAm corporate issuance. “If there is a gradual move with interest rates, that gives the market time to be comfortable with it,” says Panait, whose base-case scenario is a slow rise.

Yet while there are concerns about US rate rises and volatility, high-yield corporates have a negative correlation with US Treasuries and hence act somewhat as a buffer, Kurdyavko says.

“I don’t think raising US interest rates is going to have a huge negative impact on corporate issuance in emerging markets,” says Chris Wilder, who helps manage Stone Harbor’s EM portfolio. While rate hikes have a greater impact on investment-grade names, high-yield is not necessarily immune if a sharp climb in US yields provokes a wider spike in risk aversion. “I don’t think we’re at a point yet where we should expect to see a major impact on new issuance,” he adds. LF

Adding Opportunistically: MainStay’s Booth

equity fund manager survey


other regions in the world, it’s still in very good shape.”

Landers has increased his overweight in Brazil as he sees weaknesses in favorite stocks such as mining company Vale and the banks. His fund has returned 0.4% in the past three years versus a 1.6% loss for the MSCI Latin America index.

“Once we get more clarity on the inflation front, these sectors should start to perform better,” says Jose Costa Buck, portfolio manager at T. Rowe Price, discussing Brazil’s banks and others that have underperformed. “The question is the timing — when are we going to see inflation slow down?”

If Brazilian authorities are able to lower inflation to within the upper 6.5% limit of the central bank’s target band, Costa Buck says he would be optimistic. But if inflation remains above that level, then more government measures might complicate the economic outlook.

Buck says his LatAm fund, which holds $2.87 billion in assets, has not adjusted Brazilian allocations in his portfolio and is still overweight domestic consumer-driven shares.

He echoes other managers in noting that the consumer growth play still looks positive in the long term, given the growing middle class in Brazil, the relatively low credit penetration and the country’s housing deficit.

There remains no shortage of new plays on the Brazilian consumer. The last two weeks of June were set to offer no fewer than seven new deals. These ranged from health (Qualicorp) to energy (Perenco Brasil and Energias do Brasil) to

LatAm equity funds have had a bumpy ride of late as regional indices dramatically underperformed US

stock markets during the first half. But portfolios remain in good shape year-on-year thanks to the post-crisis resurgence in 2010. Investors are now seeking buying opportunities and diversification away from Brazil, while also keeping their faith in the region’s consumer growth story.

Concerns over inflation, particularly in Brazil, and the return of political risk in Peru after the election victory of left-wing presidential candidate Ollanta Humala, have weighed on prices this year and subsequently dented dedicated LatAm portfolios.

For the year to June 1, the MSCI LatAm index was down 1.2%, reflecting the largely lackluster performance across the region in dollar terms. For instance, Brazil’s Ibovespa index fell 4% over the same period, making it one of the region’s worst performers with the exception of the 12.6% dip seen on Peru’s IGBVL. Meanwhile, Colombia’s IGBC jumped 3.3%, while Mexico’s IPC slid 2.4%.

This stands in contrast to the 6.16% rise seen on the Dow Jones Industrial Average over the same period, though LatAm falls in line with the broader EM universe. For instance, Shanghai’s Stock Exchange Composite Index (SSE) 180 declined 4.00%, while the Bombay Stock Exchange Index (Sensex) plummeted 9.50% over the same five-month period.

Investors still see a solid fundamental story supporting growth in LatAm despite concerns that rising inflation and efforts to contain it may upset economic stability. Betting on the region has paid off over the last year or so, particularly away from Brazil, which failed to outshine its regional peers.

Year-on-year to May 31, 2011, Brazil’s Ibovespa enjoyed 17.9% returns in dollar terms, but looked comparatively weak

Buying Opportunity

Concerns over political and inflation risks have hit equity portfolios dedicated to the region. Investors are now on the hunt for value and diversification away from Brazil.

by Ben Miller

against the 41.3% seen on Chile’s Ipsa index, the 29% on Colombia’s IGBC, the 24.8% on Mexico’s IPC, the 52.6% on Peru’s IGBVL or even the 22.5% on the MSCI LatAm index.

Unsurprisingly, top-performing managers have benefited from such movements, especially if they have diversified away from the region’s largest economy and into some of the smaller markets. However, in the wake of the recent sell-off some portfolio managers have been buying on the dips, even in Brazil.

“On a relative basis Latin America’s macro still looks good,” says Will Landers, manager of the BlackRock Latin America A fund, which has some $554 million under management. “If we compare with

MILA driving IPO market: Steimel



for choice offerings within this theme. Pharmaceutical company CF Recalcine’s recent IPO in Chile is a good example of what Steimel describes as a low-valuation family business opening up to the markets.

Also in Chile’s health sector, clinic operator Cruz Blanca raised $234 million equivalent in late June. Health companies are expected to offer new plays on middle-income growth in several countries. A follow-on for Mexican clinic operator Medica Sur is also in the pipeline.

Ideally, the creation of MILA would break down the binary Brazil-Mexico dynamic that has historically characterized LatAm equities, and increase opportunities in Chile, Colombia and Peru, Steimel explains. The deal had been set to conclude by the end of the year, and would create the third-biggest exchange in LatAm after Brazil and Mexico.

A pick-up in volumes will very much depend on whether regulators will allow pension funds to increase their holdings of international stocks or count issuers from other MILA countries as part of their domestic limits.

Yet political risks have already slowed

Colombian exchanges, known as Mercado Integrado Latinamericano (MILA), also promises to bring more liquidity and hence more listings.

“Some of this IPO activity is all about this integration,” says Stacy Steimel, portfolio manager at PineBridge Investments. Her LatAm Small and Mid Cap Equity fund has $334 million under management and is among the top performers in the region over the last three years, returning 11.6%. The fund is about 50%-55% allocated to Brazil, and is focused on $100 million-$2 billion market cap stocks.

Steimel likens the potential in MILA to the creation of the Novo Mercado which pushed the total market cap of listed companies in Brazil to $1.3 trillion from $370 billion and greatly increased the number of listed companies, resulting in the flush issuing conditions seen today.

PineBridge’s fund is largely focused on the boom in domestic consumption, and Steimel explains there is potential for more of this type of opportunity outside of Brazil. As with Brazilian names, though, investors must look carefully

real estate (BR Properties).Patrice Lemonnier, head of emerging

market equities at Amundi with $745 million under management, notes that LatAm valuations are in line with the rest of EM, but Brazil is among the cheapest. Its market trades at an average 10x earnings, compared to 16x for Chile.

Colombia should offer interesting possibilities, though Mexico and Peru bring too much political uncertainty, Lemonnier says. The Amundi LatAm fund returned 2.4% during the last three years up to May 31, 2011.

Andean PlayBrazilian shoppers are still generating most of the headlines, but investors have been optimistic about prospects away from LatAm’s largest market. The Chilean market in particular has offered investors an increasing array of offerings, even for those interested in something other than the salmon sector, which has seen three IPOs in 2011 alone.

Though the election of Humala in June might not be what investors wanted, the integration of the Peruvian, Chilean and

Top LatAm Equity Funds over Three Years to May 31 2011Chile, small caps on top

Benchmark Launch Fund Value($m)

Allocation LatAm (%)

Annualized Growth Return (%) 1 yr 3 yr 5 yr

MSCI EM Latin America 22.50 -1.60 17.80

Lipper Latin American Funds Classification Average

31.43 -0.90 16.40

Manager Fund

iShares MSCI Chile Investable Market Index 2007 919.80 99.90 42.50 17.40 N/A

Pinebridge Global Funds Lat Am Small and Mid Cap Equity 2007 333.70 90.60 42.90 11.60 N/A

Fidelity Latin America 1994 2,177.80 94.00 30.50 3.70 18.80

Amundi Funds Latin America Equities 1994 746.50 98.20 29.00 2.40 21.70

iShares MSCI Mexico Investable Market Index

1996 1,6194.20 99.80 29.00 2.00 13.80

Templeton Latin America 1991 1,887.30 90.30 25.40 1.00 19.80

BGF Latin American Fund 1997 6,988.80 92.90 27.90 0.70 18.10

BlackRock Latin America Fund 1991 554.10 93.40 29.80 0.40 19.10

iShares MSCI EM Latin America 2007 352.80 96.60 27.00 0.40 N/A

Nordea Latinamerikafond 1997 237.20 96.30 27.90 0.30 17.80Source: Lipper



momentum behind the MILA initiative and unnerved investors, some of whom have cut their Peru positions until Humala clarifies his market policies.

In early June Colombia’s Bolsa (BVC) and Peru’s Bolsa (BVL) delayed their merger until they could present details to Peru’s newly elected government. This followed statements from Humala advisor Kurt Burneo that MILA had been put together too quickly, and that the government would want to renegotiate parts of the agreement if the benefits aren’t equitable.

The two exchanges claimed the deal would not be altered and that the delay would have no bearing on the MILA integration, which is separate to the BVC-BVL tie-up, but the setback has raised doubts about the immediate success of the initiative.

“There may not be many large transaction volumes until this is resolved,” says Ramon Suarez, equity analyst at Munita, Cruzat & Claro in Santiago, though he notes Peru is the shallowest of the three and unlikely to contribute much change in the near term.

Peru’s bolsa sold off following the election, on concern Humala would make good on his early campaign promises to boost government intervention despite his tacking toward the center as the election approached.

“Peru had been the darling among the smaller markets preferred by many, including ourselves,” says Landers, who reduced his Peru exposure this year. Still most accounts see few if any real spillover effects into other LatAm countries.

“With respect to performance and IPO potential, Chile still has a healthy pipeline of both IPOs and secondary issues,” Steimel says. A scandal over unauthorized lending practices at retailer La Polar probably had a greater impact on the local market than any spillover from Peru’s elections, she adds.

Colombia has also seen a recent surge in offerings as issuers take advantage

of strong valuations. “There could be a pipeline of more than $5 billion [in Colombia], but that could take place in six months or two years,” says Costa Buck. He is encouraged by the listings this year of airline Avianca ($278 million) and financial holding company Grupo Aval ($1.1 billion), and would like to see more from the Andean nation.

In early June, Nutresa, the food products company formerly known as Nacional de Chocolates, opened books on a 522.5 billion peso ($295 million) follow-on. Aval was also due to raise up to

$1 billion in the US ADR market.Colombia’s market may still lack the

depth to accommodate large deals in the same way Brazil does, but expectations that the government will float at least another 1% more of oil producer Ecopetrol has also lowered volumes despite interest from foreign accounts.

“We’ve been spending more time in the Andean region, and have been finding better opportunities on a risk-reward basis,” says Adam Kutas, portfolio manager at Fidelity, whose LatAm fund had returned 3.7% in the last three years and has $2.18bn under management. “Both from a sentiment and valuation perspective, these are very attractive opportunities.”

Fidelity is allocating more money to

this part of the region, Kutas says, though he declines to name specific companies in which he has invested. As in Brazil, buyers target the consumer growth play as economies grow and incomes rise.

Just as brewer AmBev is seen as a stable play on growth in Brazil, investors also like bottlers Femsa and Embotelladoras Arca in Mexico as well as Chile’s Embotelladoras Andinas. As the population becomes wealthier, these regional bottlers should benefit from spending beyond beer and see sales rise for water, juices and vitamin drinks.

These players are offering more discretionary alternatives, and Femsa also benefits from Coca-Cola bottling as well as its convenience store chain. Though Chile may lack the room to grow, certain Chilean retailers, such as Cencosud and Falabella, are plays on Colombia and Peru as they use Chilean cashflow to expand into those markets.

Still China DependentThe key for the Brazilian portion of the index is still whether inflation can be contained without hurting GDP growth.

“We’re not extremely concerned unless real

interest rates go up,” says Martin Junker Nielsen, portfolio manager at Nordea. Its Latinamerikafond manages about $237 million and was up 0.27% over the last three years. Nielsen doesn’t see this happening in Brazil or Mexico, but the political situation in Peru, for example, could lend itself to this scenario.

The domestic picture is only about 60% of the equation. China’s slowdown affects overall market sentiment for risk assets, and demand for commodities can impact large cap LatAm names.

“The outlook for China is very positive. Chinese officials are going to great lengths to try and soften the rapid growth. I don’t think they would do that unless they were sure that the economic growth would remain.” Nielsen says. LF

Dec-2009 Mar-2010 Jun-2010 Sep-2010 Nov-2010 Feb-2011 May-2011-30%

-10%

10%

30%

50%

70%

90%

IBovespa (Brazil) Ipsa (Chile)

IGBC (Colombia)

IGBVL (Chile)

IPC (Mexico)

S&P 500

Source: Economática

LatAm Equity Performance - Percentage Return in USDBolsas vs S&P500

latam tech investing


country is listed as either the third or fourth largest market for PC sales in the world, potentially beating Japan and Germany and putting it behind China and the US. PC consumption grew by 17.7% from 2008 to 2010, according to BANIF Securities.

“There’s a huge opportunity in the technology sector just to support the macroeconomic consumer opportunity,” says Fabio de Paula, investment director of Intel Capital in LatAm. Intel has been investing in technology companies in the region for the last 10 years, de Paula says. “We have a portfolio of 11 companies in the region. Eight of them are in Brazil, but we also have invested in Chile, Colombia, Mexico and Argentina.”

De Paula says Intel does not have numbers for how much it has invested in the region so far, but worldwide the VC firm invested $327m in 2010. It is expanding its presence in LatAm. The firm hired Alexandre Villela away from Stratus Group to join its São Paulo operations at the beginning of 2011, and is looking to add another investment professional, de Paula says.

“We definitely have been seeing an

Technology may not be the first sector that leaps to investors’ minds when they think of LatAm. The region is

more often dominated by deals from the oil & gas or mining sectors, which between them represented $94.5 billion in M&A deal volume in 2010, 38% of all deals that year, according to Dealogic.

But investment in the technology sector, though still at low levels, is beginning to catch the eye of some major strategic and financial investors.

“Colombia has the same level of penetration that the US did in 2000,” says Daniel Gertsacov, new markets director for Google Latin America. “It has the same percentage of e-commerce as a percentage of total retail that the US had. This isn’t going to take 10 years this time. It’s going to take three or four. What we didn’t have ten years ago was mobile phones and tablets.”

“The region is a little bit lagging what’s happening in other parts of the world: Asia, Europe and the US,” says Hernan Kazah, CFO of MercadoLibre, the Argentina-based online retailer. “Investors have seen what has happened there. Their models are successful in those regions and they are now trying to find winners for those models in Latin America.”

In March, Google announced plans to increase its headcount in the region by 50%. It is also expanding, opening new offices in Peru, Chile and Colombia last year to supplement its existing locations in Brazil, Mexico and Argentina. Gertsacov says he also has plans to open two additional offices this year in Central America and the Caribbean.

“This is the region that grew quickest [for Google in 2010]. And it’s not just because we’re starting from a base of small numbers. It’s because it’s really starting to become an important place for our business,” Gertsacov says.

It is also becoming an important place

Back to the Future

The potential for a repeat of North America’s tech boom has some investors salivating, but a lack of exit opportunities remains an obstacle.

by Jef Cozza

for Google’s competition. In February, Facebook announced that it had poached Alexandre Hohagen, Google’s vice president in charge of LatAm. He will serve as vice president of sales for LatAm at Facebook, according to the company.

Middle Class GrowthMuch of the interest in LatAm, and specifically Brazil, is a play on that country’s expanding middle class. Depending on who you talk to, the

Internet penetration driving technology investment



Improvements to Brazilian copyright law, which governs software in the country, are also being discussed and making the country more attractive to foreign software developers. “I have heard of five projects from five leaders in the IT sector setting up operations in the country,” she adds, though declines to disclose the names of the companies.

Taiwanese electronics giant Foxconn, which produces components for Apple, is looking at a potential $12 billion investment in Brazil, President Dilma Rousseff said in mid-April.

That is a marked change from the behavior of those companies in the past, Machado says. Previously, major IT and technology companies were hesitant to launch local operations in Brazil due to high taxes, she says. The fact that the same companies no longer see taxes as a barrier to entry, despite the fact that they have not gone down, indicates how positive they are on the market.

New regulations are starting to draw the eye of PE firms in the US. “Regulations and compliance is always a key driver of adoption of technology,” says Brett Rochkind, managing director at General Atlantic, a global growth equity firm. Rochkind is part of the firm’s Internet & Media sector.

General Atlantic entered Brazil’s IT space in 2007 with a $70 million investment in MercadoLibre. “At that time, people started to get comfortable with the financial stability of the Latin American market,” Rochkind says.

General Atlantic, which typically makes investments of $50 million-$500 million in companies, has about a half dozen investment professionals in São Paulo, its only LatAm office. Rochkind tells LatinFinance the firm has looked at investments in internet, software and outsourcing services in Mexico and Argentina, and gaming companies in Brazil.

“You haven’t seen as much early stage funding going into these markets,” Rochkind says. “You haven’t had a lot of copycats come up. If you look at a lot of the venture markets in the US, you’ll see 10 or 20 companies doing the same thing. When you do see a financed company in Brazil, they tend to have established a market leadership position earlier than a relative company in the US.”

says. Machado says she expects Microsoft, Accenture, Salesforce.com, Hewlett-Packard and IBM to be major investors in the Brazilian IT outsourcing and cloud computing markets.

“Most of the acquisition interest comes from the US,” Machado says. “But we also see France and China participating in this market.”

MercadoLibre’s Kazah says interest from both financial and strategic investors is increasing. “Both markets are more active than what they used to be a few years ago,” though he believes corporate investors have been somewhat more active.

Brazilian companies, sometimes backed by financial investors, are also expected to be major players in consolidation. “We are ourselves very interested in companies in Brazil,” André Frederico, director of M&A and strategic planning at Tivit says. “Of course we’re seeing international private equity firms [buying companies]. . . but also we ourselves are looking for opportunities.”

Regulation Driving SpendingNew legislation being drafted by the Brazilian legislature which would ensure data privacy for end-users and facilitate the transfer of data from Brazil to other countries will allow the country to develop into hub for IT outsourcing, Machado says.

increase in interest in Latin America overall, especially Brazil,” de Paula says. “The other regions now are also picking up along with overall interest from more mature market investors looking at the region.”

De Paula credits the strong macroeconomic trends experienced by Brazil and several other countries in the region as the main drivers of the increased interest. De Paula says technology is following the same path as other sectors in the country and in the region: infrastructure, services and plays on the expanding consumer power of the so-called “C class” of middle-income consumers.

More M&AGoogle is likely to make several acquisitions in the region this year, according to Gertsacov, although he says he has no knowledge of any specific plans at Mountain View. The company plans to make around 50 acquisitions worldwide this year, he says. “I wouldn’t be surprised if more than one of those came from Latin America,” though any deal will have to fit within Google’s core businesses of mobile internet, YouTube, and display advertising.

Maria Cristina Machado Cortez, an M&A lawyer with Trench, Rossi e Watanabe specializing in the tech sector, says she is seeing in uptick in M&A and investment throughout the sector. “We know there are more transactions going on,” Machado says. IT outsourcing, software and services and cloud computing are areas where Machado says she sees the greatest potential for growth.

French technology company Capgemini announced it had agreed to acquire a 55% stake in Brazilian IT outsource provider CPM Braxis for 517 million reais. In 2008, Brazilian software developer TOTVS acquired fellow Brazilian software company Datasul for around 710 million reais. And PE firm Apax Partners acquired Tivit, another Brazilian IT services and outsourcing firm, for 873 million reais in 2010.

That leaves TOTVS and Stefanini IT Solutions as the largest independent IT services companies remaining in Brazil, according to Machado. Both are likely to see interest from potential investors, she

Companies are buying more hardware: Luiz



Where’s the Exit?But signifi cant barriers to increased IT investment still remain, according to Mauricio Bejarano, chief of sta� to former Colombian vice president Francisco Santos. Bejarano is now an angel investor in Colombian IT companies. “In Colombia at least there’s huge missing gaps in venture capital. There are very few angels. If you talk to them about exit strategy they don’t know what you’re saying,” Bejarano says.

In Europe and US, many tech companies are traditionally founded as start-ups backed by venture capital funds. “The primary thing Latin America could do to facilitate venture capital and private equity activity around the sector is work on the capital markets,” says Gertsacov. “There’s no exit. IPOs are few and far between. The mergers and acquisitions stu� usually happens between the big family groups and the big [corporations].”

It’s a problem that’s being seen in several countries. “We think that’s a problem in the region, especially

in Colombia,” says Francisco Mira of Promotora, a VC fi rm focusing on Colombian tech companies.

Mira says Promotora solves the issue by investing in companies that make good potential targets for global strategic investors. “For example, Spanish strategic investors are looking for new technologies to be included in their portfolio, or are looking for companies that could develop their own technologies here in Colombia at a lesser cost.”

Mira says the best solution may be the development of new bolsas. “We have to develop secondary stock exchanges that allows this kind of company to go public. Like a Nasdaq.”

But there are signs things may be improving for investors looking for exit opportunities. “We have been doing exits the last four years,” says Intel’s de Paula. “We have lots of large corporations around the globe that are interested in Brazil and are doing acquisitions. And you have the local markets doing IPOs.”

De Paula says he sees this trend spreading outward from Brazil to some

of the countries in the region with smaller capital markets. “I think Brazil is a little ahead of the pack,” he says. “But I can see this [sales to global strategic companies] happening in other countries as well. I think we’re going to see more and more this type of exit opportunity in the region. It’s improving a lot as time passes.”

Outside of Brazil, the lack of capital markets has been problematic, Bejarano says. But some countries are looking to step into the breech. Chile, for example, launched Start-Up Chile last year, a government program looking to spend $40 million funding entrepreneurs, according to Nicolás Shea, CEO of the program. Half of the funds awarded so far have gone to tech companies, he says.

Strategics to the Rescue“Potential buyers are back at the table and looking for countries in Latin America,” says Ariel Muslera, director of strategy and product development at LAVCA. “Brazil, Chile, Colombia, Peru . . . those countries are back on the top of the minds of large companies as a place where they can fi nd



growth and opportunity. So that brings potentially more exit opportunities.”

Bejarano sees some of the newer, North American technology companies stepping up to provide exits for investors in early-stage LatAm tech companies. Playdom acquired Argentinean gaming company Three Melons for an undisclosed sum last year, before itself being bought by Walt Disney.

Bejarano says he knows of other Argentinean gaming acquisitions in the works, though he declines to disclose the players, and says he expects Zynga, a social network video game developer, to make a large acquisition in the region soon.

While not necessarily every acquisition will be of significant size, Bejarano says the cumulative effect of tech start-ups being acquired and demonstrating the viability of exit opportunities to tech investors will increase funding to the sector.

“The only thing that’s missing is local success stories. When young guys have a successful company, that’s what inspires the next generation,” he says.

“The capital markets will open up, particularly in the US,” General Atlantic’s Rochkind says. “For leading companies in areas such as the internet or technology, there will be US market opportunity available for them in the next two years, particularly as US investors are starved for growth.”

He says he expects the local exchanges to become more active as well. “People are starting to recognize the attractiveness of the business models in the internet and software services space.

It will be a very hot IPO sector over the next few years.”

Meanwhile, Rochkind says the M&A sector is also heating up, pointing to the CapGemini and Apax deals. “You have a set of strategic acquirers that want to gain access to a very fast growing market,” he says. “You’re going to see a lot of M&A activity in the next few years.”

Some early stage investors appear to be getting involved already. According to LAVCA, a VC association focused on LatAm, VC investment in the information

technology sector nearly doubled from 2009 to 2010, reaching $767 million in 2010 from a base of $395 million the year before. Other technology-based sectors saw a spike in new VC capital last year as well, according to LAVCA. The clean tech and alternative energy sector leapt to $731 million in venture funding from $224 million the year before, while life sciences and healthcare combined for a whopping $1.3 billion, up from $160

million the year before, a 717% increase. “Most likely the exit side of the

business will come from a strategic investor from the US,” Muslera says.

“The tech sector within Latin America is going to face very strong growth in the coming years,” says José Rogério Luiz, CFO at TOTVS. TOTVS, a Brazilian software services developer, acquired SRC Serviços em Informatica for $24 million in cash in August 2010. Luiz says he expects to see the LatAm sector continue to grow by double digits

in the coming years, partly driven by increased regulatory requirements from Brazil, Argentina and Mexico. In Brazil, for example, companies must now file their taxes electronically, further increasing demand for software solutions.

Luiz also cites the falling price of hardware as another factor leading to increased demand for software service in Brazil and throughout LatAm. “A few years ago, in order to get a very good server, a company had to pay $16,000. Nowadays, with $2,000 you can have a very good server. So companies are buying more hardware. And

when they buy more hardware they also demand more software.”

If Brazil and the rest of the region follows the same technology trends seen in North America, Europe and Asia, LatAm may be poised to launch its own Facebooks, Groupons, and Netflixes.

“Latin America presents today a golden opportunity for folks to rewind the clock and invest before the herd stampedes,” Gertsacov says. LF

VC Investment in Brazil by SectorIT is the fastest growing sector in last two years

2008 2009 2010 2010 vs. 2008

Investment by Sector Amount ($m)

Amount ($m)

Amount ($m)

Growth ( %)

Health/Lifesciences 564 97 1,216 116%

Energy 0 401 578 N/A

Information Technology 133 354 682 411%

Clean tech/Alternative/ Renewable Energy

164 86 435 166%

Education/Educational services 117 258 321 175%

Logistics & Distribution 111 0 470 325%

Manufacturing 159 11 448 182%

Retail 315 42 250 -21%

Hospitality/Travel/Leisure 0 N/A 250 N/A

Financial Services 0 191 59 N/A

Other Natural Resources (non-hydrocarbons)

310 0 215 -31%

Other Services 0 0 130 N/A

Infrastructure 0 0 65 N/A

Agriculture/Livestock/Agribusiness 94 11 49 -48%

Other 542 582 317 -42%

Total 2,509 2,033 5,485 119%Source: LAVCA

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central bank policy


because such measures are still relatively misunderstood and underestimated, they are not always as effective at controlling inflation expectations.

This was born out at the beginning of this year, when hikes in the Selic, Brazil’s base overnight rate, translated directly into expected inflation expectations changes, while the macro-prudential moves did not.

“When you move interest rates, expectations react quickly, but this hasn’t been the case with macroeconomic measures,” says Loes.”

In Brazil, for example, capital adequacy measures have never been used for this specific goal, though in practice they have a dampening effect on real demand, Loes adds.

In addition to the difficulties posed by high rates for local long-term investment in infrastructure and manufacturing, the strength of the local currency is cause for considerable concern.

There is still a huge rate mismatch between Brazil and the US and Western Europe. Brazil has real interest rates hovering around 6%, while real rates in many developed countries are close to zero. This has led to strong inflows, pushing the real up to worrying levels for the government.

Rita Mundim, an expert in capital markets at the Fundação Dom Cabral, a center for executive and company development, believes policy shifts reflect the declining power of the bank lobby.

“The main lobby in Brazil has always been the bankers’ lobby, and now the

Brazilian authorities have been resorting to less conventional methods to tackle rising prices

as a way to avoid strengthening the real through rate hikes. This is uncharted territory and arguably a risky venture for a country that has a history of hyperinflation. Markets are not necessarily convinced the plan will succeed, but understand the need for a broader set of monetary tools.

Brazil has long been attacking its serious inflation problem with serious interest rates. The hyperinflation that plagued the country in the 80s and 90s was brought down with a new currency, the real, as well as sky-high rates. Fifteen years after the “plano real” was put into effect, the nation still has some of the highest real interest rates in the world, posing problems for local long-term investment, though inflation has been under control for some time.

But as last year’s rapid economic growth raised the spectre of overheating, and inflation slowly broke the central bank’s official upper 6.5% limit, the government has not been content to rely solely on interest rate hikes to fight it.

Starting in December of last year, Brasília has employed a set of measures, collectively described as “macro-prudential,” alongside its traditional monetary policy. This involved raising banks’ capital and reserve requirements in December last year, then again in January. By February, reserve requirements on term deposits were increased to 15% from 13%. The most recent action came in April, when the government doubled a tax on personal loans, to 3% from 1.5% a year.

Initially, some investors thought this a risky strategy, one less serious than traditional interest rate policies and with unclear consequences for financial market participants.

New Tools for Old Problems

Faced with an over-valued real the Brazilian government is relying on a wider set of ‘macro-prudential’ measures to fight inflation.

by Vincent Bevins

Despite such doubts, most investors and experts within and outside Brazil consulted by LatinFinance say that the macro-prudential approach is likely to remain part of the central bank’s policy tool set.

André Loes, chief economist at HSBC in São Paulo, expects interest rates to be the main tool used to battle the current inflation crisis, but the broader macro-prudential strategy will become more important going forward.

Because growth in demand in the Brazilian economy is driven to such a large extent by loan book expansion – now leading to fears of a credit bubble – these types of measures can in theory be quite effective in fighting inflation.

However, detractors argue that

Policy to impact investors: Loes

central bank policy


Since the boom in lending is mostly to consumers who pay very high interest rates on purchases – often ranging from 70%-100% – some argue that the Selic’s effectiveness at cooling down demand in the economy is often overstated.

“Selic does matter but when you have an enthusiastic consumer in Brazil, strong wage gains, strong employment growth, Selic is the pea under the mattress,” says Newman. “The princess can feel it but a lot of others can’t.”

Containing Brazil’s credit boom will of course help fight inflation and indeed a broad group of market participants believe the central bank is heading in the right direction.

Brazil is not the only emerging market country that has gone down this path. Turkey, for example, took an arguably more unconventional approach late last year by increasing reserve requirements but cutting interest rates.

“It makes sense to use the whole range of policy instruments. I think Brazil’s actions now are completely consistent with a lot of emerging market thinking on the issue,”

says Jerome Booth, head of research at Ashmore Investments Management.

At the end of the day, however, central bank measures have a limited impact on curbing inflation unless they are accompanied by progress in cutting fiscal spending.

It is still early days for the effects of the macro-prudential push to be known, but an over-reliance on the strategy could pose risks for one of the most profitable banking systems in the world, long used to benefitting from high interest rates. But there is little indication that the government’s incentives for trying the macro-prudential path should disappear soon. LF

has been one of Brazil’s main drivers of growth, and curtailing it too much would have been too much to take, says Tony Volpon, head of emerging markets research for the Americas at Nomura Securities in New York.

“Credit has been one of the big factors . . . if not the big factor behind the growth in aggregate demand,” Volpon says. “The government is worried about currency appreciation especially, and it’s trying to lean on these kinds of direct macro-prudential measures to take some of the

pressure off interest rates. I think the mistake they made is that they’ve been unwilling to really bite the bullet and be forceful [with limits on consumer credit].”

However, Gray Newman, managing director and senior LatAm economist at Morgan Stanley, says that perhaps too much attention is paid to the inflation-fighting side of the macro-prudential approach. “They have been implemented first and foremost to deal with the prevention of credit bubbles forming,” he says.

This may make sense given the increasing fear of a credit bubble in Brazil after a rapid expansion in retail lending.

government is looking a little bit more to the production side: that is, small and medium-sized businesses,” she says. “The government is afraid of the psychological side of inflation in Brazil,” made more dangerous by the country’s hyper-inflationary past, “but there is also the realization of the damage that high rates have to local businesses.”

But if this shift is happening, Loes is unsure that this will negatively affect his bank or the financial sector. “It’s a riskier way of doing monetary policy, because of the potential effects of over-kill on the financial system, investors, and ultimately the growth of the economy,” Loes says. “But as for affecting the profitability of the financial sector, I’m not sure.”

Loes sees a larger impact on the investment community which, for instance, will have greater difficulties playing the yield curve given the uncertainties surrounding the central bank’s new and untested approach.

Lupin Rahman, senior vice president on the emerging markets portfolio management team at PIMCO, echoes such thinking. She says that investors may face some “unpredictability of policy” if the central bank is seen making ad hoc decisions, though the move hasn’t altered PIMCO’s investment strategy in Brazil. “On the margin it proves the attractiveness of local rate positions if you believe that the CB is being proactive in terms of attacking inflation and credit growth,” she adds.

At the other end of the debate, some analysts feel that macro-prudential measures will have a limited impact on inflation as the government has failed to go far enough. Directing state-controlled Banco do Brasil to pump credit into the economy after the financial crisis unfolded

Brazil Moves to Contain Inflation and Strength of RealMacro-prudential measures implemented since October 2010

October 2010

IOF tax hike on capital inflows, lifting tax levied on all fixed-income investment flows to 4% IOF tax hiked again for fixed-income investments to 6% from 4%.

December 2010

BCB increases reserve requirement, ups capital requirements for household credit operations with more than 24-month maturities and increases minimum deposits guaranteed by the FGC.

January 2011

BCB implements measures to limit short USD positions in banking system. It introduces a permanent 60% cash (non-interest bearing) reserve requirement on short-USD positions.

March 2011

Government extends the 6% IOF tax to short-term loans and security issuance. Government extends 6% IOF tax to debt issuance/loans with duration below 720 days

April 2011

Government temporarily doubles IOF tax levied on household credit to 3.0%. The finance minister explicitly states that this is a macro-prudential measure, and it is aimed at moderating the pace of consumption growth.

Source: Barclays

centam energy


only regional nation that produces oil is Guatemala, which produced 4.3 million barrels of oil in 2010, according to the Guatemala Ministry of Energy and Mines (MEM). Guatemala’s crude production, however, has diminished every year since 2003 and national demand exceeds supply by more than five times, MEM reported.

To combat reliance on foreign fuel, the push for renewable sources has shifted into high gear. According to Héctor Rodríguez, coordinator of the international project “Accelerating the Investments of Renewable Energy in Central America,” the region will need an additional 7,000 MW of generation capacity by 2015. “An estimated investment of $13 billion will be necessary to produce that amount,” Rodríguez said during the Clean Energy

A drive along the Inter-American Highway through Central America provides a glimpse of what the

isthmus hopes the regional energy market will soon become. On the lone intercontinental roadway that runs the Pacific coast from Guatemala to Panama City, windmills, hydroelectric dams and geothermal stations at the bases of volcanoes periodically pock the landscape.

Yet as more renewable energy projects pop up throughout the region, Central America finds itself in a battle to reverse the trend of its recent reliance on petroleum. According to the Costa Rican Electricity Institute (ICE), in the early 1990s, renewable energy sources provided the region with about 90% of its electricity, with the rest coming from petroleum generation. By 2010, ICE estimates that only about 58% of regional electricity was generated from renewable sources, while petroleum and carbon produced about 42%.

The reason for this, according to ICE, has been a surge in demand. In a region where per capita annual income ranges from around $7,000 in Panama to about $1,000 in Nicaragua, according to the World Bank, many smaller towns and rural areas in the isthmus did not have access to electricity until 10 or 15 years ago. Some towns are still without it. According to ICE, from 1985 to 2010, the average annual increase in electricity demand was 6%.

To compensate for this increase in demand, nations turned to the quickest source of energy production: petroleum.

“Energy in Honduras was almost completely renewable in the 80s and 90s. Elsia Paz, the president of the Honduras Association of Small Producers of Renewable Energy (AHPPER), says.

The Cajón dam had provided 90% of the nation’s electricity, until growing demand from industries led to the

Green Shoots on the Isthmus

The need to reverse Central America’s reliance on fossil fuels is expected to spur an investment boom in renewable energy. Foreign companies have responded, but challenges lie ahead.

by Adam Williams

adoption of short-term energy generation solutions, according to Paz. The easiest way to ramp up energy production quickly was through the construction of hydrocarbon plants, which can be built in three months, she says.

In recent years, the increased reliance on fossil fuel-based energy production has resulted in enormous hikes in living expenses, particularly due to the cost in imported fuel, Gisela Chávez, director of economic studies at Costa Rica’s Economy Ministry (MEIC), says.

Reiterating Renewable While fuel costs rise globally, they are of particular concern for the seven nations of Central America, which rely almost entirely on imports of foreign fuel. The

Honduras’ new law is attracting investment

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centam energy


Summit hosted in Guatemala City by the Central American Bank of Economic Integration (BCIE) in May.

To attract investment, regional governments are altering legislative policies and reducing barriers of entry to make regional development projects more attractive to large scale energy companies.

In Oct. 2007, Honduras passed a law that eliminated all taxes, tariffs, and import taxes associated with the purchase of materials and services for projects designed to create renewable energy. The law provides a financial incentive worth 10% of the base price of electricity to renewable energy projects larger than 50MW during the first 15 years of operation, worth 10 cents/KWh, and waives income taxes.

“The passing of the Honduras new renewable energy law provided very attractive incentives to renewable projects,” Jay Gallegos, CEO of MesoAmerica Energy, tells LatinFinance. “That was definitely part of the motivation in creating our wind project.”

MesoAmerica’s wind energy project, Energía Eólica de Honduras, (EEHSA), is a fully owned indirect subsidiary of Globeleq Mesoamerica Energy located in Cerro de Hula, south of Tegucigalpa. The project, which began operation in June and is anticipated to generate 102MW, carries a $260 million price tag funded primarily through equity investment, including a majority stake held by Globeleq Generation.

A majority stake of the project was purchased by Globeleq Generation Ltd., an operating power company with energy projects in Africa, the Americas and Asia. Other contributing investors, according to MesoAmerica Energy, are prominent Central American families and individuals.

Other nations in the region have put together similar incentive plans to promote clean energy. In 2004, Panama

to build as much generation capacity in the next 10 years as it has in the last 60, all while making the transition to renewable sources to combat rising fuel prices.

Chinchilla sent an emergency bill to the legislative assembly known as the Electricity Contingency bill. If passed, the bill would permit an additional 400 Megawatts to be added to the national grid in the next five years and would allow for the creation of larger scale renewable projects.

Regional Renewable PowersAs regional governments plan to open their

doors to allow for further developments of renewable energy throughout the isthmus, several of the world’s largest energy companies have already planted their flag in Central America.

Italy-based ENEL, Europe’s largest energy provider, currently has projects in five Central American nations and, according to Francesco Starace, CEO of ENEL Green Power, it plans to further expand in the upcoming years. In late March, ENEL announced plans to create a 50MW hydroelectric plant, known as Chucas, on the Tárcoles River in Costa Rica. The plant, which is expected to become operational by 2013, carries a $92.36 million price tag that is being financed

by the China-based energy company Sinoyhdro and will provide electricity to over 81,000 homes.

ENEL is also currently constructing an 84MW hydroelectric dam in Quiché, Guatemala, known as Pala Viejo. The project requires an investment of $228 million and is being partially funded by Simest, a public-private holding company that promotes the development of Italian enterprises. The bulk of the financing is being provided by the Israel-based Housing and Construction Holding Company, which is providing $200 million.

“We are completing our participation in the Guatemalan company, which, together with the public venture capital fund, will

passed legislation to eliminate taxes and import fees on materials used for construction for renewable energy projects smaller than 500MW. According to the law, smaller projects will receive a financial incentive equivalent to 25% of their original investment required from the Panamanian government and between 50% to 100% breaks on income taxes depending on the project size. Since enacting the law, national hydroelectric generation has increased 7%, according to Economic Commission for Latin America and the Caribbean (CEPAL).

According to the Panama Secretary of

Energy, there are currently 22 renewable projects slated for construction in the next four years that will add 1,061MW to the national electricity grid, an 87% increase compared to current production. Investment in renewable energy is expected to eclipse $4.37 billion, about 20% of GDP.

“We hope to diminish the use of petroleum for energy generation by 30% by 2014,” said Juan Manual Arriola, the president of the Panama Secretary of Energy, at the 19th Annual Latin American Energy Conference.

Costa Rica hopes to become carbon neutral by 2021. President Laura Chinchilla has said the country will have

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Hydro

Geothermal

Thermoelectric

Diesel

Gas

Coal

Cogeneration

Wind

Source: Cepal

Growth in Net Generation for CentAm (GWh)Diesel is the fastest growing category

centam energy


total 6%, with a financial commitment of 10 million euros,” said Massimo D’Aiuto, CEO of Simest in May. “Last year we implemented projects with major Italian companies involving more than 720 million euros in international investments, with a Simest commitment of more than 34.5 million euros, equal to about 22% of our current commitments.” LatAm represents about 5% of that investment, according to Simest’s annual report.

The Quiché dam will be ENEL’s fifth hydroelectric plant in Guatemala, where the company enjoys the benefits from the Law of Incentives for the Development of Renewable Energy projects. Through the law, which passed in 2003, national renewable projects are exempt from import fees of equipment related to construction and project value-added taxes for the first 10 years. Income taxes on renewable projects are also waived.

Chucas will be the company’s third hydroelectric development in Costa Rica, where it also operates a 24MW power plant in the northwest town of Tilarán. ENEL also owns a 36.20% interest in the 195MW geothermal plant, LaGeo, in El Salvador, and a 49% share in the 300MW plant in Panama known as Central Edwin Fábrega. Throughout LatAm, ENEL runs 33 plants responsible for 669MW.

In 2010, ENEL reported revenues of over $3.3 billion, a 19.8% increase from 2009. Enel’s Iberia and Latin America Division accounted for 576 million euros in revenue 2010. The company is planning to invest 25% of its 6.4 billion euro 2011-2015 budget in LatAm.

The other giant in the region is the Arlington, Virginia-based AES Corporation, which claims to supply 80% of the total electricity in El Salvador and to be the largest energy provider in Panama, where its four hydroelectric plants provide 36% of the nation’s electricity. AES also plans to begin operation of a new hydroelectric facility, known as Changuinola in the northeast Bocas del Toro province, as soon as June.

The Changuinola plant is expected to generate an additional 233MW and carries an investment price tag that exceeds $700 million that was largely financed by a $366 million loan from the Banco Continental de Panama and other

national lenders in 2007. In 2010, AES reported revenues of

$16.6 billion, a 17.9% increase from 2009. Of that $16.6 billion, AES reported that LatAm projects accounted for 69% of the company’s consolidated revenue in 2010.

In addition to the investment of European and US companies, in late May, the Chinese energy giant Sinohydro Corporation began construction on a hydroelectric plant in Honduras known as Patuca III. The project will be the second largest in the country and is anticipated to generate 104MW of electricity by 2014. The overall project investment is estimated at $350 million.

Sinohydro has also expressed interest in developing a 300MW hydroelectric plant on the Reventazón river in Costa Rica.

Challenges AheadRenewable energy development in Central America has historically been wrought with a series of challenges.

“New developments have to take into account all of the environmental issues that could result from the creation of the project,” Gallegos of MesoAmerica Energy says. “There is always opposition to projects. Always. It is mandatory to always exemplify best practices. From my perspective, it takes a lot of patience and you have to wear a lot of hats and understand a lot of issues. You really must develop projects from the very beginning thinking about the financing.”

In addition to environmental and social impacts of projects, MesoAmerica Energy, which has developed regional wind energy in the region since the mid-1990s, has seen projects stalled for a myriad of reasons. While constructing their wind project in Honduras in 2009, former President Manuel Zelaya was overthrown in a coup d’état, causing some suppliers and investors to temporarily cease project aid. While working on the same project, a shipment of equipment carrying a vital transformer sent from India was hijacked by Somali pirates.

“I think the challenge of working in Central America is often times there is a lack of clarity and lack of protection to the investor and lack of understanding in terms of what types of things the banks are going to require from investors,” Gallegos said.

The generation of renewable energy sources has also resulted in some difficulty with integration in regional electricity grids, due to the variability of wind, water, solar and geothermal supply. Because supply fluctuates, it is difficult for regulators to gauge the amount of supply to expect from renewable projects.

“Geothermal power varies from time to time. Sometimes supply is constant, though it characterized by fluctuations during different periods of the year,” José Antonio Rodriguez, the general manager of the Polaris Energy 10MW geothermal project in Nicaragua, says. “This causes some difficulty for the national electricity company when integrating a non-thermal power source into the grid.”

Full-Speed AheadDespite the difficulties posed by development of renewable energy in Central America, regional governments are encouraging investment into the sector with unrivalled vigor.

Honduran President Porfirio Lobo said at an event in May that his country plans to build 21 new energy projects, including five large hydroelectric projects with investment price tags ranging from $110 million-$700 million. Lobo said that Honduras hopes to attract over $2 billion in investment for the projects.

Later in the month, Costa Rica’s Chinchilla visited Lawrence Berkeley National Laboratory at the University of California at Berkeley to promote foreign investment in renewable energies.

“One of the key strategies of my administration is to continue to promote sustainable development and environmental security,” she said. “Due to that commitment, the objective of this visit is to get a more detailed understanding of the research projects in the clean energies sector and to explore the possibilities of cooperation in that area.”

Central America’s ability to create renewable energy sources and reduce foreign oil dependence will most likely be determined during the upcoming 5-10 years. In the meantime, it is apparent that regional governments will exert plenty of their own power into creating new types of energy. LF

mexican airlines


A growing middle class and an increased number of passengers per flight are seen as positives for the industry. “There is also huge potential in offering low-cost airfares to a market that travels by bus. Of the 107 million people in Mexico, 96% are transported by bus and only 4% fly,” says Mauro Castillo, CFO of Viva Aerobus, a low cost airline founded by Ryanair and Mexican bus company IAMSA.

Mexico’s population of 113 million should yield around 170 million trips per year if air travel were similar to countries

After two years without growth, the recent improvement in the Mexican economy, together with

the reduction in the number of players in the airline sector, has led to demand exceeding supply. Airlines, old and new, are looking to tap the capital markets to fund expansions, but the sector still isn’t competitive enough.

“There is now a new market structure in Mexico and we expect the market to grow,” Ricardo Sanchez Baker, CFO of Aeromexico tells LatinFinance. “There is less uncertainty and all the airlines are making investments. Before, there were price wars, more aircraft and more losses. Now there are less aircraft but more efficiency.”

The remaining players in the sector have wasted little time in trying to raise money to compete for market share. Aermexico’s IPO for 3.89 billion pesos ($329m) in April was done partly to fund the $1.3 billion expansion it is planning over the next two years. New low-cost airlines like Interjet and Volaris have also both filed for IPOs. Interjet is planning to issue primary and secondary shares in Mexico and overseas. The timing and size of both IPOs has not yet been determined.

The listings are expected to have a positive impact on the sector as a whole. “IPOs mean there is more transparency relating to costs, which is good for the sector and it is also good news for investors, as it offers them more choice,” says Stephen Trent, a LatAm aerospace analyst at Citi.

Despite Aeromexico’s stock trading down to 27 pesos per share by mid-June after pricing at 31 pesos, or the lower end

Ready For Take Off

In the last three years, eight airlines in Mexico have ceased operations. But those remaining in the market are optimistic about growth and looking to expand.

by Natalie Feary

of the 30-34 peso range, analysts still see potential upside for IPOs from some of the newer low-cost airlines that have recently set up shop in Mexico.

“Interjet is financially solid, its costs and liabilities are low, it has efficient airplanes with low running costs,” says Cecilia Jimenez, a Mexico City-based analyst at Principal Finance. “The only thing that could be considered not attractive is that they do not hedge fuel prices, but they say they will hedge 45%-55% of their fuel, though they have not yet done this.”

Clear skies thanks to falling capacity

mexican airlines


Total internal resources, including internal cash generation and the cash raised by the IPO, are expected by the CFO to come to $700-$750 million over the next two years. The company also plans to raise a further $600 million.

The company also has secured a $315 million in loans from Brazilian development bank BNDES to buy planes from aircraft manufacturer Embraer, but it needs $250-$300 million more. “We are exploring financing from export import banks. For aircraft funding, this is more efficient than regular working capital lines of credit,” says Sanchez, who adds that the company is not considering issuing bonds at the moment.

Viva ExpandsMeanwhile Viva Aerobus, which started operations in 2006 with only two aircrafts, is expanding rapidly. It now has 15 aircraft and by the end of 2012 aims to have 27. “In the short term we will be adding more routes within Mexico and in the long term to the US,” says Aerobus’ Castillo.

From June to December 2010, Viva Aerobus managed to reduce costs by 7%, he adds. The company leases its planes, and has credit lines with several banks, with no plans to IPO for now. Castillo declines to identify the banks providing the credit lines.

With planned growth by Mexican airlines expected to make up around half of Mexicana’s lost capacity, the market is not expected to become anywhere near over-saturated, according to Trent. “Mexico offers a lot of potential for the airline industry. It is a big country. It could be a good hub for Latin America and a lot of people there want to travel,” says Pattyn.

“There is huge potential for investing in Mexico’s airline sector, it is just a question of choosing the right vehicle,” says Jimenez. With IPOs coming from players with new, efficient fleets, they could prove attractive to investors.” LF

airline Mexicana will not resume operations. Mexicana has not been operational since filing for bankruptcy in August 2010, despite efforts by Mexican private equity firm and investment bank PC Capital to inject $200 million in the airline. Mexicana’s apparently permanent exit should provide more pricing power and the opportunity for other airlines to pick up routes.

Aeromexico Benefits One of the main beneficiaries of the demise of Mexicana is Aeromexico, as it is now the country’s only flagship carrier. In 2011, the airline had its best first quarter in 15 years. Net income in Q1 was 465 million pesos, which compares to a net loss of 230 million pesos during the same period in 2010.

According to Mexico’s Dirección General De Aeronáutica Civil, as of February 2011, Aeromexico owned 42.6% of the market, up from 34.1% in February 2010. It has also seen its share of the international market among Mexican carriers climb from 27.8% to 79.1% during the same period.

Aeromexico is looking to grow, including adding new routes and more frequent flights.

The company’s CFO says its focus is on profitability, not market share, but adds that it wants to buy 20-25 aircraft in the next 24-30 months. The airline’s portfolio of aircrafts is 95% leased and 5% owned. It plans to own 25% of its planes within the next two to three years and rising to 50% within the next five to 10 years. In the next five years, 40% of Aeromexico’s aircraft leases expire.

“The benefit of owning versus leasing aircrafts is that it will improve the balance sheet, give more flexibility, financial stability and provide assets to sell should the operating environment become difficult,” says Sanchez.

The company also wants to have a 15% cash-to-revenue ratio. “We need $300-$400 million cash on our balance sheet, which is important due to volatility and seasonality,” says Sanchez, who adds that Aeromexico has around $370 million on its balance sheet, including proceeds from the IPO.

where people fly more frequently, but instead there are only 50 million, according to the International Air Transport Association, an international trade group.

“The case was similar in Brazil in 2005. There is still a lot to do to catch up, but the market is growing,” says Sanchez. “There is going to be a big increase in the size of the pie. We expect the increase in the numbers of passengers to be 1.7x the growth of the size of the economy.”

Dampener on Competitiveness Despite potential demographic and macroeconomic growth, challenges exist that could put Mexican airlines at a disadvantage versus competitors abroad. The industry faces relatively high landing and fuel costs as well as regulatory limits on foreign investments.

“All pilots must be Mexican citizens and foreign investment cannot exceed 25%, which means players do not have enough access to capital in a very capital intensive sector,” says Bart Pattyn, CEO of Coface Latin America, a trade receivable company, which also provides company credit information and scores. “Mexico will have to rethink its commercial aviation strategy. It is a sector that needs long-term reform.”

Possible integrations between Mexican airlines and Latin American carrier LAN, for instance, would help stimulate growth in the sector, Pattyn adds. But costs such as airport charges, which are around $20 per flight in Mexico versus the $12 worldwide, remain a challenge.

“We want the high airport tariffs in Mexico to be addressed, we want more competitive pricing and more transparency,” says Aeromexico’s Sanchez. Fuel costs are also higher than in other countries, with the cost to refuel in Mexico between 8% and 10% higher than in the US, according to analysts.

Meanwhile, capacity at the Mexico City airport is running out, according to Sanchez. The airport has enough space for the next one to two years, but not enough capacity to meet the growth expected in the next five years, he says.

Analysts say they expect that defunct

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mexico renewables


Infrastructure Partners (GSIP) is looking. “As an infrastructure fund we are

looking for relatively stable cash-yielding investments,” Marc Ricks, VP of GSIP tells LatinFinance. “We are not early-stage development capital. We have had terrific experience investing in Mexico and our funds are some of the largest foreign direct investors into this country.”

GSIP has not yet invested in Mexican wind, but Ricks says this is due to timing and commitments to other Mexican infrastructure projects.

For large investors, the Mexican wind energy sector can be problematic, says Ricks. “A lot of the opportunities are on the small side for us. We generally prefer to invest amounts of roughly $100-$150 million to $400 million per opportunity

With installed operational capacity of only 530 megawatts (MW) and ambitions to build another

1,700MW by next year, Mexico’s nascent wind sector could represent a potential windfall for investors. Investment in 2010 alone came in around $1.8 billion, and Mexico’s Secretary of Energy estimates another $5.5 billion will be required to reach its 2012 targets.

However, investors and developers complain of a lack of support from the government, despite its lofty goals to build out the sector. The government’s much-trumpeted Energy Transition Fund, established in 2009, promised to provide incentives to develop renewable energy projects.

The fund also pledged to fund research and development into renewable technology. Neither has happened. The fund instead directs its budget (5 million pesos to date) to small-scale energy efficiency projects such as the switch to energy-saving light bulbs.

Until now, the wind market in Mexico has focused predominantly on Oaxaca, due to the region’s wind resources and the Federal Electricity Commission (CFE)’s transmission infrastructure. However, transmission capacity in the state will be fully occupied by existing wind farm projects within two years unless the CFE builds further infrastructure.

“Within 10 years Mexico can be the world leader in wind power,” says Miguel Angel Alonso, director general of Spanish wind developer Acciona Energia Mexico, which has $1.25 billion invested in Mexican wind projects. Despite Alonso’s optimism, the market remains in its infancy.

Mexico has a total operational capacity of only 530MW, expected to rise to 2,000MW by 2012, against Brazil’s 931MW or the US’s 40,180MW. Mexico’s

Tilting at Windmills

Mexico’s wind energy market is potentially lucrative. But a lack of government commitment and insufficient transmission capacity could stall its development.

by Rebecca Conan

Secretary of Energy estimates the country has the capacity to build 71,000MW of wind energy generation.

Government SupportIn mature wind markets, fiscal incentives make project development costs viable. But tax incentives for wind energy projects do not exist in Mexico. Eduardo Andrade, director of Spanish developer Iberdrola, complains “there is neither a mechanism nor a commitment from the government to develop the market.”

The government prefers to concentrate on creating “regulation and policy to consolidate the market,” adds Julio Valle Perena, director of renewable energy for the energy secretariat. Yet even a cautious fund such as Goldman Sachs

Mexico could become the world leader in wind energy

mexico renewables


open season failed to build their projects. The first investors in Mexican wind were generally small, local developers without the deep pockets to move projects forward.

Timing was not kind to these developers. Projects that had been under development for years reached the financing stage at the height of the economic crisis. With less liquidity in commercial lending, some projects stalled. For example, international developer EDF recently acquired two stalled projects in Oaxaca from Eolia Renovables. The acquisition takes EDF’s investment in Mexican wind to $196.8 million. “We are entering a new phase,”

says Katzew. “Last year saw the entrance of large international developers with the balance sheet and the experience necessary to take the projects into operation.”

Private sector financing, both equity and debt, also looks set to take over financing from development banks. “We are seeing additional projects going forward in Oaxaca and the commercial banking market is coming back. Our expectation is less and less development bank involvement in the financing of Oaxaca wind projects, if at all,” Cheryl Edleson-Hanway, principal investment officer

at the IFC, tells LatinFinance.The Macquarie Mexican Infrastructure

Fund (MMIF) recently acquired Preneal’s wind farm in Oaxaca as part of a consortium for a total transaction enterprise value of approximately $89 million. MMIF took a 32.5% interest while FEMSA, the Coca-Cola bottling company, took a 45.0% share.

Exporting to the USThe Baja California region also has excellent wind resources and its proximity to the US makes export a viable option.

Exporting electricity to California is attractive for many reasons, but the main draw is demand, says Dino Barajas,

Mata-La Ventosa reserved 67.5MW and paid CFE $7.3 million on completion of the line. The purchase of transmission capacity was included as a project cost within the total project-financing figure.

Proposals for the Oaxaca and Tamaulipas open seasons will be presented to the CFE in May 2012 so that financing can be included in the 2013 budget. The new transmission line to be constructed in Tamaulipas will have a capacity of 1,000MW, while the second line to be built in Oaxaca will have a 4,000MW capacity. “Both of these projects will depend on the interest of private investors to develop new wind farms,” says Peraza.

Investors say they welcome the news of additional transmission capacity. Both Iberdrola and Acciona confirmed their interest in the open season and Andrade says the announcement is good news for strengthening the electricity network at their disposal.

“If there is no transmission capacity, we cannot continue to build projects,” Thomas Mueller, country manager for EDF Energies Nouvelles (EDF) tells LatinFinance. “We have all been lobbying for a second open season and are delighted with the news.”

The CFE was initially reluctant to expand transmission infrastructure as several successful bidders in the first

but you don’t find many wind farms in Mexico in that range. If projects inch up towards the $100 million mark, even if it doesn’t quite get there, we will seriously consider them.”

Open SeasonAdrian Katzew, regional director for turbine supplier Vestas says “there is huge short-term opportunity in Oaxaca but it’s going to finish in a year and a half unless the government provides additional transmission capacity.”

Projects operating in Oaxaca export their electricity to a transmission line with 2,000MW in capacity. Within a year and a half, the transmission line will be at full capacity and no new projects will be able to connect to export their electricity.

To address the lack of transmission infrastructure, Alejandro Peraza, director of electricity and renewable energy for the Energy Regulation Commission (CRE), announced in May two new open seasons for the states of Oaxaca and Tamaulipas.

The open season refers to the CFE’s commitment to construct a new transmission line with simultaneous undertakings from generation companies to buy transmission capacity from that line.

Without guaranteed transmission capacity, developers could not secure financing for their projects. At the time, CFE said it could not use public funds for the construction of a new transmission line unless it had a firm commitment from the developers to pay for transmission capacity.

As a result, 12 companies including Preneal and Fuerza Eolica reserved specified amounts of capacity, backed by letters of credit, while CFE built the transmission line in Oaxaca. Following construction, CFE sold transmission capacity to generation companies at $108,000 per MW.

For example, EDF’s wind farm La

Argentina Brazil Chile Colombia CostaRica

Cuba Mexico Nicaragua Uruguay Caribbean0

1,000

900

800

700

600

500

400

300

200

100

Source: Global Wind Energy Council

LatAm Wind Energy Capacity 2010 (MW)Mexico catching up to Brazil

mexico renewables


partner at law firm Akin Gump Strauss Hauer & Feld specializing in renewable energy and clean technology project financing. Rules established under the California Renewables Portfolio Standard require utilities to generate at least 33% of their electricity from renewable sources by 2020.

In 2008, electricity demand in California was 62,949MW but is expected to rise to 70,147MW by 2016, according to data from state power grid and wholesale electric markets operator California ISO (CAISO).

To reach the 33% target, CAISO estimates that 70,000GWh will be required in 2020 in addition to the 31,000GWh in operation.

When a developer can secure a second client, such as a Californian utility, the diversification of the revenue stream makes the project more attractive to lenders, says Barajas.

For US developers looking for a competitive edge in a saturated Californian market, Barajas says Mexico has a friendly development environment and less of a “not in my back yard” culture.

A key feature of these projects is their likely dollar-denominated revenue stream. This compares “favorably to peso-denominated projects where funds such as ours often hedge back to dollars at an added cost,” says Ricks.

Another key financing issue is the quality of the electricity purchaser. “The regulated utilities in Southern California are high quality, credit worthy companies and so we expect that we could get comfortable with the opportunity set very quickly once various details are resolved,” says Ricks.

Initial ProposalsA few US export projects are in late-stage development but have yet to reach the financing stage. The first wind project that could export to the US is the Energía Sierra Juárez project developed by Sempra Generation.

Sempra recently signed a 20-year power purchase agreement (PPA) with California utility San Diego Gas & Electric. The companies, both subsidiaries of the listed Fortune 500 company

Sempra Energy, have agreed to a PPA for the purchase of 156MW.

The existence of a long-term PPA guaranteeing the project’s revenue stream attracted partner BP Wind Energy, which signed a preliminary agreement for the purchase of a 50% project partnership interest. Financing arrangements have yet to be finalized but the first phase of the project is expected to be completed in 2012.

Smaller local developers are also interested in the market. WindPower de Mexico is developing a 1,000MW site located in Jacumba, Baja California, at an estimated cost of $2.5 billion.

Fritz Jacobson, WindPower’s president, says his company will partner with turbine supplier GE Power & Water and is in talks with the Italian developer Enel. “I think it will be easy to secure financing with partners like this,” he tells LatinFinance.

Jacobson says that financing discussions are still in preliminary stages, but that talks have begun with the Ex-Im Bank and IFC with regard to providing the $1.6 billion required for the project’s first stage to generate 800MW. “This figure can be broken down into a 70% limited recourse project financing portion and a 30% equity investment,” says Jacobson.

That type of project development is typical, says Edleson-Hanway. “Often by the time a reputable small local developer has acquired the permits and the land and invested in wind measurements, their capital resources are tapped out,” she says. “Partnering with a US or European developer at this stage is what is going to help make the project viable.”

The IFC is an experienced player in the Mexican wind market. It has financed 317MW of the total capacity in operation using direct long-term financing from IFC’s own account of $100 million, plus the mobilization of over $390 million in long-term financing from other lenders. “Mexico’s wind potential in Baja California has yet to be developed – that is precisely what we want to support,” Edleson-Hanway says.

In 2010, IFC participated with 10 other entities in the $600 million Eurus wind farm project developed by Acciona

Energía, the largest wind farm financing to date in LatAm. Acciona Energía provided the majority of the $225 million equity investment, while the rest of the project was debt financed.

IFC contributed $71 million in senior debt and a mezzanine tranche with a 15-year term and, together with the IDB as co-arranger, syndicated $62 million of senior debt from BBVA Bancomer and Banco Espirito Santo. A further $242 million of senior debt was raised by Nacional Financiera, Banco Interamericano de Comercio Exterior, Instituto de Crédito Oficial of Spain, French development finance institution Proparco and Deutsche Investitions und Entwicklungs Gesellschaft.

HurdlesThe main obstacle to exporting wind-generated electricity to the US remains transmission capability. “We need clear rules, a clear process and transmission, transmission, transmission,” says David Munoz, director of Baja California Energy Commission. Californian utilities such as San Diego Gas & Electric, Southern California Edison and Pacific Gas & Electric will consider generation projects outside the US but transmission into the US is problematic.

One project under construction will go some way to solving the transmission issue. The Sunrise Power Link, owned by San Diego Gas & Electric, is a 117-mile transmission line dedicated entirely to renewable energy. Due to begin operation in 2012, the $1.883 billion line will run along the US side of the border from Imperial County to San Diego. Mexican projects along the US border will be able to purchase transmission capacity on the line.

Larger developers remain sceptical about exporting to the US. “We have had various offers to partner on projects but we don’t think they are viable yet. The reality is not far away but they certainly need more support,” says Alonso.

“There are still many uncertainties such as transmission and the applicability of US tax credits that need to be resolved before investors can commit,” says Mauricio Trujillo LatAm project manager, Global Wind Energy Council. LF

peru agriculture


has increased as the planted area expanded. We now have planted 6,500 hectares and will decide whether or not to plant additional land in 2012,” Llosa says.

The company started exporting its entire production to Germany in 2009, but it began focusing on the local market last year, when the Peruvian government started requiring a 7.8% blend of ethanol in gasoline. Application of the law began in the north of the country in April 2010 and gasohol is now sold in nine of Peru’s 25 departments or states. The full national roll out begins in July, according to new regulations published in May.

“We began exporting, but we are now in a new stage with production exclusively for the local market. We are supplying the north of the country and building stock in

Farmland carved out of the desert has made Peru one of the world’s largest asparagus and paprika producers

today and, in the 1950s and 1960s, an international powerhouse in sugarcane production.

But sugarcane is poised to make a comeback as growers prepare to cater for the growing demand for ethanol both at home at abroad.

Ari Loebl, a representative of Peru’s National Society of Industries (SNI), says investment in ethanol projects will likely top $1 billion by 2015 and there are even more encouraging signs with a string of free-trade agreements signed by Peru and the possibility of the United States eliminating subsidies on sugarcane.

“There are four or five projects in the development stage that could start construction in the next 12 to 18 months. Many of the large sugarcane plantations are looking at adding land for ethanol production to take advantage of international conditions and changes in the local market,” Loebl says.

Investors are betting that Peru will be an ideal location for this growth sector. “The best way of producing ethanol is using sugarcane and arguably the best place in the world is on the coastal region of Peru, because the climate is exactly right,” says Richard Savage, head of energy research at London-based Mirabaud Securities, a London brokerage.

Brazil, the world’s sugarcane-based ethanol leader, harvests an average of 75 metric tons of sugarcane per hectare, while yields on Peru’s northern coast average 130 tons per hectare.

Only one project, Agricola del Chira, a subsidiary of Peru’s Grupo Romero, is producing ethanol in Peru. Romero has invested around $200 million in it so far. A second project, being developed by Maple Energy at a cost of $254 million, will come on line at the end of this year.

Just Add Water

Nearly all of Peru’s long coastal strip is desert, but just add a bit of water and the arid landscape quickly becomes a paradise for farmers.

by Lucien Chauvin

Local DemandThe first company to jump into the ethanol business in Peru was Grupo Romero, a conglomerate with holdings in several sectors, and a controlling share in the country’s largest bank, Banco de Crédito del Peru (BCP).

The Agricola del Chira project, located on the northern coast in the Piura department, began producing fuel-grade ethanol in August 2009 and has the capacity to produce 33.2 million gallons annually. Juan Llosa, Agricola del Chira’s GM, says the project produced 13.3 million gallons in 2010, rising to 19.8 million gallons this year. It is expected to reach 25.1 million gallons in 2012 and be at full capacity at the end of that year.

“This is a new project and production

Yields on Peru’s northern coast average 130 tons per hectare

peru agriculture


with the Peruvian government to buy approximately 15,000 hectares of arid land in Ica. The company plans to install the first 100 hectares of seed beds by the end of 2011, with the help of an Israeli firm.

Initial production will be used to satisfy local demand, which is growing due to regulatory changes. Since January 2011, diesel sold in Peru must contain a 5% blend of biodiesel. The country’s refineries currently import biodiesel from Argentina and Asia. Imports from the US, once the top supplier, were stopped after the government’s competition agency, Indecopi, ordered that a $150-ton anti-dumping premium be applied to US imports.

“The initial beneficiaries of production will be the local refineries, but we expect to be capable of exporting excess volume within two or three years after the start of production,” says Alberto Siles, HPO commercial manager.

Siles says the project will require an investment of between $180-$200 million, depending on whether the company decides to build its own desalinization plant or hire an outside construction company. Ica, the star of Peru’s agro-export industry, is facing a serious water crisis as a result of agricultural expansion. Projects like that planned by HPO will be required to find alternative water sources.

Financing for the project is still in the works, but Siles says HPO is in the final stage of going public.

“We have completed the paperwork to list on the stock market (Lima Stock Exchange). This should be finalized in the third quarter of 2011. We are looking at an IPO of around $20 million,” he says.

Peru’s government is looking to stimulate investment in other biofuel projects in the jungle (sugarcane for ethanol) and highlands (rapeseed for biodiesel), according to Julia Justo, who runs the state’s National Environment Fund (FONAM).

The other major possibility is biodiesel made from palm oil. Besides Agricola del Chira, the Romero Group also has palm oil plantations in the northern jungle, where it produces palm oil for human consumption, but could move into biodiesel as crops spread. LF

a higher price than ethanol made from other sources, such as corn. In the case of Peru’s northern coast, both Maple and Agricola del Chira are also planting on barren land, which means they are not clearing any vegetation that would have a negative impact on carbon emissions. All this helps bring in a higher price for the product.

The company is finishing the process for certification through Germany’s Roundtable for Sustainable Biofuels (RSB), which develops and maintains global standards for biofuel production.

Maple’s ethanol project is a pilot project for RSB and certification from the organization, which is expected in the third quarter of 2011, will allow it to eventually export to the EU under favorable carbon- reduction standards.

Cleaner diesel Aside from ethanol, companies are looking to produce other types of biofuels on Peru’s coast. For instance, Peru’s Heaven Petroleum Operators (HPO) is developing 50,000 hectares in the southern Ica department to grow jathopha, also known as physic nut. Jatropha is considered one of the top alternatives for biofuels due to the high oil content of its seeds and minimal water requirements.

HPO recently concluded a deal

order to supply Lima,” Llosa adds. The company expects to resume

exports once it reaches full capacity at the end of 2012. Free-trade agreements Peru has signed with several Asian countries, the European Union (EU) and the US, create multiple options for exports. But Llosa says the EU offers the best conditions due to new rules that will require member states to lower carbon emissions.

Green ExportMaple Energy, which owns 13,500 hectares of land in Piura, also plans to export to Europe. It will have 7,800 hectares planted by the second half of 2012 and has the capacity to produce 35 million gallons of fuel-grade ethanol.

“We sit just 25 kilometers from a deep water port (Paita) where we can ship to Japan, EU or the US. Our principal market, however, will be Europe with exports likely entering Rotterdam,” says Rex Canon, President and CEO of Maple Energy Canon.

Maple has a contract with Penta Tanks Terminals, a subsidiary of Peru’s Andino Investment Holding, which will build and operate ethanol storage tanks and a submarine pipeline to upload ethanol to tankers for export.

Maple’s ethanol project requires $254 million in investment from private and multilateral sources. Of that amount, $105.5 million came from equity investments, including $28 million raised through the public markets in June 2010 and $12.5 million in preferred equity from a local infrastructure investment fund managed by Peru’s AC Capital Partners. Maple provided the remaining equity.

Meanwhile, $148.5 million took the form of long-term, senior secured debt financing raised in 2010 from the Andean Development Corporation ($65 million), Dutch development bank FMO ($33.5 million), Inter-American Development Bank ($25 million) and Peru’s Interbank ($25 million).

Canon says the decision to export to the EU rather than other markets results from Maple producing “a very efficient ethanol in terms of greenhouse gas reduction.”

Sugarcane-based ethanol receives

Europe will be Maple’s primary market, Canon

corporate sustainability


for the sector, there were bright spots. Telemar Oi, the Brazilian operator of the Oi telecom brand, actually improved its compliance ranking between 2009 and 2011 to 59% from 55%. Increased transparency, improvements in corporate governance and overall management quality as well as consideration of a greater number of risk areas drove the improved rating.

Telefonica Colombia, meanwhile, led the sector with a final tally of 65%, bolstered by a score of 75% in compliance but dragged down by low ratings for performance (33%) and risk (23%). While such percentages are enough to put it well ahead of other leading telecoms in the region like Oi (53%), Vivo (47%) and Telmex (45%), it remains significantly

LatAm telecom companies performed worse this year on a series of metrics measuring social responsibility,

corporate governance and overall sustainability, according to a study by LatinFinance in association with consultancy Management & Excellence (M&E).

“Performance scores among telecoms this year ranged from 16%-33%, all very weak scores,” says William Cox, managing director at M&E.

The sector faced more stringent compliance guidelines in 2011 when compared to previous years, though this is the first year M&E has analyzed the sector as a whole. Most were not up to the challenge. “Telecoms have not yet discovered sustainability as a mechanism for driving investor interest, employee productivity or sales,” Cox says.

The study measures companies according to three metrics: compliance, risk, and performance. All three are combined to yield an overall final score. Compliance measures the number of sustainability metrics, such as having a corporate code of ethics, which a company attempts to fulfill. For example, if management tries to comply with just 33 of the 157 categories covered in the survey it will receive a compliance score of about 21%.

Scores are generated in a similar way for performance, but it calculates how often a company delivers on its compliance intentions. Risk, meanwhile, computes the level of volatility in a company’s metrics from year to year. Companies that excel on the survey typically have a narrow spread between performance and compliance, according to Cox.

To achieve a good result, companies need to demonstrate quantifiable performance improvements and stability in areas as diverse as emissions and

LatAm Telecoms Fall in Ratings

LatAm telecom companies faced a tougher compliance questionnaire this year. Despite some improvements, most fell short.

by Staff Reporters

employee work days lost, as well as earnings per share and debt costs. They must also demonstrate consistency and stability in past and current performance.

The performance section of the questionnaire was new this year. Telecom companies had performed better in previous years when they were only asked to identify which aspects of corporate sustainability they were seeking to address.

This time they were also evaluated on how much progress they were making toward their goals and on specific data points such as percentage of emissions reductions and earnings per share. By these metrics, telecom lags other sectors M&E tracks, such as mining and energy.

Despite the general poor performance

Investors aren’t hearing progress from telecoms

corporate sustainability


the NYSE, for example, are forced to submit a form 20F to the SEC, detailing consolidated figures for executive compensation. Although such reporting is common in developed countries, LatAm companies tend to remain closed with

regard to management remuneration.

Investors are likely to increase the pressure on LatAm entities not only to be more transparent on sustainability initiatives, but also to demonstrate that investments in the sector are yielding positive cashflows. MSCI has plans to rate the entire investment universe of 8,500 companies worldwide on sustainability measures. “Sustainability is going to increasingly drive demand for equity as it becomes perceived as a fundamental indicator of effective management,” Cox adds.

Meanwhile, Brazilian companies that have done consistently well in the survey have shown to outperform the Bovespa. A market cap-weighted index of 27 companies outperformed the overall Bovespa by 114% last year. However, much of that performance was driven by Vale, which accounts for nearly a quarter of the index and generated a staggering 86% return last year.

Indeed, the top Brazilian companies are already close to fulfilling all their compliance requirements with the Global Reporting

Initiative, an organization which produces international sustainability reporting guidelines.

In general, companies perform best with regard to having a complete code of ethics. They tend to stumble on more difficult points such as being a member of the Dow Jones Sustainability Index or for rotating auditing firms every few years. LF

companies take sustainability seriously,” Cox says. “The big ones such as Vale [are] investing over $100 million annually in this area. If we were to consider environmentally relevant modernizations, these investments could

easily be in the billions.” The banking sector performed the best

overall, with other sectors only producing one or two companies in the top rankings. Companies that have listed ADRs tend to perform better in the rankings, but overseas listings aren’t always a guarantee of good management.

Companies listing their ADRs on

below scores for companies in other sectors.

“Telefonica Colombia excelled with consistent improvements in financial data and improving employee satisfaction results,” Cox says. “But a final score of 65% is not good.”

In comparison, LatAm’s largest extraction companies tended to outshine on their survey, with Brazilian mining company Vale reaching a compliance grade of 86% and a final score of 79%, followed by Brazilian steel concern Usiminas with 69% and 61%.

Brazil remains the most advanced country in sustainability compliance. “Brazil is far ahead of the others, with Chile, Colombia and Mexico following,” Cox says. “The top Brazilian companies are world class in sustainability.”

Eight Brazilian companies, including two banks, are members of the Dow Jones Sustainability Index, the only LatAm country with companies represented in the index. Despite being the region’s second-largest economy and having well-developed capital markets, Mexico lacks a single blue-chip company represented.

Mexican cement company Cemex, for example, fell short with -11% in sustainability, due to high risk caused by volatility in key performance data and low performance. Volatility in its EPS over the last three years is over 700%. Earnings per share have swung from $0.09 per share to -$0.04 per share over the last five years. However, it improved in areas such as work days lost, dropping to 3.2 in 2009 from 5.2 in 2007.

“In general, only the Brazilian

Performance of Largest LatAm Extractive Companies 2011Brazil still leads

Vale Usiminas Codelco GMexico Cemex

Brazil Brazil Chile Mexico Mexico

Compliance

Percentage 86% 69% 42% 34% 61%

Performance

Percentage 56% 35% 18% 34% 25%

Risk Score

Percentage 17% 29% 18% 27% 108%

M&E Final Score

Percentage 79% 61% 46% 45% -11%

Rank 1 2 3 4 5Source: Management & Excellence

Performance of Largest LatAm Telecom Companies 2011Colombia at the top

Telefonica Colombia OI Vivo Telmex Digicel

Colombia Brazil Brazil Mexico Jamaica

Compliance

Percentage 75% 59% 36% 32% 1%

Performance

Percentage 33% 38% 24% 16% 0%

Risk Score

Percentage 23% 41% 15% 8% 0%

M&E Final Score

Percentage 65% 53% 47% 45% 7%

Rank 1 2 3 4 5

Source: Management & Excellence

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european private equity


Cate Ambrose, president and executive director of the Latin American Venture Capital Association (Lavca) echoes such sentiments. “There are very limited opportunities in [Europe’s] domestic markets to invest in growth. In terms of growth, Latin America is quite attractive as compared to the kinds of opportunities they might see at home,” she says.

The perception that LatAm is now more stable, both politically and economically, on a long-term basis, is also driving interest in the region among European GPs. “I would go so far as to say that the tables have turned with regard to asset classes and destinations for investment and uncertainty,” says Rupert Hayward, director, Salamanca Capital Investments. Salamanca raised a 500 million euro global real estate fund in 2007 that has invested in Brazil and Poland. “Brazil has become very stable, far more predictable with regard to where people see it going in the near to medium-term future.”

But while the region has seen significant increased investment from public equity and fixed-income investors, the private equity asset class is only now just starting to bloom as investors establish a history in LatAm. Private equity funds, with investment horizons that can stretch many years, are particularly sensitive to the need for long-term trends in politics, inflation and sustainable GDP growth. That level of macroeconomic stability is still relatively new in LatAm.

Round TwoAlthough many European funds are scouring the region for the first time, many

LatAm’s macroeconomic growth story over the last several years is now a familiar one. But for

European investors seeking exposure to the growing class C, as the region’s middle class segment is called, options are limited. Private equity is often the best and sometimes only way of fulfilling such needs and as a result is generating considerable interest among Europeans.

“The stock exchanges are quite small, and there’s not lots of listed companies on them,” says Sven Soderblom, a partner with Spanish firm Arcano Group’s asset management division which is also involved in private equity. Arcano has about $1.4 billion assets under management, with about 10%-15% in LatAm.

Most exchanges in LatAm still tend to be heavily weighted toward companies in the natural resources sector, and offer little in the way of consumer and retail exposure.

“If you want to access the growth in the middle class, the best industries to be in are consumer and retail,” says Alvaro Gonzalez, investment director responsible for LatAm with Altamar Private Equity, a Spanish firm. “These companies are very difficult to find in the public markets. So that’s why private equity is, I wouldn’t say booming, but there is a lot of interest.”

The relative dearth of public equity opportunities in sectors tied to middle class consumption is leading to increased interest among institutional investors for LatAm private equity. Although the asset class continues to be dominated by US-based funds, European GPs are increasingly looking at the region as well, according to Miguel Zurita Goñi, partner with Spanish PE firm Mercapital, which manages 1.4 billion euros.

“We definitely see an increase in [interest in] Latin America, but not just from private equity firms, but from

Let’s Try That Again

European funds are increasingly eyeing LatAm PE in an effort to gain exposure to the growth in middle class consumption. But can they avoid the mistakes of the past?

by Jef Cozza

investors and corporates in general,” he says. Two factors are driving the region’s appeal, namely decreasing GDP growth in Europe and a growing belief in the long-term macroeconomic stability of LatAm.

“There were plenty of opportunities in Europe until recently,” Zurita explains. “There was a lot of low hanging fruit.” Since the crisis, however, relative expectations for GDP growth have inverted. According to the World Bank, the eurozone economies are collectively expected to grow at only 1.7% in 2011, while LatAm is expected to grow at 4.5%.

“In Europe the growth scenarios are very low,” Gonzalez says. “They’re certainly not going to benefit from 5%-6% growth in the economy, and that’s what they’re going to try to look at in Latin America.”

Fund-of-funds strategy makes sense: Soderblom



cannot leverage in dollars, for example. People got burned.”

That history has made US private equity funds gun-shy on the region, while European investors are looking at the region with fresh eyes and hence more willing to invest there.

Lessons LearntEuropean funds say they have learned the lessons of the past and are opting to partner with local managers, who can provide guidance on how to navigate investments on the ground where targets are often family-owned. “Private equity is

a local market,” says di Lorenzo. “You need to understand the local culture, the local environment. You need to have the right relationship.”

In general, most firms are now following a model similar to Blackstone’s. “They partnered with guys like Patria with a lot of experience in the Brazilian market,” Gonzalez says. “But they are not landing there with 10 American guys trying to do deals there.”

“There’s a lot of debate about the whole concept of fund-of-funds or fee-on-fee,” says Arcano’s Soderblom. “For these kinds of situations, a remote market far away, it makes sense. The alternative is to recruit an internal team to go out and do the work, or take a lot of risk and invest in the wrong team.”

Coinvestment provides another avenue for GPs looking to invest in the region without having to source investment themselves, according to Gonzalez. “A lot of the funds in Latin America, with few exceptions, are not huge, $300-$500 million at most,” he says. “They’ll find target companies that are too big for their own digestion, so they will offer coinvestment [opportunities].”

Bolt-on StrategySome PE investors say their interest in LatAm stems mostly from a desire to find bolt-on acquisitions to existing, Europe-focused, portfolio companies. “The most successful companies in Spain have

expanded internationally, in particular in Latin America,” says Mercapital’s Zurita. “Probably over 50% of the revenues come from outside Spain. So we see that as a natural evolution.”

Zurita says Mercapital is able to combine European buyers that have mature corporate governance, reporting, and technology with LatAm companies able to provide exposure to a rapidly growing market.

“Integrating a Spanish business with a Latin American business makes an appealing story for public equity markets,” he

GPs remain cognizant of the last time wave of private equity investments in LatAm. The results were not encouraging.

US private equity funds, such as DLJ, Hicks Muse and Warburg Pincus, invested heavily in the region in the late 1990s on the back of the internet boom, only to be burned when Brazil and Argentina devalued their currencies and the technology bubble burst. According to Ambrose, fundraising reached a peak of $3.6 billion in 1998, but by 2000 had dropped off dramatically and continued to do so for five or six years.

“You had the US investors coming in, and they came in too early in the region,” Marcelo di Lorenzo, partner, managing director and head of Brazil for 3i Group, tells LatinFinance. The firm recently opened an office in São Paulo with five investment professionals and has 12.7 billion pounds under management. “I think the macroeconomic environment was not as stable as it is today. And what happened was they didn’t fully understand the complexities of investing in Latin America and they made mistakes.”

US funds tried to follow the same investment script they used for their domestic investments, Gonzalez says, particularly when it came to the use of leverage. “The main problem back in the 1990s was not that the [portfolio] companies were bad, corrupt, or badly managed, but because they put leverage on the companies, and they put leverage in dollar terms,” he adds.

When Brazil devalued its currency in 1999 and Argentina abandoned its convertibility peg to the US dollar in 2002, portfolio companies were left with revenues in swiftly inflating local currencies, while trying to service dollar-denominated debt.

“They came with a very US-centric view of the world. They applied that model here,” says di Lorenzo. “PE funds need to use a more cautious model when investing in the region. You

US investors came in too early: di Lorenzo

Fundraising Investments Exits0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,0002007 2008 2009 2010

Source: Lavca

LatAm PE/VC Last Four Years ($m)Exits still haven’t recovered



says. “Our strategy is to help middle-size companies in Spain to expand into Latin America through acquisitions.”

Zurita adds that he sees Brazil, Colombia, Mexico and Peru as the markets in which Mercapital is most interested. The firm has opened offices in São Paulo and Miami. “We would love to have one in Colombia, one in Peru, one in Mexico, but we don’t have the size to do that.” Mercapital is focusing on investments in the healthcare, infrastructure and food sectors.

However, finding appropriate targets may be difficult for European PE funds accustomed to making substantial investments. Smaller opportunities may not be worth the trouble for larger players, Hayward says.

“A lot of these private equity vehicles want large tickets. Most of the funds want [investments worth] $150-$200 million. They need larger acquisition targets,” he says. The dearth of middle-market opportunities, what Hayward describes as the classic target for PE firms, is a result of a lack of liquidity in the capital markets. “The middle, that universe of acquisition targets for the more established funds isn’t there,” he says.

Targets that do exist at that size often lack the same level of sophistication that investors are used to seeing in sizeable companies, he adds. “Larger targets like that you would expect to have the proper corporate governance,” he says, but too often that isn’t the case. “You have to take a bit of a bet.”

Difficult DecisionsFinding the best way to invest in LatAm private equity can prove difficult, especially for European investors with little or no knowledge of the region. But the right choice can make all the difference when it comes to achieving attractive returns.

“There are huge differences between the well performing and the not-so-good teams,” says Soderblom, who also advocates a fund-of-fund strategy. “It is very difficult to invest directly into companies if you’re not very close to them, wherever it is. A lot of things happen.”

Soderblom says most European LPs prefer to invest with European fund-

of-funds in order to gain exposure to LatAm PE. The alternative would be to try to partner directly with LatAm GPs themselves, a challenge most are not equipped to handle.

“There are a lot of private equity funds that are not so big, maybe they’re on their second fund; maybe they have $100-$400 million,” says Soderblom. “That kind of fund is not that easy for a mid-sized European pension fund to find. Because you have to go out, meet a lot of private equity teams, and evaluate their track records. That’s why it makes sense to go with a fund-of-funds.”

Soderblom says that much of the value that PE brings to a portfolio company comes from operational improvements. Raising corporate governance practices up to investment standards or establishing

new reporting and accounting practices are simple measures that can substantially increase a portfolio company’s Ebitda. “It’s difficult to do that if you’re far away,” he says.

A lack of talented managers is another a major hurdle for investors looking for opportunities in what is still a relatively young sector. “There are very, very few managers with enough experience,” Altamar’s Gonzalez says. “If you want to invest with a lot of managers, you have a lot of risk because you will probably get a lot of bad managers.”

Because of the limited history of private equity in the region, there are few investment professionals with proven track records. Those who can point to a history of success are seeing their funds get over-subscribed. Meanwhile, there remains a much larger group of unproven managers who often can’t raise funds.

“You have a very limited number of professionals in the region that have survived the cycle,” says di Lorenzo, referring to the bust following the glut of late 90s investments. “Those that survived, they learned the lesson. Now they have a very successful business.”

Successful GPs can offer investors significant returns. According to Altamar, citing data from Cambridge Associates, LatAm PE returns diverge wildly. The average buyout’s internal rate of return over 10 years is only 2% for the region, compared with median returns of 12% in Europe. However, funds in the top quartile yield returns of around 30%, compared with 18%-22% for the top quartile returns in developed regions such as the US and Europe. “I don’t think there are that many GPs to partner up with that have track records. That’s the issue,” di Lorenzo says.

“Human capital is a huge constraint,” Ambrose says. “It’s particularly difficult to hire in Brazil and Colombia, for example.” Ambrose says the challenge isn’t a lack of qualified people, but that there aren’t enough experienced professionals given the huge increase in demand. “With all the global firms going into the region, it is very competitive to put together investment teams right now. There are talented professionals, but it’s a relatively limited pool of experienced managers,” she says. LF

“It is very competitive to put together investment teams right now.

There are talented professionals, but it’s a relatively limited pool of

experienced managers,” Ambrose says.

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Parting Shot

China has moved into LatAm in a big way, with over $15 billion invested there in the past years. But that amount would be much greater if Chinese companies investing

in the region could gain better access to low-cost government financing.

Chinese companies are interested in purchasing equity stakes, taking on build-operate-and-transfer (BOT) projects and building long-term investments but they need funding to carry these ambitions forward.

Chinese buyers involved in other regions outside of LatAm typically have access to cheap financing, provided by governmental banks like the Export Import Bank of China (Eximbank) and China Development Bank (CDB). But that form of loan generally requires a sovereign guarantee, which many LatAm countries are reluctant, or even forbidden, to provide.

China Eximbank and CDB are the most important lending organizations for Chinese companies going abroad. But state-owned enterprises say that China Export & Credit Insurance Corporation (Sinosure) is the key gatekeeper in getting a loan. For projects without a sovereign guarantee, government banks will generally provide funds only if Sinosure insures the loan.

Sinosure, which was formerly part of China Eximbank, has its own demands for insuring loans. Sinosure will look for either a sub-sovereign guarantee or a deal with a reputable bank operating in LatAm that can on-lend the funds.

For deals in which either Sinosure or China Eximbank is involved, at least 70% of the content used in the project must come from China or the borrower will need to take on greater risk. Additionally, Sinosure currently looks to only insure projects up to seven years, so longer term projects may need to be arranged directly with government banks.

Among the most notable examples of this structure is China Railway International’s 2010 arrangement to build a new subway line in Buenos Aires. The project is estimated to cost $1.5 billion, with the vast majority of the funds coming from China Eximbank. The terms are particularly favorable: a five-year grace period, ten years amortization and a rate of less than 4%.

The project was made possible when Sinosure agreed to recognize the city’s credit without a sovereign guarantee. The Buenos Aires project allows China to strategically open a new

market in a region that is heavily urbanized.Further sub-sovereign guaranteed loans seem likely. For

instance, this structure is also commonly used by intra-regional development banks like Brazil’s BNDES, which has its own insurance company that seeks guarantees for projects.

A successful transaction will need to offer benefits to all sides. Sub-sovereign guarantees will only be forthcoming for projects that local governments view as strategic. The Buenos Aires subway project was supported strongly by the city’s mayor who visited China as part of the process.

For more commercial projects, local banks that have a better understanding of the project’s risk profile can be engaged. These banks could profit by borrowing capital cheaply from Chinese governmental banks and on-lending to the Chinese company participating in the project. Hence there is a possibility for Latin American banks to create a large intermediary role.

Still, it is questionable whether LatAm banks are willing to take on such risks. Peter Vonk, vice-president of corporate finance and investment banking at regional development bank Corporación Andina De Fomento (CAF), remains unconvinced.

“It doesn’t sound like a very feasible situation to me, except for state-owned development banks. For commercial banks or even for CAF, we would prefer to see a risk sharing element involved. Otherwise it’s just a funding exercise as far as we are concerned,” he says.

Most of China’s participation in LatAm continues to be in the form of barter agreements, whereby the Chinese offer money or facilities in exchange for either commodities or a guaranteed offtake.

But given the number of Chinese companies looking to expand into LatAm, there is a large potential opportunity for any advisor who can develop a winning and replicable formula to securing Chinese government loans. Loan approval is principally at the discretion of Sinosure and China Eximbank, so developing a strong relationship with them and understanding their evolving criteria is key. LF

Chinese companies want to invest in Latin America, but access to cheap financing can be an uphill struggle.

by Günther Hamm

Günther Hamm

Günther Hamm is a private equity professional at CDH Investments, one of China’s largest local PE firms. He previously worked in the Latin America M&A group at JPMorgan.

Can LatAm boost Chinese Investments?

JULY/AUGUST 2011 NUMBER 219 - Nxtbook...

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