Opportunities%20for%20Corporate%20Finance%20in%20Latin%20American%20Capital%20Markets

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Opportunities for Corporate Finance in Latin
American Capital Markets

• John C. Edmunds
• Professor of Finance
• Financial Columnist, América Economía
• March 2006

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Overview of World Capital Markets

• Demand for bonds and stocks is very strong.
• Hundreds of millions of people are buying
  securities every month.
• The dollar value of bonds, common stocks, and
  bank deposits now exceeds 150 trillion, more
  than three times the value of world annual
  output.

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Overview, 2

• Latin American companies have issued corporate
  bonds recently, but
• They have not issued as many as the market will
  absorb.
• The total amount of private debt securities
  outstanding in Latin America was only 12 of GDP
  in 2003.

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Overview, 3

• The total amount of private debt securities
  outstanding in Latin America was still only 11
  of GDP in 2004.
• For those same years, the amounts of private debt
  securities in Canada were 38 and 41 and of GDP.
  
• Latin American companies issued more bonds in
  2005.

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Overview, 4

• Latin American companies can issue MORE BONDS.
  If they issue approximately US800,000 million
  more private debt securities, the regions ratio
  of private debt to GDP will reach Canadas.
• The collateral exists in Latin America to support
  that amount of private bond issuance.

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Overview, 5

• The total amount of private debt securities in
  Latin America would then be approximately 1 000
  000 millions.
• That figure sounds large but the world capital
  market is MUCH larger.
• 1 000 000 millions is less than 3 of the total
  amount of bonds that exist in the world.

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Overview, 6

• During 2005 Latin American companies were able to
  place bonds in international markets and also in
  local markets.
• Total private bonds outstanding increased
  approximately US20,000 million in five
  countries.
• Local bond markets were VERY receptive to new
  issues.

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Overview, 6

• Latin American equity markets also absorbed new
  issues of common stock.
• The strong performance of these equity markets
  was due to the capital market reforms that five
  countries have put into effect.
• The commodities boom helped but was NOT the only
  reason for the rally.

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Local Buyers

• The buyers of these newly issued bonds and stocks
  include LOCAL pension funds and mutual funds.
• International portfolio investors are also buying
  but the local buyers are maintaining a steady,
  firm tone to these markets.

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Implications for Corporate Financing Alternatives

• Historically Latin American companies borrowed
  from commercial banks in the countries where they
  were operating or from commercial banks in
  financial centers like London.
• These loans were short term and often were
  denominated in foreign currency.

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Implications for Corporate Financing
Alternatives, 2

• In the past, companies in Latin America had to be
  very wary of using borrowed money.
• The cost of borrowed money was very volatile.
• Companies now have a much better range of
  financing possibilities, and should not be as
  wary of using debt financing.

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Implications for Corporate Financing
Alternatives, 3

• Latin American companies can now more easily
  match the maturities of their debt to the
  maturity structure of their assets.
• The era of financing fixed assets with short term
  debt is coming to an end.

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Implications for Corporate Financing
Alternatives, 4

• Latin American companies can now create natural
  hedges for exposure to foreign exchange risk.
• They can borrow local currency and foreign
  currency in the proportions that match their
  local currency and foreign currency cash flows.

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Implications for Corporate Financing
Alternatives, 5

• Latin American companies can also consider
  issuing equity securities in local markets.
• There have been many initial public offerings in
  Brazil and Chile and many more are in the
  planning stages.
• Equity markets are functioning well and can
  perform a larger role in raising capital for
  private companies.

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A New Competitive Environment

• The financial policies of many Latin American
  companies used to be very conservative.
• They did not use much debt financing.
• They did not list their shares on local stock
  exchanges.
• These policies now need to be reviewed.

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A New Competitive Environment, 2

• Now the companies that take advantage of the new
  opportunities that capital market reforms have
  created will have an advantage.
• The amount of capital they can safely use will be
  larger than it used to be
• And their cost of capital will be lower.

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Conclusion

• The wave of capital market reforms in five Latin
  American countries has made Latin American
  securities more attractive.
• The worlds appetite for Latin American bonds and
  common stocks has not been satisfied.
• Latin American companies can issue bonds and
  stocks and place those successfully.