Raising finance for Latin America, never easy, became a lot harder last year. In each of the region’s main economies – Argentina, Brazil and Mexico – governments and corporations executed fewer deals than they did in 2000. In the case of Argentina, the reasons are obvious. In Brazil, investors and businesses struggled to make sense of a directionless economy as the currency leaped about unpredictably. Mexico’s recession slowed down capital markets operations.
The fact that Mexico had so few deals in LatinFinance’s selection of top transactions in 2001 reflects its shift from an emerging market economy to one that is more closely aligned with the United States. Most deals in Mexico were remarkably simple and straightforward because there was little need to design complex transactions required in more volatile or uncertain markets. Says Peter Gerraghty, managing director at Darby Overseas, “Boring is good. Mexico has shown it does not need to do any fancy deals to close deals when it wants to.”
Brazil, where the year began with so much promise, is the country where financiers had to work the hardest. A slowing economy, the fear of contagion from Argentina, declining volumes of foreign direct investment, a volatile exchange rate and growing political uncertainty with the approach of the October 2002 elections made Brazil a harder story to sell than usual.
Yet companies, banks and the government itself still required financing. Investment bankers had to come up with structures that enabled clients to raise money at a reasonable cost by giving investors sufficient comfort to maintain exposures to Brazil. This is why nine out of the 16 best deals LatinFinance selected as last year’s top transactions are from Brazil.
Risk mitigation, one of the main themes to emerge from the region this year, started in Brazil when Petrobras, the national oil company, began issuing bonds with political risk insurance in a series of transactions run by UBS Warburg. The Central Bank, which manages the government’s debt, further burnished a reputation for skill and sophistication with its approach to liability management. A clever $2.15 billion Brady bond exchange put together by Citibank and Credit Suisse First Boston takes this year’s liability management prize.
The rare equity deals that got done last year came mainly out of Brazil, with blockbuster issues from Embraer, the regional jet maker, and Petrobras. These deals underscore the extent to which investors are only interested in big, liquid stocks with global appeal. Only a few Latin American companies qualify and most of them are Brazilian.
And it is no accident that some of the most challenging corporate finance transactions took place in Brazil. The mind-bending complexity of reorganizing former state-owned companies was a major theme last year. It took bankers 30 months to tease Companhia Siderúrgica Nacional apart from Companhia Vale do Rio Doce, a deal that takes a prize this year for corporate reorganization.
The government’s sale of Companhia Petroquímica do Nordeste (Copene), which takes our prize for privatization of the year, was another complicated and time-consuming deal. Some may complain that this transaction was not a true privatization since Copene was formerly a private-sector company until the state absorbed its parent, the failed Banco Econômico. Our argument is that any transaction that results in the transfer of control from the state to the private sector counts as a privatization.
Of this year’s 16 top deals, nine were led by JP Morgan or Citigroup. These giants of Wall Street also worked together on one transaction when they advised the buyers of Copene. The traditional investment banking houses, such as Goldman Sachs and Morgan Stanley, did not keep up the same pace. Goldman worked on two prize-winning transactions, the sale of Banamex to Citigroup as well as Colombia’s $750 million bond. Morgan Stanley and Merrill Lynch each worked on only one of our winning deals this year.
Citigroup and JP Morgan, and the European banks such as Deutsche Bank, use their huge balance sheets to help them win investment banking mandates often by offering cut-rate advisory services but making up the loss by selling clients commercial banking services. In spite of the tremendous consolidation in the industry, banks are less willing or able to do deals alone, especially those that require large chunks of capital such as handling bond issues. Nomura was the only bookrunner to sell a big sovereign bond alone, when it placed Brazil’s ¥200 billion Samurai bond.
Although the leadership of the giants of Wall Street is not in dispute, the European houses notched up some impressive deals. CSFB worked on the Brazilian debt exchange, UBS pioneered political risk insurance in Brazil and Deutsche Bank backed a syndicated loan with oil.
It is only appropriate to end with Argentina. The role the international financial community has played in that country’s calamity and the responsibility of the investment banks in its downfall will be ceaselessly debated. One thing that is clear is the largest and perhaps most complex deal of 2001 – Argentina’s $30.5 billion debt exchange in June – was also the worst. It added $2.5 billion to Argentina’s debt and stuck investors with lower-yielding bonds that Argentina defaulted on six months later anyway. The only winners in the deal were the investment banks that pocketed $137 million in fees.