Case Studies in Latin America: From Peru to Mexico, AmBev to Enersis
Although recession continues to plague the economies of many Latin American countries and investors remain skittish about the region, Peru in early 2002 went to the capital markets to refinance its debt.
The country’s $1.4 billion bond offering should give hope to other Latin American countries that might want to refinance their debts, said Susana de la Puente, managing director for Latin America at J.P. Morgan. De la Puente – along with Carlos Brito, director of operations at AmBev and Ricardo Alvial, chief of investments at Enersis – participated in a panel discussion on Latin American case studies.
De la Puente’s bank was the leader of a group of banks that underwrote Peru’s bonds. “Peru had not been in the capital markets for 74 years, despite the fact that it had [experienced] tremendous economic performance in the mid 1990s,” she said. Instead, the country depended on loans from multilateral organizations such as the World Bank. But when Pedro Pablo Kuczynski, a former investment banker who also spoke at the Wharton conference, became finance minister, he understood the benefit of calling on Wall Street. By doing so, according to de la Puente, Peru reduced its debt expense by $330 million.
Its bond offering solved other problems, too. The country was facing a hump in the repayment schedule for its debt, with much of it due in the next 12 years. “It needed to reprofile the debt,” said de la Puente, who is a native of Peru.
In addition, much of its debt was in the form of Brady bonds, which didn’t appeal to many investors. (Brady bonds were issued as part of a restructuring of developing-country debt led by former U.S. Treasury Secretary Nicholas Brady.) “Investors liked the idea of swapping from the less liquid Brady bonds into the new bonds,” de la Puente said. Of the $1.4 billion, $500 million was new money and rest was new bonds exchanged for the old Brady bonds.
To call on Wall Street, of course, a country needs to be able to give investors confidence that they will be repaid. Some of that confidence comes from solid economic performance and avoiding mistakes such as recent currency devaluations in Brazil and Argentina, de la Puente pointed out.
Wall Street rewards countries that don’t disappoint it, she added, citing Mexico, which, since its 1995 devaluation, has strived to put its economic affairs in order and open its markets. “Mexico has been very good about communicating with investors – providing transparency and consistent information. And the capital inflows have been pretty steady.”
Unfortunately, Latin American countries, especially the smaller ones, can also be buffeted by events beyond their control.
Consider the election of Luiz Inacio Lula da Silva in Brazil, Latin America’s most populous country. De la Puente says the ascendancy of Lula’s “leftist/populist” Workers Party makes a lot of investors nervous. “Brazil has a big impact on the rest of the market. And the big question is whether Brazil, under Lula, has the willingness and ability to honor its debt. It seems like Lula has the willingness – he’s made enough market-friendly noises. But does Brazil have the ability? We feel it does.”
That can only benefit a region where investment, particularly from foreigners, remains critical to future growth. The gross domestic products of Latin American countries track capital inflow, de la Puente pointed out. “There has been more capital outflow in the countries that have mismanaged their economies.” Outflow creates a vicious cycle in which interest rates rise, investment decreases, and deficits increase. That, in turn, leads to even less access to the market and more expensive debt. “The perfect example of this is Argentina,” de la Puente said.
“Latin American is a net importer of capital,” she added. “Capital inflows – foreign investment and investment by locals – are really the only solution for permanent growth for all these countries. How do you attract it? The answer is confidence, confidence, confidence.”
Investor confidence depends not only on government economic management but also on fostering well-managed public companies such as Brazil-based AmBev, Latin America’s largest beverage company, and Chile-based Enersis, its largest electric utility. AmBev is also the world’s fifth largest brewer, said panelist Carlos Brito, the company’s director of operations. It has 17,000 employees and 52 plants. Its revenue has lately grown at an average of 20% a year and its earnings before interest, taxes, depreciation and amortization, at 34%.
During his 13 years at AmBev, Brito has come up with what he calls “a business survival kit for South America.” Foremost, cash is king. “We do everything we can to [reduce costs]. We have got to extract all the cash we can from the business because credit markets aren’t as developed in Latin America.” Latin American companies can’t count on loans the way U.S. companies can.
Even when they can get loans, those loans tend to be more expensive than they would be for a comparable company in the United States or Europe. So a company’s capital structure – its level of indebtedness – has to be very conservative, Brito said. And like any company anywhere, it has to constantly compare its performance with others in its industry and, where it finds itself wanting, make improvements.
Panelist Ricardo Alvial, Enersis’ chief of investments and risks officer, also has come up with rules for doing business in Latin America. A utility such as Enersis, he pointed out, depends on debt; it has $9.2 billion worth. So it has to have access to the capital markets. That requires sound financial management to retain a high credit rating as well as close contact and clear communication with investors. “You have to be consistent with your long-term corporate goals.” What’s more, in periods of instability, growth can be postponed. But when a company does that, it must look for ways to improve its efficiency and productivity.
Enersis does business in Chile, Brazil, Argentina, Colombia and Peru. It grew from $600 million in assets in 1991 to $16.1 billion in 1998. In 1999, Endesa, a Spanish power company, bought a controlling stake in the company.
Finally, Alvial said, companies doing business in Latin America have to give investors the sort of financial transparency that the best companies in the United States and Western Europe do. Their financial statements have to give a complete picture of their activities.
"Not to have skeletons in the closet, not to have off-balance-sheet accounts, that’s the key. We always try to say exactly what’s going on with the company. Investors deserve to know that."
It’s a lesson some U.S. companies should heed, too.