LatinFinance - May/June 2016 - 43

group's hospitality division.
"A company would decide to conduct
an IPO to raise capital for investment, but
we are in the opposite situation, we have
cash in hand and looking for the right
investment projects that meet our requirements. If we would need funding, a loan
is still more attractive to a company with a
proven track record, even if margins might
get wider. It is faster, more efficient and less
demanding in requirements such as paying
for a credit report," Poma says.
Size, and control, matter
The private sector in Central America is
dominated by small companies, many
of them startups, with modest financing
needs that tend to be served by the banking
sector. If these family-owned companies
limit their growth to within national borders, why should they resort to the more supervised, complex and demanding capital
markets?
"They would need to open the books
to international investors if they seek to
scale the company to the next level, that is
when corporate governance becomes a key
aspect," says René Medrano, senior director
for financial institutions at Fitch.
Jaspe points out that more subjective
considerations can influence a company
owner when deciding whether to go public
or not. "There's a factor related to human
nature, it's control. How do you tell someone that he or she must relinquish control?
It's a painful process."
Grupo Melo's example has been followed
by others in Panama, such as insurance
company Grupo Assa, and conglomerates
Rey Holdings and Unesa (Unión Nacional de
Empresas).
"Investors want to make sure that they
are working with similar minded corporates," Stanley Motta, chairman at Grupo
Assa, president at consumer goods importer Motta International, and chairman
at Copa Airlines, tells LatinFinance. "All
companies must understand that they are
being measured not only based on results
and performance, but also environmental
and social responsibilities."
Need for enhanced regulation
Panama has one of the more investorfriendly financial systems within Central
America. But risks remain.
Bond issuers can tap the market without being rated, for example, something
authorities are trying to change. In August
2012, RG Hotels company sold at par an un-

LUC GRILLET, IFC

"ENTREPRENEURS
ARE CRITICAL TO
THE REGION'S
ECONOMIES BUT
LACK THE FINANCIAL
SERVICES NEEDED
TO INCREASE
PRODUCTIVITY AND
GROW THEIR
BUSINESSES"

rated 8.25% $15 million 2017 bond. In February 2015, the real estate company came
to the markets again to raise $15 million
through a short-term instrument priced at
a fixed rate of 7.25%. Additionally, it took
out a $5 million loan from state-owned bank
Caja de Ahorro. When a new management
took over RG Hotels in June 2015, they
discovered irregularities and allegations of
fraud. The company declared bankruptcy
by December.
Panama's stock exchange authorities
are now pushing legislators to make credit
ratings mandatory for bond issuers. Of
course, that does not remove risk, though.
Companies can deceive ratings agencies,
while some investors are happy to take on
high-risk paper, notes Marelissa Quintero,
superintendent at the Panama bolsa.
Globally however, financial institutions
are being obliged to enforce more rigorous compliance processes and Know Your
Customer (KYC) procedures.
Panama has long battled negative
perceptions in the international financial
community about its use as a tax haven and

a conduit for illicit funds, and this made
many global banks wary. So when the intergovernmental Financial Action Task Force
(FATF) in February 2016 removed Panama
from its Anti-Money Laundering/Combating the Financing of Terrorism watch list,
citing "significant progress", Panamanian
authorities hailed it as a victory. However,
the recent revelations of the "Panama
Papers" have prompted further calls for
increased scrutiny.
The IFC's Grillet says that during the
nearly two years which Panama spent
on the FATF's "grey list", the World Bank
financing arm was not able to do business with or invest in enterprises which
had holding companies based there. This
prevented access to long-term funding for
at least a dozen projects.
At a corporate level, multilateral lenders
have requirements which make it all the
more important for companies in Central
America to improve corporate governance
practices.
The IFC's rigorous due diligence process for evaluating an investment project
includes an assessment of a company's
corporate governance framework.
"IFC considers a range of areas: the company's commitment to good governance,
whether the Board of Directors is up to the
job of steering the company, whether the
controls within the company are appropriate, corporate transparency and disclosure
practices, and the degree to which minority
shareholder rights are respected," Grillet
says.
For this reason, it is precisely Central
America's smaller enterprises and startups
- together the largest employers in the region - which can most benefit from greater
transparency.
"These entrepreneurs are critical to the
region's economies but lack the financial
services needed to increase productivity
and grow their businesses. For example,
57% of all Nicaraguan businesses, including
28% of large companies, report difficulty in
obtaining loans," says Grillet.
Companies unwilling to invest in compliance and corporate governance are
destined to fail, says Marlon Tábora, the
Inter-American Development Bank (IDB)
executive director for Central America.
He calls for an end to the existing mistrust
between the public and private sectors in
the region. The public sector also needs
to strengthen its institutions and enforce
compliance policies, so all players can act in
a fair and even playing field. LF

May/June 2016 - L ATINFINA NCE.COM 43

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