Latin Finance - April 2008 - 62

Inside source Corporate Struggle Ahead What is the mood in Latin American markets? From a volatility-adjusted perspective, all emerging markets – be it debt, equity or local currency – have all behaved incredibly well. The reason for that is they haven’t been the problems. Sovereigns in general will be fine, apart from the ones with high debt to GDP. Latin America, apart from Argentina, is in pretty good shape. So you’re either a country like Brazil that’s improved to no end, or Colombia – these countries that are virtually investment grade or on the cusp of investment grade – or you’re a country like Ecuador or Venezuela where real debt-to-GDP is incredibly low anyway, and more importantly, you’re two of the biggest oil producers in the world when oil is at all time highs. People worry about the politics, but I’m more interested in whether they can pay their coupons. In a situation where the world economy is lowing down and it’s difficult to refinance, you can’t get a better credit than Ecuador: a dollarized economy with low-debt to-GDP, and high levels of commodities. I’m slightly concerned with this Brazilian tax on overseas investments. It’s not the greatest step I’ve ever seen at a time when financing is a problem. I would have left things as they were. In this environment, the rating agencies want any excuse to not to upgrade someone to investment grade. I think corporates will struggle. There seems to be a slight disconnect between what’s going on in the world and what’s going on in some equity markets. I think the equity markets are far too stretched in LatAm if you compare valuations around the world. CVRD is an incredibly well-run company, but I don’t understand why they want to do a deal with Glencore and Xstrata. The cost of financing will be so high that they will have to loose their investment-grade rating. So that cannot be good for shareholders and it certainly isn’t good for bondholders. The same example would be [JBS] Friboi or any of the meat companies. They’re expanding like it’s going out of fashion. They haven’t got enough cash. I think a couple of the meat companies could go bust this year. Simon Treacher Corporates face challenging times, says Simon Treacher, senior portfolio manager at BlueBay Investment Management, with over $6.0 billion in LatAm of its $16.4 billion under management. Venezuela should certainly be doing more on the debt management side. Colombia may have to do an outright exchange. Argentina is different, I think they’ll continue to issue regardless of the markets. They did nothing last year in debt management, and I don’t think they have any interest in doing it this year. This idea that the old debt is going to be looked at – there is no chance in a million years, in my opinion. A couple of corporates have come out this year and said, we’re going to issue this year because were doing capex or expansion. You have to pay a high premium in these markets. If your spread is, for example, 150 over, and you wanted to bring $1 billion, you wouldn’t be able to bring it for less than 180 over, which Petrobras saw earlier this year. How has your own allocation to LatAm changed relative to other regions? I’m overweight in LatAm. I think Asia is a bit complacent on the global slowdown story. I don’t think the countries have done enough to reduce debt to GDP. The spreads are being paid, and it’s just not attractive enough. I’d rather take a basket of Latin America – Ecuador, Venezuela and Colombia – and net-net my spread is much, much higher. What names do you like or dislike? The country I’ve reduced has been Argentina. If you have an inflation-linked market and then try to re-jig your inflation because the numbers are too high, and you’ve paid the coupon, as investor as far as I’m concerned that’s an NPV haircut. I’ve got no problems with Venezuela or Ecuador. They’re willing to pay and they’ve got the money. I’ve owned Ecuador since November 2006, and I continue to add to that position. We’ve added to Venezuela recently. We continue to be favorable towards Colombia because of the US support and the positive investment-grade story. In Brazil, we’ve tended to favor local currency, but we’re monitoring the tax situation quite closely. On the corporate side, BlueBay continues to like electricity and telecom sectors given their defensive nature. Our top picks are Maxcom in Mexico, ISA in Brazil, and EEB in Colombia. We are negative on select credits in the airline sector, such as Gol, and meat industry, such as Friboi, in Brazil, as well as credits with high M&A risk, like CVRD. LF Where will see supply this year? As we look at sovereigns in Latin America, apart from Argentina, most of them don’t need to come to market this year. Brazil continues to buy back external debt. I still think Ecuador could do some debt management, so if anything they’ll be buying back debt. 62 LATINFINANCE April 2008

Latin Finance - April 2008

Table of Contents for the Digital Edition of Latin Finance - April 2008