Latin Finance - April 2008 - 64

Parting shot 3. Have investable cash at hand so that you can be an opportunistic contributor but not a driver of defaults. What we are likely to see is a investor. number of one-off defaults as a natural consequence of the large volume of corporate debt issuance and the impact of macro, industry, and other 4. In doing your analysis, be sure to evaluate the “process risk” micro factors. elements along with your fundamental analysis. While theoretical Corporates have issued around $120 billion in bonds in the last five enterprise value is a starting point for your analysis, anticipation of years and there is around $347 billion of corporate bonds and syndicated the obstacles to realizing it – shareholder control of the enterprise, loans outstanding. If 10% of the bonds issued in the last five years – or difficulties of working through the legal system, different objectives 3.5% of the total corporate debt outstanding today – were to default, of the various creditor constituencies, lack of transparency, technical there would be $12 billion of defaulted corporate debt. trading factors, mark-toThe prospects for defaults market risk, etc – will allow are increased if one looks at LatAm Corporate Debt Amortizations, 2008-09 ($ billions) for a more realistic the amount of corporate Mexico spike coming valuation. debt to be refinanced over the next two years, especially 2008 2009 5.Understand that if the new issue market does Country Bonds Loans Total Bonds Loans Total TOTAL creditors will only get what not reopen soon and if bank Argentina 0.42 81.056 1.484 0.803 0.769 1.572 3.056 they negotiate, not what lenders remain cautious. Brazil 4.064 19.301 23.365 1.635 3.873 5.508 28.873 they deserve. Unlike the There will be over $80 Chile 0.520 1.059 1.579 1.597 1.888 3.485 5.064 US where virtually all billion in corporate bond and Colombia 0.012 0.150 0.162 0.000 1.000 1.000 1.162 reorganizations are done loan amortizations in the Mexico 4.380 3.545 7.925 4.838 7.226 12.064 19.989 with a predictable outcome region, predominantly in Panama 0.060 0.142 0.202 0.300 0.151 0.451 0.653 under judicial oversight, Brazil and Mexico, which Peru 0.012 0.000 0.012 0.018 0.075 0.093 0.105 most LatAm restructurings could result in a sharp spike Uruguay 0.100 0.000 0.100 0.100 0.000 0.100 0.200 are still done outside the in defaults if there is an Venezuela 0.000 1.124 1.124 0.135 0.325 0.460 1.584 courts. Further, even inability to refinance. Other 2.590 6.756 9.346 0.516 10.705 11.221 20.567 though new bankruptcy Total 12.166 33.133 45.299 9.942 26.012 35.954 81.253 regimes have been put in How to Invest place in countries like Many investors in LatAm Source: ING Emerging Markets Strategy Group, Gramercy Advisors Mexico, Argentina, and distressed debt from 2001 to Notes: “Other” is predominantly bond and loan amortizations attributed to Bermuda, used as an Brazil, there is still limited 2005 were quite successful, issuing jurisdiction experience in using them. although the systemic nature There have been some of the distress was such that curious interpretations of a somewhat indiscriminate the rules that were very detrimental to creditors’ rights, such as approach could still be profitable. In the current environment, a much Iusacell in Mexico, Fargo in Argentina, and Varig in Brazil. more selective and disciplined methodology will be necessary. We offer the following suggestions for investing. 6. Be prepared to be proactive and involved if you want to influence the outcome. Otherwise, be prepared to have significant 1. In screening performing debt trading at spreads of 1,000 basis periods where there is little public information as negotiations take points or more, try to discriminate between those cases that have place behind closed doors under confidentiality arrangements. LF been beaten down due to technical pressures and are likely to rebound versus those that have fundamental business problems along with potential liquidity issues, making them more likely to default. Robert L. Rauch is a partner and director of research of Gramercy Advisors, an 2. Do your homework upfront. The key to successful distressed event-driven hedge fund with $2.8 billion under management. It specializes in investing is investing at the right price, but that means you need to be opportunistic corporate and sovereign investment in global emerging markets. able to respond quickly when blocks of paper are offered. 64 LATINFINANCE April 2008

http://www.latinfinance.com/freetrial http://www.latinfinance.com/freetrial

Latin Finance - April 2008

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