Latin Finance - May/June 2011 - 2

Front Notes

Scylla and Charybdis
eruvians went to the polls in April to send nationalist Ollanta Humala into a June 5 runoff with Congresswoman Keiko Fujimori, setting up a battle between right and left that may leave centrist voters scratching their heads on who to pick in the next round. Both candidates come with high rejection levels among voters. With average GDP growth of over 7% for the last seven years, what markets fear most in Peru is a change in direction. But Humala’s victory over a crowd of stay-the-course candidates indicates radical change might be exactly what Peruvian voters are seeking, markets be damned. The five-year CDS on Peru’s sovereign debt rose ahead of the first round as Humala’s lead over his rivals grew, only to fall as worries of a potential leftist administration fell. Investors fear the possibility of resource nationalism rearing its head in a country that is the world leader in silver production, second in copper, in the top five in lead, tin and zinc, and number six in gold. Humala has said a new approach to resource management is needed, and has proposed windfall taxes. His 2006 campaign was endorsed by no less than Hugo Chávez. His opponent, on the other hand, is the daughter of disgraced former president Alberto Fujimori. Fujimori père is serving a prison sentence for human rights abuses, including murder, kidnapping, and crimes against humanity, carried out during his administration. Nobel prize winner Mario Vargas Llosa has described the choice left to Peruvian voters as that “between cancer and AIDS.” More sanguine analysts point to Humala’s last run at the presidency in 2006, when he polled well in the first round only to fall to Alan García in the second. With poverty levels dropping from 45% at the time of the last election to around 35% today, Humala may have even less appeal than he did then. Meanwhile, Humala’s coalition is likely to cobble together only 30%-35% of the votes in Peru’s congress, restricting the level of radical change he could implement. The country’s strong fundamentals, including large trade surpluses, significant domestic demand, and an independent central bank, are unlikely to be seriously threatened by a Humala administration, no matter how strident. Humala himself has made noises about moving to more centrist positions, though the sincerity of his comments remains to be seen.

NEWS Editor Jef Cozza aSSiStaNt Editor Ben Miller rEportErS Natalie Feary, Taina Rosa CoNtributorS Lucien Chauvin, Sean Mattson, Adam Williams art dirECtor Rosa Matamoros-Sense CoVEr iLLuStratioN Gary Neill CommErCiaL dirECtor James Norton, T +1 305 428-6273 dirECtor of buSiNESS dEVELopmENt Teresa Aguilar, T +1 212 224-3051 rEGioNaL dirECtor, braZiL J. Albert Negrón, T +1 305 428 6275 SENior maNaGEr, mEXiCo, CaribbEaN, SoutHErN CoNE Arielle Schrader, T +1 305 428 6274 VENEZuELa rEprESENtatiVE Matthew Perks, T +1 718 260-8970 dirECtor of CoNfErENCES Michael Brosgart SENior EVENtS maNaGEr Omar Suarez EVENtS markEtiNG maNaGEr Alex Rubin CLiENt rELatioNS maNaGEr Audrey Cechinel EVENtS proGrammErS Cate Doyle, Teddy Ward Aarti Bhatnagar markEtiNG maNaGEr Hilary Neil CirCuLatioN markEtiNG maNaGEr Patricia Arcic offiCE maNaGEr Teresa Romero aSSiStaNt to tHE CEo Vicky Maqueira LatiNfiNaNCE board of dirECtorS prESidENt Christopher Garnett dirECtorS Stuart Allen, Colin Jones, Giuliana Moreyra CHiEf EXECutiVE offiCEr Stuart Allen CHiEf opEratiNG offiCEr Giuliana Moreyra

Blood in the Streets

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Baron Rothschild, patriarch of the famous Rothschild banking clan, famously declared that the best time to buy is when there’s blood in the streets. But LatAm investors failed to take his advice during the turbulent last few months global markets have experienced, reeling from protests through the Middle East and North Africa, to NATO bombing campaigns. If markets weren’t spooked enough, a 9.0 magnitude earthquake struck northern Japan March 11, spawning a subsequent tsunami and nuclear disaster now believed to be on par with the Chernobyl disaster. LatAm investors shied away from equity and debt issuance alike. The chaos had nervous issuers sitting on their hands and praying for calmer waters. Roadshows closed without deals, while equity issuers downsized, delayed and reduced pricing on their offerings, or considered themselves lucky to price at the bottom of their range. Grupo E, a Mexico property group, reduced the size of Mexico’s debut REIT in March after a three week delay. Brazilian cement maker Cimentos Liz postponed its up to 713 million reais IPO indefinitely after weak demand. Meanwhile, Brazil’s International Meal Company (IMC) priced a 474.2 million reais IPO at the bottom of its range. By April, investors had begun to return to both the DCM and ECM, although it is not yet clear if headline risk has decreased at all, or investors and issuers have grown inured to the drumbeat of volatility. Brazilian steel producer Gerdau priced a 5.54 billion reais follow-on that is the country’s largest since last year’s Petrobras follow-on. By mid-April, Arcos Dorados was able to beat the top of its IPO range by 13% in a $1.25 billion deal. The world may not have gotten any safer, but issuers seem may be feeling more secure. LF

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Latin Finance - May/June 2011

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