Latin Finance - June 2008 - 2

Front Notes Corporate Stress W ith such intoxicating momentum inflating the region, talk of corporate distress is about as popular as an Argentine at a German bondholders’ cocktail party. But a significant amount of LatAm corporates show signs of strain, mainly because of contagion from developed markets. It is easy to get swept away by the success and charm of entrepreneurs like Eike Batista, whose alphabet soup of companies spoons out cash. And the JBS-Friboi revolution that turned a small time meatpacker into global leader in just three years is clearly cause for praise. There is a colorful new shopping list of ascending LatAm private entities, propelled by a vibrant beat from Brazil with fundamentally robust assets – commodities and infrastructure – at its core. The set includes newcomers that are expanding the frontier of deal activity, through local markets, cross border financing, and aggressive M&A. Besides the longstanding curse of meager secondary liquidity, there is a host of reasons for investors to be wary before diving in. After being burned by this year’s sporadic equity issuance, they need to get back to basics to ensure sustainable portfolio growth. The buyside must care about how their companies are run. Surprisingly, Mexican giants like América Móvil rank below average for corporate governance, while others like Cemex and Bimbo are managed like family businesses or even autocracies. Meanwhile, leading a slaughterhouse in Brazil’s Midwest is clearly not the same as managing a global meat packing and processing empire, as JBS is no doubt finding. Long term focus can also be a challenge for those newly on top. If all his three letter acronyms did not have to end in the multiplier X, ADD might be another to add to Batista’s stable as he flits between industries and opportunities. The embattled sell-side only adds to the confusion. Global investment banks have taken a severe hit on subprime and scaled back in developed markets. But the rush to increasingly competitive emerging markets might well backfire as bankers scramble to meet targets by putting volume first. It is heartening to see that investors are starting to insist on greater disclosure. Corporates have seen the tables turn decisively against them, in stark contrast to last year’s hot tub of liquidity that was open to even the junkiest credit. Lenders are wise to insist on structures and pricing to carry them through tougher times. Hedge fund Gramercy Advisors identifies 57 LatAm corporate bond issues with a face value of almost $20 billion trading close to 74. They include Durango, Vitro, Province of Buenos Aires, Transportadora de Gas del Sur, and Transtel. Over the next 12-24 months, Gramercy expects to see a number of defaults, fueled by the last five years of excess borrowing and pushed over the edge by an evaporation in liquidity. Now is the time to seek corporate opportunity. However, the global storm has not blown over, though many CEOs still hope for the best rather than preparing for the worst. The path of least resistance may point higher, but the downside is as steep and the exit is tiny when corporate financing dream turns to restructuring nightmare. EDITOR James Crombie ASSISTANT EDITOR Dan Shirai REPORTERS Ben Miller, Julio Urdaneta CONTRIBUTORS Greg Brosnan, Lucien Chauvin, John Rumsey ART DIRECTOR Rosa Matamoros-Sense COVER ILLUSTRATION DeanMacadam COMMERCIAL DIRECTOR James Norton DIRECTOR OF BUSINESS DEVELOPMENT Teresa Aguilar SENIOR MANAGER, MEXICO & CENTRAL AMERICA Danielle Assis MANAGER, CARIBBEAN, PERU, BOLIVIA, ECUADOR Arielle Schrader EUROPEAN REPRESENTATIVE Robert Logan T +44 (208) 579-4836 CARIBBEAN & VENEZUELA REPRESENTATIVE Matthew Perks T +1 (718) 260-8970 ADVERTISING & PRODUCTION ASSISTANT Suhey Saldarriaga SENIOR EVENTS MANAGER Omar Suarez EDITORIAL DIRECTOR, CONFERENCES & SPECIAL PROJECTS Michael Brosgart EVENTS MANAGER Marlene Alvarez EVENTS PROGRAMMER Alana Gutiérrez MARKETING MANAGER Kathy Andrew CIRCULATION MANAGER Patricia Arcic OFFICE MANAGER Teresa Romero ASSISTANT TO THE CEO Vicky Maqueira NETWORK ADMINISTRATOR Lukasz Przybyl LATINFINANCE BOARD OF DIRECTORS Stuart Allen, Christopher Brown, James Crombie, Colin Jones, Giuliana Moreyra CHIEF EXECUTIVE OFFICER & PUBLISHER Stuart Allen CHIEF OPERATING OFFICER Giuliana Moreyra Telephone: (305) 448-6593 Fax: (305) 448-0718 E-mail: editorial@latinfinance.com www.latinfinance.com Subscriptions hotline: U.S. (800) 437-9997 (212) 224-3570 U.K. 44 (0) 870 906-2600 E-mail address: subscriptions@latinfinance.com Credibility Watch Negative LatAm busted out the champagne for a long-awaited promotion of Brazil to investment grade by S&P. After Peru’s ascension in April to BBB-, the market wondered when Colombia would rejoin the club. A better question might be: who cares, now that the agencies have been so widely discredited? By many measures, Brazil still has a long way to go. But the upgrade also seemed behind the curve. Investment grade Peru is meanwhile questionable, and even highly rated stars like Mexico are showing signs of stress. At the bottom of the charts, by pure ability to pay and track record, Venezuela is clearly investment grade. And yet it languishes at low BB. Argentina makes it to single B, despite the fact that it is held hostage to billions in holdout bondholders and a rising tide of ICSID claims. Meanwhile, Brazil is number 122 in the World Bank’s latest Doing Business report, well behind Chile (ranked 33), Colombia (66) and even Argentina (109). On the other hand, A.T. Kearney’s FDI confidence index suggests agencies are too slow on Brazil, which appears at number six in the latest global ranking. There is certainly a need for more and better objective research in this market. But rating agencies may not be the best place to find it. Subscriptions: one year magazine only $495. Premium subscriptions $2,499 Send subscription orders to: LatinFinance, 2600 Douglas Road, Suite 410, Coral Gables, FL 33134 USA T 305-448-6593, F 305-448-0718. Copyright© 2008 Latin American Financial Publications, Inc. is owned by Ell Holdings, Inc. All rights reserved. Reproduction in whole or in part of any text, photograph, or illustration without written permission from the publisher is strictly prohibited. Title is protected through a trademark registration with the US Patent Office. Indexed in Information Access Company. 2 LATINFINANCE June 2008

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Latin Finance - June 2008

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