Latin Finance - DRM Test - 32

Investment banking fees survey

Equity and debt issuance and M&A activity – and their accompanying revenues – will continue to be dictated by global economic conditions and, in particular, by news from the US and Europe. While Brazil still accounts for most of the region’s investment banking business, bankers say the need now is to push for work in growing markets,in particular Peru, Chile, Colombia and Mexico. “The revenue base is more affected by Brazil,” says Javier Vargas, co-headof investment banking for Latin America at Credit Suisse. “LatAm ex-Brazilis probably flat, but given the size of Brazil, the overall level is down. Investors are a bit more careful about Brazil these days,” he says. “You have seen different trends for oil and gas and commodity producers. People are looking elsewhere. The overall trend we see is greater concern on Brazil.”

Debt driver
A weaker economic outlook for the region’s largest market is a big concern, which has so far only distorted the outlook for equity fees. Debt capital markets have driven a sizeable piece of revenue for the sector – totaling $328 million for the year up to August 17, compared with $335 million from the same period a year before. Volumes of business continue to be slightly stronger than last year. Bankers report mostly stable fees for deals, already at low 25–40bp levels. Forecasts for the rest of the year suggest business volumes somewhere between the first quarter’s DCM explosion and the second quarter’s slowed volumes. “I expect high-yield activity to increase in the second half,” says Roberto D’Avola, head of LatAm DCM at JPMorgan, noting such sales accounted for about 22% of the volume so far this year. JPMorgan is in a three-way tie with Citi and HSBC at the top of the DCM fee tables, with $33 million. D’Avola reckons that additional economic stability should boost issuance and high-yield bonds will

The $382 million of transaction income so far this year compares to $356 million for the same period. Fee trends are largely the same, bankers say. Several trends may drive volume through the rest of the year. Bankers say the market segment has barely scratched the surface of European divestures in Latin America, and there could be many more to follow. That said, there have also been some interesting additions – ranging from Spanish toll road operator Abertis to Dutch vitamin producer Royal DSM – by Europeans that can still afford to buy. They join interested Asian and US buyers in what is still a very strong intra-regional M&A trend that could grow. “What we’ve seen over the last few years continues to be valid – Brazilians consolidating the local markets, and foreign players moving into Latin America as a whole,” says Jean-Marc Etlin, head of investment banking at Itaú. Private equity activity in the region is a third, he says. The larger and cash-rich entities in Latin America looking outside the region is another, smaller trend. After years of threatening, América Móvil became one such acquirer, upping its stake in Netherlands-based Royal KPN from 8.7% to 28% at a cost of around $3 billion. A week before that it had agreed to pay around $1 billion for a 21% stake in Telekom Austria, bringing its ownership to 23%. Cheap exposure to eastern European countries will be a lever to further customer business for América Móvil. It will use its expertise in emerging markets telecommunications in countries to continue to grow regardless of the troubles The M&A puzzle M&A volume is set to continue at a healthy in western Europe. “Buying in Europe is not as easy as pace, and overall income is up from last year, as is volume, mostly thanks to a $20 people think,” says Gerardo Mato, CEO billion deal for GrupoModelo. In June, the of HSBC global banking, Americas. “It is easier for Europeans to buy in Latin families controlling the Mexican brewer America. If you are cash rich, you are were finally persuaded to part with their trying to buy companies at very acceptable final 50% holding by AB InBev’s highermultiples, and trying to grow it from there. than-expected multiple. The result shook up the league table, though less so the fee We are seeing Latin Americans interested in buying European assets, and what standings, where BTG Pactual still leads.

come to the fore. “High yield has a lot of possibilities. Investors will want to get into these names, but they must be names that are showing an improvement in their credit profile,” he says. In particular, July transactions from Peru’s Coazucar and Mexico’s ICA showed encouraging signs of demand for double-B credits. As long as the news from Europe and the US does not worsen, bankers expect more to come. The market, of course, is always open for top-quality issuers – as América Móvil showed in August, raising $1.92 billion in the sterling and dollar markets. High-yield issuers are poised to pop up across the region, D’Avola says. The key will be companies with growth that comes along with good cash generation. He notes additional crossover investment and more participation from LatAm-based investors. “These are high-growth companies, and their markets are very underpenetrated,” says Eduardo Cruz, head of banking for Latin America at Citi. “They don’t get the benefit of real leverage.” High-yield bonds could become another alternative for more leveraged acquisition finance in the region, says Cruz, with higher levels of equity being deployed than in other parts of the world, and with LatAm LBOs tending to be at least 50% equity financing, and most of the remainder coming from the bank market. There is room on balance sheets in the region to reduce this, while taking advantage of investors’ demand for highyield debt.

32 LatinFinance

September/October 2012

Latin Finance - DRM Test

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