Latin America-China Investment Guide - 63

The looming Haitong acquisition has not
slowed BESI's activities in Brazilian infrastructure. It was mandated lead arranger
on a 90 million reais bridge financing for a
hospital in Manaus this year.
But the only work connecting Chinese
corporates to international sources of
capital that BESI has pointed to is a single
bookrunning spot on a $670 million issue of
3.5% five-year bonds in April - for its parentto-be Haitong International Securities.
Any acquisitions of financial services
firms, at least in Brazil, are likely to be secondary to Chinese investors' interest in infrastructure Modal's Centola says. He notes
that recent acquisitions have been focused
on mid-sized firms, and that Chinese corporates show little interest in engaging in the
broader economies of Latin America, for
instance by buying consumer goods firms.
Still, China Construction Bank's 2014
purchase of 72% of Brazil's Banco Industrial
e Comercial (BicBanco) and Bank of Communications' $173 million May 2015 acquisition of 80% of BBM, another Brazilian bank,
point to consistent interest in the financial
services sector. Both banks are mid-sized,
lend to small- and medium-sized corporates, and specialize in trade finance.
According to Citi's Pandolfi, who advised
on both transactions, the deals will help
facilitate trade between China and Brazil.
While they will assist Chinese corporates
in investing in the region, they are unlikely

to help them financing big-ticket infrastructure projects. "Given the constraints
that Basel III places on local lenders going
beyond ten years, BNDES is still key here."
BDA's Rellie cautions against expectations of more financial services acquisitions. "There would be interest from other
Chinese banks in matching those deals, but
there seem be a limited number of remaining opportunities. The strategic rationale
is to gain a local platform to serve large
Chinese corporate clients doing business
in LatAm. Retail banking doesn't seem an
appealing business there."
The next big M&A test
For all the potential that Chinese corporates
have to make their mark in infrastructure
and financial services, commodities still
offer the most immediate opportunities.
Chinese producers are comfortable with
the region's operating environment, and
are dealing with motivated sellers and accommodating host governments.
But the most recent test of Chinese appetite for hard assets in Latin commodities
did not end with a Chinese buyer on top.
In July, Barrick Gold agreed to sell a 50%
stake in its Zaldívar copper mine in Chile
to Antofagasta. Antofagasta, which is listed
in London but controlled 65% by Chile's
Luksic family, agreed to pay $980 million
upfront, and $25 million over the next
five years for the stake, and will become

Zaldívar's operator.
Antofagasta was one of the names linked
to the bidding, along with X2, the new mining investment vehicle of Xstrata's former
chief executive, Mick Davis, Canadianlisted Hudbay Minerals and BHP Billiton,
which owns 57.5% of Zaldívar's neighbor,
Escondida.
But by mid-July, market rumor suggested
that China Molybdenum, was leading the
bidding for Zaldívar, after the company said
it had submitted a binding bid of up to $2.15
billion "to acquire certain overseas mining
assets from an international mining company. The project has matured operations and
generates stable profits and cash flow."
China Molybdenum confirmed some of
the speculation, if not the optimism about
its chances, when it said, two days after
the Antofagasta announcement, that it
"did not win the bid for the project due to
intensive competition during the bidding
process".
But Chinese interest is no longer purely
about commodities, and the country's
investors are willing to work through the
investment channels, particularly for
infrastructure, that Latin American governments have created. These involve transparent bidding and long-term involvement
with assets. "It is likely that they are using
a variety of approaches to manage risk and
potentially improve long-run returns," says
AMC's Monck. LF

Aiming high
Two large transcontinental projects - a Brazil-Peru Railroad
and the Nicaragua Canal - illustrate the challenge for China in
matching its financing capabilities to its ambitions.
Both projects enjoy top-level support from their host governments, but are unlikely to benefit from state guarantees of their
revenues.
The projects may end up highlighting the shift in Chinese
focus from contracting opportunities to investment opportunities. "These are very complex projects," says Pandolfi. "Regional
contractors with the relevant experience will be crucial to getting
these built. But the Chinese can play as investors."
The Nicaragua Canal is perhaps better known, thanks to its
$50 billion price tag, and for launching just as the Panama Canal
completes a $5.25 billion expansion. HKND, the developer, which
is controlled by telecoms investor Wang Jing, has provided some
details of the route, and said it submitted an environmental and
social impact assessment to the Nicaraguan government in May.
But HKND has given little indication of how it might finance
this vast civil engineering undertaking. Its main advantage over
the Panama Canal will be its ability to handle larger ships, and

HKND's cast of advisors includes Environmental Resources
Management, which produced the environmental assessment,
McKinsey and contractors SBE from Belgium and MEC from
Australia.
Until these advisers have finished their work, HKND will not
know whether the cost of the canal will be more manageable than
the $50 billion quoted, as Wang has suggested in the past. Even at a
lower cost, and even if the developer can attract low-cost Chinese
bank financing, servicing any debt will be a challenge.
And, as if the Nicaraguan canal was not bold enough, the Chinese, Peruvian and Brazilian governments agreed in May 2015 to
study the $10 billion Transoceanic Railway between the Brazilian
and Peruvian coasts. Unlike the canal, the railway would benefit
from explicit Chinese government backing. Chinese rail expertise is highly developed and a strategic priority for the country.
The railway would allow for an alternative export route to the
Pacific for Brazilian agricultural products, which are currently at
the mercy of Brazil's doddering ports infrastructure. Ironically,
the Panama Canal, and its nascent Nicaraguan sibling, would be
the railway's chief competitors. LF

September/October 2015 - L ATINFINA NCE.COM 63

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