LatinFinance - March/April 2013 - Costa Rica Supplement - 14

Costa Rica | Capital markets

Heavy government debt issuance locally has put a damper on Costa Rica’s fledgling
capital markets.Yet dynamism is coming from specialized areas

Blue sky thinking

New issues: kickstarting local markets

I

n November, Costa Rica broke a drought. It sold its first
Eurobond since 2004. The $1 billion 10-year deal was the
country’s biggest ever issue and was five times oversubscribed.
International investors snapped up the paper yielding 4.25% –
US accounts took over half the issue. They were eager to diversify
beyond the only other recently sold Costa Rican dollar benchmark,
a $500 million issue from state-owned electricity company ICE.
“It was important to return to the international markets as a
method of financing, and give investors Costa Rican paper in
their portfolios,” Luis Liberman, Costa Rica’s vice president, told
LatinFinance at the time.
The deal has opened the door to other institutions to follow suit.
Banco de Costa Rica, the country’s second largest bank, has said it
is targeting the third quarter of 2013 for a $500 million international
bond debut. And the sovereign itself is planning a return to the
international markets as early as April or May to continue the
process of diversifying its funding base in US dollars. “Costa

14

A Supplement

to

Rica has a very, very low level of external debt as we have not
used such financing for a long time,” says finance minister Edgar
Ayales. “It’s about 5% of GDP and so we have space to issue.” He
has congressional approval to raise $3 billion more in international
funds, including up to $1 billion in the second quarter Eurobond
deal. Bookrunners Deutsche Bank and Citigroup will advise timing.
Ayales sees a number of advantages in using international
markets. Local funding of the deficit pushed up local rates to 12%
last year. They remain high at 8% even after coordinated measures
to bring them down. “Local rates are high because Costa Rica has
traditionally financed its deficit domestically,” he says.
In last year’s roadshow, which took in Los Angeles, New York,
London and Boston, Ayales found investors impressed by Costa
Rica’s overall story, but concerned by the fiscal deficit. He sees
the future for emerging market debt financing as relatively positive.
Although US rates might go up, any increase over the next year is
likely to be marginal at maybe a quarter percent, he says.
The government’s continued financing through the local bond
markets has kept rates high and crowded out other borrowers,
helping to explain the paucity of corporate bond issues. Moreover,
Costa Rican companies are typically very small and prefer to fund
through loans. Nearly all – 98% – of companies in the country are
small- to medium-sized enterprises with less than $50 million in
revenues.
Given the government’s dominance in markets, the national
stock exchange is heavily skewed to money market instruments and
government bonds, says José Brenes, CEO at the exchange. Some
$200 million to $250 million in money market and repo instruments
are traded daily, with a further $50 million turnover in bonds, he
says. A proposed 30-point increase in the tax on gains from interest
by non-residents – bringing it to 38% – could reduce liquidity.

Equity crowded out
Costa Rica’s equity market is limited. For now, most activity is
crowded out by government bonds, which offer close to 10% at
low risk for the $4 billion in institutional funds managed in Costa
Rica. There are just nine listed companies with $1.7 billion in market
capitalization and a paltry $35 million in trading throughout the
whole of 2012, says Brenes.
Partly that’s because of a number of delistings. Retailer
Almacenes Gollo, PVC piping firm Durman Esquivel and bank
Interfin were all taken off the exchange after a foreign parent
bought them. A brewing company represents 50% of the market

LatinFinance | March/April 2013



Table of Contents for the Digital Edition of LatinFinance - March/April 2013 - Costa Rica Supplement

Latin Finance - March/April 2013 - Costa Rica Supplement
Contents
Getting it right
Securing the future
Making the leap
Finding space
A hard currency
Trading up
Green credentials
LatinFinance - March/April 2013 - Costa Rica Supplement - Latin Finance - March/April 2013 - Costa Rica Supplement
LatinFinance - March/April 2013 - Costa Rica Supplement - Cover2
LatinFinance - March/April 2013 - Costa Rica Supplement - Contents
LatinFinance - March/April 2013 - Costa Rica Supplement - Getting it right
LatinFinance - March/April 2013 - Costa Rica Supplement - 3
LatinFinance - March/April 2013 - Costa Rica Supplement - 4
LatinFinance - March/April 2013 - Costa Rica Supplement - 5
LatinFinance - March/April 2013 - Costa Rica Supplement - Securing the future
LatinFinance - March/April 2013 - Costa Rica Supplement - 7
LatinFinance - March/April 2013 - Costa Rica Supplement - Making the leap
LatinFinance - March/April 2013 - Costa Rica Supplement - 9
LatinFinance - March/April 2013 - Costa Rica Supplement - 10
LatinFinance - March/April 2013 - Costa Rica Supplement - 11
LatinFinance - March/April 2013 - Costa Rica Supplement - 12
LatinFinance - March/April 2013 - Costa Rica Supplement - 13
LatinFinance - March/April 2013 - Costa Rica Supplement - Finding space
LatinFinance - March/April 2013 - Costa Rica Supplement - 15
LatinFinance - March/April 2013 - Costa Rica Supplement - A hard currency
LatinFinance - March/April 2013 - Costa Rica Supplement - 17
LatinFinance - March/April 2013 - Costa Rica Supplement - Trading up
LatinFinance - March/April 2013 - Costa Rica Supplement - 19
LatinFinance - March/April 2013 - Costa Rica Supplement - 20
LatinFinance - March/April 2013 - Costa Rica Supplement - 21
LatinFinance - March/April 2013 - Costa Rica Supplement - 22
LatinFinance - March/April 2013 - Costa Rica Supplement - 23
LatinFinance - March/April 2013 - Costa Rica Supplement - Green credentials
LatinFinance - March/April 2013 - Costa Rica Supplement - Cover3
LatinFinance - March/April 2013 - Costa Rica Supplement - Cover4
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