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DEALS OF THE YEAR: Best Equity House

Jan 1, 2013

Bank of America Merrill Lynch

Recent years have been challenging for new equity issuance and 2012 was no exception: volumes and the number of transactions hit a trough while Brazilian markets all but ground to a halt.

The upside is that a diminished focus on Brazilian issuance has meant a more intense interest in Mexico, Peru, Colombia and Chile. Even Brazilian banks are pushing hard to get in on the Andean-Mexican act.

Several banks are poised to benefit from the emergence of the ex-Brazil markets, having laid the groundwork in recent years. Bank of America Merrill Lynch stands out among the elite group of ECM firms with a pan-regional operation, working on several of the largest and most groundbreaking transactions (and generally earning a high fee on the deals).

This is not to say that opening up markets outside Brazil has been easy. Market capitalizations and eligible issuers are still a fraction of what they are in Brazil - which may yet see a rebound in 2013.

While investors want geographic diversity, for BAML and many other bankers, the quality of the issuer is the most important question.

"This has been an unprecedented year for Latin America," says Facundo Vazquez, head of LatAm ECM at BAML. He says that while overall volume is way down, the ex-Brazil focus is greater than ever before. "It works for the right names with the right profile, at the right price," he says.

Last year was one for strong issuers. BAML was one of four global coordinators on the groundbreaking IPO for Santander Mexico in September. The 52.81 billion peso ($4.11 billion) deal is the biggest in the region and Mexico's largest ever offer.

The shares had traded up 21.5% as of December 1, and may do much to open up the market for further Mexican issuance. In the months following the deal, transactions from Mexichem, Pinfra and others followed, including some in the new Fibra real estate fund asset class.

In Chile, BAML helped put together another piece of Santander's regional fundraising puzzle. Santander Chile attracted more than two times demand for a $949 million-equivalent all-secondary follow-on. About 70% of the buyers were international - this is much higher than the one-third foreign participation normally seen in such Chilean deals.

Strong international reception also drove Chile's largest-ever IPO in July, when Inversiones La Construcción raised $469 million-equivalent. Explaining the makeup of the complicated holdco for various investments of the Cámara Chilena de la Construcción was not an easy task. ILC owns health insurance firms including AFP Habitat and Consalud and also the Tabancura and Avansalud clinics.

In the end demand reached about 2.5 times, with international buyers accounting for 35%. Proceeds from the sale, managed by BAML, IMTrust and JPMorgan, funds the health care operations and also be used for expansion.

Bancolombia opened the market in January, raising more than $900 million-equivalent through international and domestic tranches of a follow-on sale. BAML led the deal with UBS, JPMorgan and Bancolombia.

The only major market BAML missed was Peru, which offered only the Pacasmayo follow-on during the awards period. All signs point to increased activity in Peru in 2013, particularly after a successful IPO of Intercorp's retail operations in October.

This was not Brazil's year in ECM, but BAML was present on some the country's most successful operations, though the BTG Pactual IPO was the bank's one noticeable absence in the region.

Its work in Brazil included the 1.76 billion real ($876 million) follow-on deal for Taesa. The transmission company's "re-IPO" received close to five times demand, drawing investors with high dividend yields and convincing them to ignore the illiquid shares' trading levels and pay within the pre-set price range. BAML managed the deal with BTG, Banco do Brasil, Goldman Sachs and Santander.

"For brand names and established companies issuing in size from Brazil there is a lot of demand," Vazquez says. "Brazil works for the right companies, and they are achieving very solid valuations."

Follow-ons including Fibria and Qualicorp also performed well in what was otherwise a difficult year.

Vazquez and other ECM bankers are hopeful for a pickup in volume in 2013. Sticking to top-quality well known names offering liquidity will be the key. This may seem like an obvious strategy, but it has eluded Brazilian issuers in the last few years as foreign investor have stayed away.

Shifting perceptions of valuations - the decline in the Bovespa and the greater attention paid to Mexico and the Andes means Brazil is starting to look cheap - will help Brazilian issuers going forward.

While the increased interest in diversification can't be ignored, an issuer's quality is more important than the address.

"Brazil versus ex-Brazil is a misconception," Vazquez says. "Investors have changed. They are no longer willing to pay for a small-size company with a lack of cash flow and high execution risk. If you put such a company in Mexico it will fail, or in Brazil, Peru or another country, it will also fail. The market in general is saying it doesn't want those types of companies for a while."LF



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