By Leon Lazaroff
Faced with $170 million in debt
coming due in 1998, Guillermo Gotelli, the straight-shooting
president of Argentine athletic footwear company Alpargatas,
had a cold realization: because the extreme turmoil in Asian
markets was likely to keep international volatility high and
liquidity low well into the year; unusual measures would have
to be taken if his company were to cover its debts. In short,
extraordinary conditions required extraordinary
Instead of going to the
international bond markets in December for a previously planned
sale of $176 million of seven-year bonds, Gotelli went to his
board of directors to lay out a three-part plan: early in 1998,
Alpargatas would issue $80 million in new equity, followed by
the sale of some $50 million in real estate assets, and later a
syndicated bridge loan for roughly $100 million.
"The markets are not there, and
they won’t be there for a while," said Gotelli,
whose company’s operations also include textiles,
engineering, retail and fishing. "Right now, you have to be
more creative in adapting some of these instruments to the
current realities of our countries."
And right now, those realities are
harsh. While Asia has all but tanked, Latin America is feeling
the wrath of rising interest rates, plunging bond prices and
markets with less liquidity than the Sonoran desert. With
global investors wary of emerging markets and suspicious of
highly leveraged firms, the region’s corporates
and sovereigns are taking whatever actions are necessary to
prepare themselves for what could be a very trying year,
wasn’t shaping up to be such a tough year for
debtors, either corporates or sovereigns. Take Brazil, the
region’s economic powerhouse and its biggest
domino. After watching his country make good on $22 billion in
external debt, public and private, in 1997, Banco Bozano
Simonsen fixed income analyst Armando d’Almeida
insists that Brazil should have little problem financing the
$12 billion in maturing obligations ($3 billion in
international bonds, and $9 billion in bank debt, long-term
trade finance, Ex-Im Bank, World Bank and Paris Club debt) that
will come due in 1998. D’Almeida argues that
interest rates—lowered to 38% in mid-December after
having been increased from 20% to 43% in late
October—should continue to fall, that direct foreign
investment should top $25 billion, and most Brazilian companies
already have enough cash on hand and projected revenues to meet
"We won’t have the
same pressure that we had during this year," said
d’Almeida. "We will not have the same number of
companies accessing the international markets, and the
companies that will do that will be the top companies in their
That’s the upside.
But while many Brazilian firms are respected as worldwide
caliber, investors nonetheless remain cautious.
Brazil’s domestic debt is $70 billion, public
sector and current account deficits are 4% to 5% of GDP, and
talk of a currency devaluation—even after the November
$18 billion fiscal package—continues at a steady and
annoying beat, More important still is worldwide liquidity.
Regardless of the strength of individual corporates, for the
short term the money just isn’t there.
The bottom line is that Latin
American corporates and sovereigns are squarely on a collision
course with the world’s other emerging markets for
a limited supply of cash. Not only will Latins be competing
this year against each other to issue and refinance billions of
dollars of debt—some $18 billion in Latin bonds alone
will mature in 1998, not counting bank debt and other bilateral
and multilateral obligations—but Asians, Russians and
Eastern Europeans will be battling for that money as well.
Korea alone is estimated to have over $90 billion in external
debt, public and private sector, coming due in the next
"All these countries are competing
for the same pool of capital at approximately the same price
range," said Allen Vine, Latin American corporate debt analyst
at Merrill Lynch. "What used to be a seller’s
market is now a buyer’s market. Everyone is
raising rates and everyone is saying 'please pick
With their backs against the wall,
Asian corporates and sovereigns will start the year under heavy
pressure to meet gigantic short-term debt obligations from
private creditors, neighboring countries and international
lending organizations. Throw in demand for dollarized Russian
GKO bonds and liquidity looks very tight. On the financing
side, spreads are likely to widen and volatility to remain
high, leading to expensive pricing. Commercially, Asian
corporates are expected to heavily discount their exports,
thereby putting additional pressure on competitors in Brazil,
Mexico and the United States.
"Even if there are no more
exogenous shocks, i.e., problems with Asia’s IMF
rescue packages or turmoil in Japan’s banking
system, Latin American markets will still be hard pressed to
supply the type of financing corporates are hoping to access,"
said David Tapp, vice president in emerging markets research at
ABN AMRO Bank.
All this adds up to a bruising
debtor’s battle. Across emerging markets, high
spreads for sovereign debt have all but pushed corporates out
of the market—at least for the short term. While
Argentina did manage to pull off a 300 billion lira note
followed by a $500 million bond, those deals were viewed as
isolated cases owing as much to the demands of the lira market
as Argentina’s solid reputation in bond markets.
Besides those two issues, emerging market borrowers spent the
final 100 days of 1997 in a deep freeze,
The dried up liquidity became
apparent in late October when Globopar, the Brazilian pay-TV
group, was forced to pull its $300 million bond deal. Investors
liked the deal, but not the timing—the launch was
scheduled for the day Hong Kong’s troubles
signalled more problems in Asia. Globopar, though, was able to
get bridge financing. In Argentina, steel maker Siderar was
forced to postpone a $100 million bond issue. And Peru, which
expected to sell about $260 million in bonds at the end of the
year, also shelved its plans.
Other issuers, such as the Mexican
cement maker Cemex, sit on the bubble. While the
Monterrey-based firm has historically shown proficiency at
surviving crises by using revenues from exports and foreign
subsidies to offset foreign currency shortages, the year-end
market situation has prompted red flags to be raised about
Cemex’s overall debt—a whopping $5.2
billion. Of that, $757 million is made up of short-term
obligations—bonds, commercial paper, trade finance
loans—that will come due in 1998. For its part, Cemex
argues that its diversified geographic cash flows, $402 million
in cash on hand and a $600 million banking facility secured
last spring, are good enough to relieve investor worries. (It
was apparently enough to convince Standard &
Poor’s to upgrade Cemex to BB+ from BB on November
25.) Nonetheless, Cemex is being closely watched.
"In the case of a recession, they
would have problems," said Anne Milne, head of Latin American
corporate debt research at ING Barings. If the markets are
open, fine, but if there is a situation like '95, how would
they finance that debt?"
That’s a question
being asked throughout the region. Few doubt that in a normal
year, if there is such a thing, Cemex and companies in similar
situations would have little problem paying off their debts.
But the crisis in Asia changed the rules of the game, and in
the process brought Latin America’s impressive
comeback to a wrenching halt.
Ironically, Latin America thought
its most formidable financial battles had already been fought.
Having paid dearly for the "Lost Decade" of the 1980s, and the
"Tequila Crisis" of 1995-1996, Latin companies large and small
took comfort in 1997 as the region enjoyed 18 months of
liquidity and investor favor. The coming year will likely have
little in common with the one just finished.
During 1997, Latin sovereign
issues tallied in excess of $30 billion by mid-October, $5
billion more than the entire 12 months of 1996, according to
Steven DeSalvo, managing director of emerging markets debt
syndicate at BankBoston. Latin corporate debt issues totalled
$15 billion for the first eight months of 1997, nearly matching
the $16.4 billion total for the previous year. In fact,
corporate debt as a percentage of total issuance in the region
increased from 35% in 1995 to 48% in 1997.
The story of a recovering Latin
America played particularly well. Brazil’s $8
billion in corporate issuance accounted for 24% of all emerging
markets corporate debt, followed by Argentina at about 16%, and
Mexico in third place with 14%. Indonesia and India were next
in line. For 1998, however, most observers don’t
believe corporate issues will even reach $8 billion.
"The pipeline for new financing,
for all but the top-tier companies, is shut," said Chris
Taylor, Latin corporate bond analyst at Bankers Trust. "And
even those top companies are going to have to pay significantly
to issue bonds or refinance maturing debts."
Such talk has become commonplace.
The lingering possibility of further global economic shocks has
degenerated into the expectation that the end of
Asia’s bloodletting is not yet in sight. During
the final months of 1997, spreads tripled on many of the most
well-respected Latin bonds and a number of bond issues had to
"It’s very difficult
for anyone to go out and borrow," said Arthur Byrnes, president
of Deltec Asset Management, whose firm manages $800 million in
the region. "The crisis has made everything expensive. It makes
it very hard for good companies to pay off maturing debt. And
when companies do go looking to roll over debt or access new
money, investors will be looking for higher-than-usual
Without question, Brazil remains
the country most susceptible to "Asian contagion." Although
investors reluctantly applauded Brazil’s decision
to double interest rates in late October, thereby strengthening
a currency some viewed as being on the verge of a devaluation,
Brazil continues to be seen as a currency risk where a
recession is likely. As a result, economic forecasters had
little choice but to downgrade growth expectations from 4% to
the 1.5% to 2.0% range. Brazil’s
future—and to a certain extent that of South
America—will depend on how long Brazilian interest
rates are kept high to stave off worries of a devaluation.
Before March alone,
Brazil’s corporate and sovereign borrowers
combined will have to find a way to roll over some $5.5 billion
in overseas debt (including bank and bilateral debt). The early
signs are worrying. At year’s end, spreads on
Brazilian bonds were precipitously high. Steel firm
CSN’s 9.125% bond due in 2007, priced at 275 basis
points over the 10-year US Treasury in June, was being offered
at 750 bps in December. Brazil’s 8.875% global of
2001 illustrates the volatility in the market— the
issue was trading at 145 bps over Treasuries in early October,
but by mid-November had widened to 625 bps, before tightening
back to a spread of about 330 in late December.
And concerns about Brazil are
likely to spread to Argentina, which sends over a third of its
exports to its Mercosur partner. Argentina needs to raise
roughly $13 billion over the course of the year.
"Corporate issuance out of
Argentina will be particularly difficult at this stage in the
ball game," said a somber Ashwin Vesan, portfolio manager at
Bank Market Steps
With international markets all but
shut down, banks will be leaned on heavily to supply a variety
of bridge loans. Already, Mexico’s Grupo Elektra
received a syndicated five-year credit for $150 million in a
deal led by Citicorp, and Telecom Argentina was forced to
secure a $100 million loan from Swiss Bank Corp. to help repay
a maturing bond. But these were two well-structured deals for
firms with excellent track records. On a larger scale, can
domestic banks be expected to pick up the slack caused by the
virtual year-end shutdown in world bond markets?
While Argentine banks held
deposits of a record $67 billion in mid-November, interest
rates had doubled to as much as 30%, putting a tight squeeze on
the private sector, especially smaller companies which have
been forced to pay interest rates 200 basis points higher than
those charged to large companies with good credit ratings.
"Ironically, Argentine banks have
had the money, they just haven’t found that many
worthy borrowers," said Buenos Aires economist Pedro Lacoste.
"The triple-A companies have been able to go to foreign markets
while small and medium companies have a very short track record
and don’t have the necessary transparency to make
For larger companies with good
borrowing records, Lacoste is confident Argentine banks, led by
foreigners Banco Santander, Banco Bilbao Vizcaya and HSBC, can
cover the difference, "These are new banks eager to get new
business," added Lacoste. But that’s money
available for the top-tier international players. Meanwhile,
small and medium companies throughout Latin America are feeling
a particularly tight squeeze.
Take Mexico. With vivid memories
of the $45 billion in bad loans the government was forced to
take over following the 1995 peso crash, Mexican banks are
greeting smaller firms at arm’s length—at
best. As a result, loan growth in Mexico has been decreasing as
domestic banks try to shore up their balance sheets. But large
companies, aware that international markets usually can be
counted on to provide better financing, often are able to
negotiate acceptable financing terms with domestic banks eager
for good clients.
Overall, Latin banks are seen as a
source of refuge. In the larger countries, analysts are
confident that at least for the short term, domestic banks,
will be able to meet the refinancing needs of larger
corporations. "Where market financing isn’t
available, bank financing will be," said Matthew Peck, vice
president in corporate bond research at Salomon Smith Barney.
Of course, rates might be higher and there might be certain
conditions placed on loans.
As a result, corporates are likely
to turn to an old standby—structured deals that tie
some revenue stream into the bond issue, such as export
receivables. Brazilian steel company Acesita received $50
million from Bank of America in early November collateralized
by export receivables, and Aerolineas Argentinas secured $50
million in bonds backed by future ticket sales.
But even with spreads high and
volatility rambunctious, Latin corporates can take solace in
knowing that they are not in Asia. While the lessons were hard,
and in many cases fatal, Latin companies have spent much of the
past three years learning to appreciate the importance of
market liquidity and a clean capital structure. That is, avoid
lots of short-term debt. "The Mexicans learned the hard way,
and face it, they’ve been excellent students,"
Hylsamex is a good example. Last
summer, sensing that markets were peaking, the firm, a
subsidiary of Grupo Alfa, refinanced a $175 million obligation
that was to come due in February. Gruma, Mexico’s
largest corn flour producer, was faced with $125 million in
maturing debt in 1998 but pulled together a $250 million issue
in early October, also receiving a ratings upgrade to BBB- from
Standard & Poor s. "They were smart to take advantage of
good market conditions knowing that those conditions
don’t last forever," said Peck of Salomon.
Mexico successfully refinanced
some $22.6 billion in public and private debt that came due in
the second half of 1997, according to economist Jonathan Heath
of LatinSource. In the coming year, Mexico’s
obligations will be a relatively more manageable $18.4
billion—most amortizations are with multilateral
creditors. "Mexico should have no problem at all," agreed
While the market will be
competitive, the prospects for Latin American borrowers is by
no means apocalyptic. Barring a frightful turn in global
markets, observers contend that most of Latin
America’s major corporates should be able to find
ways to pay off or roll over maturities in 1998.
By a stroke of fate, Brazilian
corporates, which only entered international markets in big
numbers starting in 1996, may have escaped a severe economic
crisis simply by having been refused access by world
financiers. "They just really haven’t had a chance
to leverage themselves to the hilt and get into trouble," said
Taylor. Although Multicanal Participações and
Companhia Siderúrgica Nacional (CSN) both have a high
level of short-term debt, Taylor argues that their equally high
levels of cash should serve as a sufficient cushion, barring a
severe economic slowdown. "The gamble is that there
isn’t a devaluation, which I think is a reasonable
gamble," he added.
Keenly aware of the pressure on
corporates to pay off maturing debt in the first six months of
1998, Brazil’s central bank reduced the minimum
maturity on debt issued to roll over maturing paper to six
months from three years, and shortened the required tenor on
new deals to one year from three years.
Still, the $8 billion issued by
Brazilian corporates in 1997 seems minor compared to Korea,
whose corporates issued $35 billion in debt during the first
nine months of 1997. While Brazilian firms must be careful
about their debt obligations, the country does not face the
much harsher remedies of Korea, which faces short-term debt of
$60 billion. "Brazil doesn’t have those kinds of
numbers," said Joyce Chang, director of emerging market
research at Merrill Lynch. Argentina, meanwhile, has the
benefit of a healthy banking system and the knowledge that its
government has secured a $2 billion back-up facility should the
Asian crisis get out of control.
Paul Tregidgo, managing director
for Latin American capital markets at Credit Suisse First
Boston, likes to draw a portrait of a region increasingly able
to financially fend for itself. Unlike 1993, he says, Latin
American corporates and sovereigns have a much healthier and
liquid commercial bank sector to turn to for syndicated loans.
As long as the markets don’t slip too far,
Tregidgo argues, investors are almost certain to bite into
bonds issued to pay for the privatization of
Brazil’s massive energy and telecommunications
sector as well as large scale infrastructure projects.
As tight as liquidity may
ultimately become, Latin America could emerge from the current
crisis far faster than Asia, or the region itself following the
Tequila Crisis. For as much as liquidity dried up during the
final quarter of 1997, a lot of money remains on the sidelines
looking for good investments. "If you get the feeling that
I’m somewhat sanguine about this, I am," said
Tregidgo. "Come the new year, it will be very interesting to
see where that cash that has built up will be put to work."
In the age of globalization,
getting one’s own fiscal house in order
isn’t always enough to withstand financial shocks.
Ultimately, the ability of debtors—corporate and
sovereign—to cover their obligations will depend on
how quickly a mood of ambivalence can turn the corner with a
surge of confidence. Those who can wait a little while longer
may find financing themselves out of the Asian contagion a
whole lot easier.
"The market win clearly be much
more selective in the early stages, but provided you have a
credit rationale linked to payment of a strong credit statistic
or to a concrete story, then the market is going to be there
for you," said Milne of ING Barings. "The problem is going to
be timing, and therefore flexibility will be so important."