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Equity markets: A matter of size

Sep 1, 2013

Latin American companies have proved they can deliver deals as big as anywhere in the world in ever more sophisticated markets. But smaller issuers are still left out. By Ben Miller

Latin America’s equity capital markets are unrecognizable from the late-1980s. What started as a few Chilean banks raising less than $100 million via SEC listings has in recent years unleashed some of the world’s biggest deals.

Multi-billion dollar issues are now common, with domestic and international investors participating in ever more sophisticated offerings.

Companies in the region have issued more than $20 billion in each of the last eight years, up from annual volumes of less than $10 billion in the 1990s. The rise has hardly been a smooth one, however.

In the 1990s, a US registration was needed to raise any funds. A few Chileans, Brazilians and others headed abroad – even Venezuelans and Argentines had access. In 2013 US-registered deals still happen, but are the exception.

Privatizations including Telebrás, Telmex and YPF led to a few larger deals in the early years, but macroeconomic uncertainties, and a small buyer base meant IPOs and follow-ons were not much of an option for Latin fundraisers.

"Before the early 2000s, banks didn’t have anybody focused on LatAm equity capital markets," says Javier Vargas, co-head of LatAm banking at Credit Suisse. "That wasn’t part of the offering for clients."

Boom from bust

A few telecoms and banks brought big deals in the 1990s, but the party didn’t start until well into the 2000s.

The dotcom bust in the US provided a spur for investors to look harder for alternatives. Some LatAm countries with stabilizing macroeconomics and politics began to look attractive.

Nowhere was this truer than in Brazil, where incoming president Luiz Inácio Lula da Silva’s administration proved more market-friendly than expected and global demand for commodities accelerated the economy. Transactions done under the 144a format allowed easier access than SEC-registered deals.

Brazil became home to a new wave of public companies. The $167 million IPO from Companhia de Concessões Rodoviárias (CCR) in 2002 was an early 144a example. Natura reopened the market after a two-year hiatus in 2004, raising $241 million and setting off an intense period of issuance that would last more than three years.

With locals and international issuers participating, deals of various sizes were sold, almost daily. This coincided with a shift in Brazil’s entrepreneurial culture. With examples of visible and successful private businesses increasing, more of an effort was made to formalize business practices and adhere them to the Novo Mercado, the listing segment of the BM&F Bovespa exchange.

Unrepresented or underrepresented industries emerged: consumer products, technology, real estate, financials. The market peaked with a $51 billion year in 2007 – 76% of it issued by Brazilians, including 66 IPOs from the country, according to Dealogic.

But even before the financial crisis of 2008-2009, it had started to become clear that the rush to the Bovespa was too much of a good thing. Many Brazilians came to market – and many performed poorly. The market has restarted since the crisis, but many new issuers – particularly small ones – still have trouble hitting the midpoint of their pricing target.

Local following

To the delight of investors and issuers alike, equity markets have become more regionally focused over the past two to three years, with growing opportunities for companies outside Brazil to list.

Chile has always been able to support issuers, including small ones, thanks to its pension funds holding more assets as a portion of GDP than in other countries. Hortifrut, Moller y Pérez-Cotapos and Echeverría Izquierdo are examples of recent sub-$100 million debutants, done largely without international support.

Beyond Chile, local buyers in most countries step up when international investors are skittish.

Brazilian equity deals traditionally attract 70% international buyers, and 30% national. When conditions tighten, sizes go down and the frequency of deals decreases, however, transactions still get done, with 50% to 70% of the buying coming from Brazil. The situation is similar in Mexico, with a 50% international-50% local split normal in most times but locals taking 60% to 70% when things get leaner.

"Right now local investors are critical to most LatAm ECM transactions," says Lisandro Miguens, co-head of investment banking for Latin America at JPMorgan. "We need to bear in mind that pension fund systems are developed and sophisticated in Chile, Colombia, Peru and Mexico. Additionally, in Brazil the local asset management community is not only large and liquid, but it also acts as a thought leader."

By 2005, 144a deals were well accepted from Mexican issuers. The pace picked up in 2006-2007 though only in 2013 is the market truly flourishing. Favorable macroeconomic conditions and prospects for reforms have meant fresh international attention, and finally a consistent pipeline. Mexicans had raised more than $9 billion in 2013 through to July, already setting a new record, and have opened new sectors.

A big lift came from changes to pension fund regulations, allowing the afores, as they are known, to pick stocks. Supermarket operator Grupo Comercial Chedraui was the first to take advantage of support from the afores, in 2010, raising $423 million in the first Mexican IPO in about two years.

Santander Mexico’s $4.1 billion 2012 IPO is the country’s largest yet. At the same time, the breadth has greatly improved in recent years, with Fibra Uno leading six fibras – real estate trusts – to market and IEnova offering long-desired energy sector exposure.

Changing market

Colombia’s market has emerged as the country has put difficult years behind it, although investors would still like to see more opportunities. The country must make more progress on regulations that make it complicated for international investors to buy.

Last year’s $1.15 billion IPO of Cemex LatAm marked a turning point for Colombia. The issuer set a price range before the sale and waited until pricing to divide shares into local and 144a tranches. This is taken for granted in other countries, but is a novelty in Colombia, where deals previously needed to set a price before taking orders for two weeks, remaining open to market volatility. The use of greenshoe options could come next.

"Colombia has been moving in the right direction," says Juan Carlos George, head of LatAm capital markets at Citi. "Now you have a bookbuilding process that has been used in different transactions."

The convergence of stock markets across the Andean region through MILA, the proposed integrated Latin American market, as well as looser restrictions for pension funds’ investments should mean more deals from Chile, Colombia, and Peru. Investors want access to Peru, but it still remains behind other countries in terms of new issuance. However, its rules are more in line with international standards than Colombia or Chile, which lacks a bookbuilding process to match the US, Mexico or Brazil.

"Regulations are going to evolve, mainly as a result of the growth in the size of the funds that institutional investors have to invest," Vargas says. "As those pools grow they will need more diverse forms of investment."

Still, in recent years, LatAm issuers have proved they can deliver transactions as big as those anywhere in the world, even if investors’ reactions aren’t always positive. Petrobras’ $70 billion 2010 follow-on – or $20 billion if you prefer to count the market-oriented portion – upset minority holders. Santander Brasil’s $7.5 billion IPO set a benchmark in 2009, but traded poorly. Buyers of OGX’s $4 billion 2008 IPO likely were regretting it in 2013.

Santander Mexico has so far fared better than its Brazilian counterpart. This year, Banco do Brasil’s $5.7 billion carve-out of its BB Seguridade insurance business was well received.

Left out

One of the main difficulties ahead may be for smaller issuers. They still lack the access to the equity market that their US counterparts have, although there are exceptions including several Chileans and Brazilian Linx, which raised $265 million this year. Brazil’s Bovespa Mais platform for smaller companies was a start, but only counted three stocks as of July.

"We still haven’t developed a market for smaller companies to list," says José Olympio Pereira, CEO of Credit Suisse in Brazil. "We’re seeing many relatively smaller companies go public in China and India. There is still a lot of potential. We’ll eventually get there." LF

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