FEATURE: LatAm companies, investors navigate around coronavirus

FEATURE: LatAm companies, investors navigate around coronavirus

Asset Management Bonds Debt Capital Markets Corporate & Sovereign Strategy Economy & Policy Equity Fixed Income Funds Structured Finance Project & Infrastructure Finance Latin America

Latin American banks, investors and businesses, reeling from the impact to the global financial markets from the novel coronavirus, are making preparations to insulate themselves from the inevitable spread, despite the still low number confirmed cases in the region.

Even though there are still under 20 confirmed cases in Latin America and the Caribbean as of Wednesday, according to the World Health Organization (WHO), the fact that the region is a major supplier of food and industrial commodities to China, the epicenter of the COVID-19 pathogen outbreak, is having an outsized impact.

The effective shut down of Chinese supply chains over the past four to six weeks, caused by massive quarantines halting the movement of millions of people, has roiled markets and disrupted trade and commerce on a global scale. China has 80,422 confirmed cases and nearly 3,000 recorded deaths. So far there have been no reported deaths in the LAC region.

Brazil, Chile, Peru, and Uruguay all count China as its biggest trading partner with total China-Latin America trade increasing from $17 billion in 2002 to $306 billion in 2018, according to the US Congressional Research Service (USCRS).

China’s imports from Latin America and the Caribbean amounted to almost $158 billion in 2018, accounting for almost 7.5% of China’s overall imports, and comprising primarily natural resources, such as ores, soybeans, petroleum and copper, the USCRS data shows.

In the last week, the prices of copper and iron have plunged, pressuring the economies of the commodity-dependent Latin American region.


SOURCE: LONDON METALS EXCHANGE

On the consumer side, Latin America companies have also been impacted as China closes its shopping malls and quarantines entire cities in a bid to contain the spread of the virus.

Among those directly affected is Mexican bakery conglomerate Grupo Bimbo, which was forced to halt production at its production facility in the city of Wuhan at the epicentre of the crisis last month.

Brazilian protein producers are also particularly sensitive to demand in China after ramping up production to the mainland in response to an African swine fever in 2018.

Brazilian exports to China, Hong Kong and Macau totaled $4.72 billion in February and represented 28.9% of the country’s total exports, a 20.9% increase compared to the same month in 2019, according to figures from Brazil’s Ministry of Economy.

“Brazilian meat packers have been increasing their exposure to China as a result of [African Swine Fever], varying from 10% to 30% in total sales. Even if Chinese demand doesn’t fall, the logistics in late January and February, with not enough people working at the ports or in storage facilities could be affecting meatpackers,” said one US-based fixed-income investor specializing in the consumer products sector who asked for anonymity given he has open investments in the region.

Latin American bottling, food and drinks companies have not yet suffered because their supply chains tend to be within the Americas, but if the virus were to spread in the region, their operations would be disrupted, this investor said. The retail sector would also suffer due to the closure of shopping centers.

PREPARATIONS

Behind the scenes, some companies are taking steps to prepare themselves for the possible impact of COVID-19 on their operations. According to the WHO, there are seven confirmed cases in Ecuador, five in Mexico, two in Brazil and one each in Argentina, Chile and the Dominican Republic.

In Brazil, several private companies in the midst of merger and acquisitions (M&As) are paying closer attention to the spread of the virus and trying to predict how it may affect the capitalisation of the companies, said Gabriella Maranesi Najjar, a partner Vella Pugliese Buosi Guidoni Advogados.

“What I am seeing is an additional concern and precaution in moving forward with whatever is on the table and a lack of confidence in what will come next. There is an additional concern with Material Adverse Change (MAC) clauses and we have started to determine whether coronavirus would be considered a force majeure event in order to trigger MAC clauses,” she said.

NOT 'IF' BUT 'WHEN'

Paraphrasing the statement made by the US Centers for Disease Control and Prevention (CDC) last month, several market participants told LatinFinance it is less a case of ‘if’, but ‘when’ the virus will put a drag on the regional economy.

Earlier this week, Goldman Sachs became the latest investment bank to recalculate its 2020 growth forecasts for Latin America; cutting to 1.5% from 2.2% its predicted growth rate in Brazil and to 0.6% from 1% in Mexico. Growth forecasts for Colombia, Peru and Ecuador were also revised downwards.


Volatility in the US stock markets also continued to be reflected on local exchanges and showed little sign of abating after the US Federal Reserve lowered its benchmark rate by 50 basis points to a range of 1% to 1.25% on Tuesday.

The flight to safe assets continued to drive down yields with US 10-year Treasury bonds falling below 1%, an all-time low and German bunds hit -0.63%, according to data provider Refinitiv.


Brazil’s Bovespa index closed down 1.02% on Tuesday in the wake of the US interest rate announcement and expectations the country’s Central Bank would follow suit. However, global markets ricochet higher on Wednesday, illustrating the volatile nature of markets.

“The market conditions have gotten shaky over the last week or so, but it is hard to separate this from the virus, as both are interrelated,” said White & Case LLP partner Don Baker in São Paulo.

Several debt and equity issuances have been suspended until market conditions improve in Brazil.

“Transactions involving public issuance of both debt and equity issuances have been affected because the market windows have closed and the market volatility is high,” said Vella Pugliese’s Najjar.

NEW OPPORTUNITIES

Historically low yields on sovereigns, however, are also creating opportunities as some investors switch from hunting for safe havens to searching out higher yields in Latin America.

“When you see such high volatility in the equities market, institutional investors and small qualified investors will seek to protect their principle and move funds to more fixed income instruments. Essentially it brings more appetite to the market for these types of instruments,” said Rio Bravo Investimentos Head of Infrastructure Sérgio Brandão.

Fixed-term and tax-free debt instruments, such as infrastructure debentures, are among those experiencing growing demand from investors in Brazil.

The high local content requirements in infrastructure projects can also help insulate investors by reducing the number of inputs required from foreign suppliers, Director of Specialized Finance at Sumitomo Mitsui Banking Corporation (SMBC) Guilherme Alice told LatinFinance. Alice spoke from his home after being self-quarantined upon returning from Spain.

In 2019, fixed income assets reduced their participation in the total issued due to a higher placement of shares and Real Estate Investment Funds, according to data from the Brazilian capital markets association ANBIMA.

Tax-exempt debentures targeted at infrastructure projects rose to BRL33.2 billion from BRL21.8 billion that year, totalling 70 transactions in the primary market last year with an average placement of 12.6 years from 10.3, the ANBIMA data show.

Several investors expect the trend to continue into 2020.

“In the past, we used to see funding structures for brownfield projects with cash flow and now it seems that [investors] are being a little bit riskier and putting their money into greenfield projects. Some banks are leading these types of issues in the Brazilian markets [and] it is quite attractive because the tenor is increasing and they are taking good yields,” said Leonardo Martins, Founding Partner at Equipo Capital in Rio de Janeiro.

Efforts by Latin American governments to address the risk of Coronavirus should help bolster investor confidence in the region.

To this end, Latin American development bank CAF recently made available a USD 300 million credit to help countries manage the risk and provide a timely response to the spread of the virus in Latin America.

Ultimately, it will be actions taken by the Chinese government that will have the greatest impact, says one veteran emerging markets strategist.

“The impact of the coronavirus on Latin America will largely depend on what the Chinese do with respect to the stimulus that they will inject into their economy,” said Shamaila Khan, head of emerging markets debt strategies at the asset management firm AllianceBernstein. “If they do what we expect, which is significant infrastructure stimulus, that should provide a significant anchor to commodity prices.”

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