The Great Argentine Sell Off, Part Ii

Spooked by the collapse of Mexico's peso, skittish investors have been pulling out of Argentina's stock market and dumping its bonds. Economy Minister Domingo Cavallo has a way to calm things down. He aims to attract more direct foreign investors who are eager to buy strategic stakes in Argentina's growing economy--and stay for the long haul.

To lure them, Cavallo is launching a new round of privatizations, putting around $3 billion worth of state-run power and petrochemical plants up for sale. The groundwork for the sell-off was laid with Argentina's first big round of privatizations in 1991 and 1992. Now, "Argentina can open up chapter two...very quickly," says David C. Mulford, vice-chairman of investment bankers CS First Boston, which co-managed a $3 billion global public sale of shares in YPF, the formerly state-run oil company, in 1993.

Portfolio investors have been selling Argentine holdings partly because the country ran an $8 billion payments deficit last year. At the same time, its dollar-linked peso has been over-valued--although, unlike Mexico's, it is fully backed by central-bank dollar reserves. Direct investment inflows, along with other Cavallo measures such as budget-tightening, will bolster Argentina's finances. A display of confidence by direct investors should also help offset stock market gloom.

FRIENDLY RULES. A flock of bidders is expected to show up for the new round. Prominent among them are American, Chilean, and European electric utilities that bought stakes during the previous privatizations. Some, especially early birds such as the Chileans, have reaped hefty returns on their investments. One U.S. company actively looking at the new offerings is Houston Industries Energy, a subsidiary of Houston Industries Inc. that already has four ventures in Argentina. They have been "a positive experience for us," says HI Energy Vice-President Edward A. Monto. One deal is a $100 million thermal plant being built by HI Energy and partner Techint, an Argentine industrial group. Also eyeing the new offerings is CINergy Corp., which was created by a recent merger of Cincinnati Gas & Electric and Indianapolis-based PSI. The company already owns shares in two Argentine utilities.

For U.S. utilities, Argentina is a chance to do business in a relatively unregulated market where electric-power producers can charge what the market will bear. That's a big contrast with the environment back at home, where regulators set rates and fix profit margins. U.S. companies "like the rules of the game in Argentina," says Charles J. Wortman, managing director of Chase Manhattan Bank in charge of Latin American project finance. "They are taking a market risk, and everybody knows that up front," Wortman says. "If they are efficient, they make money."

The other big attraction is the rapid rise of demand for electricity--6% to 8% annually in Argentina, compared with 2% to 3% in the U.S. A possible bonus could be large new exports of both energy and petrochemicals to neighboring Brazil. Argentine companies may join with Brazilians in bidding on two petrochemical complexes that will go on sale in the first quarter. And Argentine electricity may help supply a potential power deficit in Brazil's reviving economy.

BIG SPENDERS ONLY. The biggest prize is Yacyreta, a mammoth hydroelectric plant that will eventually pour out 3,000 megawatts of power. Built jointly by Argentina and neighboring Paraguay, the plant's site is close to Brazil's industrial south. Argentina has preliminary agreements with Paraguay to privatize Yacyreta and with Uruguay to privatize Salto Grande, another joint hydro project, possibly by offering long-term operating concessions.

To make sure that foreigners buying Argentina's remaining gems are in for the long term and not for quick capital gains, Cavallo will accept bids only by consortiums led by companies with operating experience. To keep the capital from flowing out again any time soon, the Economy Minister is also insisting that the buyers run the plants for at least five years.

Cavallo hopes the privatization campaign will help ease another problem that has been undermining the confidence of investors: an overhang of public debt. Cavallo aims to reduce the state debt load by accepting Argentine bonds, known as bocones, as part payment for shares in state companies. The bonds, issued to Argentine pensioners, are currently trading at a 50% discount. Thus, Cavallo says, sell-offs worth $3 billion in cash could retire Argentine bonds with a face value of up to $6 billion. Such debt shrinkage would be a balm to market jitters.

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