Cash Is Flowing South Again

During Mexico's devaluation crisis last March, top aides to Finance Secretary Guillermo Ortiz assembled for an urgent planning session. The U.S. Treasury had just approved its part of a $50 billion worldwide effort to help Mexico refinance $29 billion in tesobonos--short-term, dollar-denominated T-bills--that were putting the country into a severe squeeze. Would that be enough to persuade investors not to blackball Mexico?

When Mexico nearly defaulted on its foreign debt in 1982, it took seven years to win back investors' confidence. This time around, the return came a lot more quickly. Barely two months after President Ernesto Zedillo Ponce de Len put into effect an emergency plan to curb Mexico's trade deficits, rein in the money supply, and restore global confidence in the economy, the country was back in the market. Other Latin countries, whose markets nearly ground to a halt when Mexico lost its footing, were following suit. As it turned out, investors were "overly pessimistic," recalls Mexican Finance Under Secretary Martin Werner. "Their reaction to the devaluation was an overshooting."

NEW BOLDNESS. To be sure, many Latin governments and companies are now paying more for their money than they did before the Mexican crisis--a clear indication that investors are putting a higher price on political risk. But borrowers are also marketing their debt more aggressively and developing new techniques to entice capital back (table). The bottom line: Latin debt issues are well ahead of last year. Securities Data Corp. estimates that borrowers sold $13.7 billion worth of debt through August, up from $14.5 billion for all of 1994. The surge has Ortiz so pumped up that he plans an aggressive global borrowing campaign for 1996.

Mexico's new boldness is a contrast to its first cautious steps last spring, when markets were barely over the shock of the country's surprise peso devaluation. In May, Ortiz cautiously tested the Eurobond market's turbulent waters by selling a private placement of one-year debt worth $110 million for Nafinsa, the Mexican national development bank. The debt's generous yield--6.25 percentage points higher than the London overnight lending rate--was enough to reassure investors worried about a deepening recession.

The successful sale quickly led to a flurry of $900 million more in private placements. Indeed, as the news spread that Mexico would have enough cash on hand to pay off $6 billion in tesobonos coming due over the summer, the Mexicans were surprised to find investors clamoring for longer-term debt again. Heartened, the Mexican government offered $500 million worth of two-year notes through Citibank and Credit Suisse and got bids totaling a stunning $1.8 billion. They ended up selling $1 billion worth of the issue and followed it with an additional $1.3 billion in debt denominated in Japanese yen, German marks, and Swiss francs. But none could have flown without the first big deal. Says cs First Boston Inc.'s capital markets director, Paul Tregidgo: "This was the issue that turned the tide."

Ortiz, who says Mexico has drawn down about half of the $50 billion in Western financial aid, expects to raise an additional $500 million from debt markets later this year. And with Mexico setting the pace, other Latin borrowers are following. A bevy of Brazilian banks--among them several subsidiaries of U.S. and European lenders--have raised more than $2 billion this year, allowing them to earn hefty profits on the spread between Eurodollar borrowing costs of about 10% and the 40% they can earn by lending in the local money market. The Brazilian government has joined in, borrowing $1.6 billion, and the Argentines have easily raised $1.7 billion to refinance higher-yielding debt after insisting during the Mexican crisis that they wouldn't even try to test investor sentiment.

HARDER SELL. To be sure, investors aren't pumping money into Latin America with the abandon they showed in 1993, when a record $22.4 billion worth of debt hit the market. Indeed, governments and corporations are being forced to become more creative than ever to convince investors that the added risk of Latin financings is worth their while (table, page 48). As a result, Latins are stepping up their borrowings in currencies other than dollars to take advantage of low yields overseas. They are also creating new debt instruments designed to allay investors' concerns over the safety of their principal and interest.

For example, Banamex, Mexico's largest lender, closed a securitized debt deal backed by dollar remittances of credit-card purchases made by tourists in Mexico. And Latin oil companies are coming out with hefty asset-backed financings. In June, Argentine oil company YPF sold $400 million worth of notes backed by revenues from exports to Chile. Sources say that Petroleos de Venezuela, the state oil producer, is seeking bids for a similar deal.

Corporations that do not have big export revenues have had to be even more innovative. Apasco, a Mexican cement maker, was able to raise fresh capital with help from Swiss Bank Corp. and the World Bank's International Finance Corp. subsidiary. To get the deal done, the ifc lent Apasco $100 million for 12 years. It then sold $85 million of the loan to a newly created trust in the state of Delaware. Next, the trust sold $85 million worth of certificates backed by the loan to four U.S. insurers. The structure enabled the insurers to buy instruments issued by a World Bank unit instead of Apasco, which has a lesser credit rating. In the end, Apasco obtained its money at an interest rate of 9%, a half-percentage point less than it was paying before the Mexican crisis hit.

Despite the improvement in Latin Americans' access to debt, international equity investors have yet to head back south. Although there have been rallies on many Latin markets since spring, the region has seen only 61 new equity issues, totaling $1.7 billion--a quarter of last year's tally. But as markets slowly open up, that may be changing. Richard Watkins, chief executive of London-based investment bank Latinvest, notes that, since the beginning of September, "there has been a vast amount of discussion. At least 150 companies are considering equity issues."

"SO SENSITIVE." Watkins expects the Mexican corporations that make it to market will be ones with healthy flows of hard-currency export earnings, such as steelmaker Altos Hornos and miner San Luis. But before stock-market investors open their wallets again, many want to see a lot more evidence of political stability and economic growth. Controladora Comercial Mexicana, Mexico's second-largest retailer, had hoped to launch a $75 million stock offering in 1994 but was forced to put it off because of political unrest. The currency collapse left the sale even further in limbo. Now, Finance Manager Jose Calvillo is trying to get it moving again. "The equity market is taking longer to open up," Calvillo says. "The way things are going, we might be able to do [the stock sale] at the end of this year. But the market is so sensitive. Any unusual event could affect it negatively."

Ay, there's the rub. Mexico's efforts to turn itself around have lifted a huge cloud from Latin capital markets. But investors are still wary. As Mexico and its allies discovered, even one diversion from the economic straight and narrow can anger investors and leave markets in the lurch. But in these days of huge international capital flows, investors don't stay angry for long. If they become fully convinced that the region's economic reforms remain on track, the midyear revival of Latin capital markets could have a long way to run.

Latin Borrowers Get Smarter

Here are some of the creative techniques that Latins have devised to raise capital since the Mexican crash:

-- SECURITIZING YPF, the big Argentine oil company, sold $400 million worth of debt backed by dollars earned from petroleum exports to Chile.

-- EXPERIMENTING Mexican cement maker Apasco borrowed $100 million from the International Finance Corp. The World Bank unit then sold $85 million worth of certificates backed by the loan to four U.S. insurers, which had been loath to invest directly in Mexico.

-- MARKETING Mexico, Argentina, and Brazil are raising billions this year by selling high-yield bonds denominated in yen and German marks.


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