Emerging Issuers Find Keys to Cheaper Funding

Global Finance, Nov 2004 by Keeler, Dan

FUNDING IN EMERGING MARKETS

Experts in emerging markets corporate funding gathered at Global Finance's offices to discuss the state of the markets.

GLOBAL FINANCE: What are the latest issuance trends for emerging market companies and how do you expect these to develop?

JORGE CANTONNET, senior managing director, Bear Stearns: Asia has become an increasingly important component of issuance in the international capital markets. Last year, for the first time, Asia surpassed Latin America. As of the first half of 2004 about $26 billion was issued out of Asia-33% of the total issuance. That of Latin America was close to $14 billion, only 18%.

ANDREW ZELTER, managing director, Bank of New York: Over the last four years the volume related to Asia has been quite dominant as it relates to the ADR market. It represents almost 75% of the number of transactions from emerging markets, including Latin America and EEMEA.

JOYCE CHANG, managing director, global head of FX emerging markets and commodities research, JPMorgan: In the debt market, Russian corporate bond issuances-a trend that began last year-remains one that will be firm in 2005. We've seen about $9 billion in Russian corporate issuance, primarily in higher quality telcos and other industrial issuers and private sector banks. In the emerging markets debt markets all the sovereign spreads have compressed. Investors look increasingly for opportunities in corporate debt. In all regions that has outperformed the sovereign issuers this year.

CHRISTOPHER WOOD, principal, debt capital markets, Bane of America securities: We continue to see the story of the haves and have-nots. With the haves-countries such as Mexico-we've seen a big trend this year towards diversifying their investor base and, both the sovereign and the blue chip corporate wanting to do more in the local capital markets and less in the global debt capital markets. We have not seen investors concerned about the Middle East yet, but it could become a growing problem and it would seem to be practical to invest more resources into our Latin American partners to hedge that risk.

SEBASTIAN CHATEL, executive director, equity capital markets, UBS: For the past 18 months there has been a lot of appetite for emerging market equities. We had very good performance for Latin America equities in the secondary market last year and as a result of that this year you've seen for the first time since '97 the reemergence of Latin American IPOs.That market will be propelled one, by past performance, and two, the fact that a lot of money is going into emerging market equity funds. You're seeing a lot more interest domestically as well.

GF: Emerging market companies are often at a competitive disadvantage because they have higher cost of capital. What can these companies do about this?

CANTONNET: One solution is to acquire assets outside of the emerging market. As the company begins to be seen as a credit risk that was diversified globally, their capital structure begins to shift and their capital costs become lower. Crossborder acquisitions or mergers are lowering the cost of capital and making corporates more competitive in the global marketplace.

SUSAN KAUFMAN PURCELL, vice president, Council of me Americas: Some companies are in a very bad neighborhood, for example a country where there is a negative attitude toward capitalism. Those companies have to try and impress upon their governments that certain kinds of behavior prevent the whole country being attractive to foreign capital.

CHATEL: Part of the reason for higher cost of equity and lower equity valuations was poor or less good corporate governance. In Brazil they're trying to tackle this and the result is that companies are coming to market at valuations that are a lot closer to developed market valuations.

ZELTER: Getting stronger name recognition and better familiarity with their story helps issuers tap the markets more effectively and at a lower cost of capital.

PURCELL: There are some companies that figure that their competitive advantage is they don't have corporate governance.

CANTONNET: We're having discussions with clients that are interested in de-listing from the Newark Stock Exchange, for example, and listing in the local markets because of the additional costs and restrictions from conforming to US standards.

WOOD: I don't think companies would de-list because of a lack of desire for better corporate governance, but because of the cost that Sarbanes-Oxley has imposed on those companies.

CHANG: Given the strength of emerging markets this year and the improving sentiment, it's actually been much cheaper for many corporates in the debt markets to come to market in the local markets or in syndicated loans rather than in the traditional bond markets.The combination of the increased costs for corporate governance and the fact that it's actually not saving them very much meant many corporates chose the local markets instead of international markets to issue.

CANTONNET: Local issuance will continue to be a trend and will lead to a lower cost of capital because you're eliminating a lot of the currency risk.