53542 PATTERNS OF FINANCING DURING PERIODS OF HIGH RISK AVERSION: HOW HAVE LATIN FIRMS FARED IN THIS CRISIS SO FAR? Tatiana Didier May 29, 2009 Abstract This note examines the extent to which firms in Latin America have been able to raise capital through debt and equity securities as well as syndicated loans, both abroad and domestically, since the onset of the 2008 global financial crisis. The public and the private sectors alike lost access to foreign sources of financing during the height of the turbulence. Furthermore, two months after the Lehman Brothers' collapse, only governmentowned firms and governments themselves were able to reenter international markets to some extent and raise capital. Thus, the evidence suggests an important role for government guarantees in attracting foreign investors in times of high risk aversion. In domestic and syndicated loan markets, there has been a marked decrease in the total amount raised, although they have remained a viable option for the private sector in Latin America. To the extent possible, nongovernment borrowers have been able to raise capital in these markets and have generally met their rollover needs. In contrast, the role of sovereign guarantees in attracting local investors seems to have been more important in Eastern Europe and Southeast Asia, where government entities have accounted for respectively 80 and 44 percent of all new issues in local markets, compared to less than 15 percent in LAC. 1. Introduction Governments in advanced economies, especially in the U.S., have announced large fiscal stimulus and financial rescue packages to help them recover from the current economic downturn. However, these packages will need financing. How will this affect the access of emerging economies to foreign capital markets? These packages may generate a global crowding out by mobilizing savings towards richer countries and elevating the real interest rate which, in turn, may raise the cost of borrowing. In other words, firms and governments in developing countries might find it harder, and possibly more costly, to raise capital in international financial markets. In the same fashion, governments throughout emerging markets, including several Latin American countries, have also announced relatively large fiscal stimulus packages to help their economies recover from their current slump. Hence, the question on how to finance these packages also arises. Will governments rely on domestic capital markets, thus possibly affecting the access of the private sector to local sources of financing? This note aims to describe the current evolution of access to capital markets, both domestically and abroad, with a focus on whether emerging markets are being crowded out of international capital markets, and if so, the role of domestic capital markets. Access to international capital markets by the private sector in emerging market economies has deteriorated substantially since the start of the current financial crisis. This is evidenced by high frequency data on domestic and crossborder issuance of securities (equity and debt) and syndicated loans from 1990 to February 2009, which this notes analyzes. The dataset (SDC New Issues database) includes all transactions by the private sector in local and international capital and syndicated loan markets, and by governments in foreign capital markets. Government issues in local markets are not covered in this dataset and hence not addressed in this note. The local banking sector is only covered through the extent of local banks' participation in the syndicated loan market. This type of evidence provides a clear, although incomplete, assessment of access (or lack thereof) to finance in local and international capital markets by the private and public sectors, as well as their rollover needs. 2. Volume of New Security Issues During 2006 and 2007, the seven largest countries of Latin America (LAC7 countries) raised a total of $167 and $184.8 billion, respectively, with an average $13.9 and $15.4 billion per month, either through domestic or foreign capital markets in equity, bonds, and syndicated loans. These numbers are even more striking if the first three quarters of 2008 are considered, in which an average of $22.4 billion per month was raised, amounting to a total of $201.7 billion. However, between October 2008 and February 2009, firms and governments in Latin America were only able to obtain around $11 billion per month, 58% less than the same period in 200708. Figure 1 shows the substantial decrease in the issuance of new securities or syndicated loans. New corporate and sovereign issues abroad since September 2008 have fallen 10% compared to the same period a year earlier, whereas in domestic markets and in the syndicated loan market, the amount raised by corporations in 2009 represents a striking decline, of 71% and 89%, respectively. Despite this marked decrease in the amount of new syndicated loans, they still accounted for most of the new issues during the height of the crisis, from September to November 2008. New loans accounted for, on average, 78.2% of all new issues during this period. During the same period a year earlier, they accounted for only 30% of capital raisings, where both new security issues at home and abroad were significantly larger. 3. Rollover Needs of the Private Sector Figure 2 allows a comparison of new capital raised with expiring liabilities (aka rollover needs) of the private sector. It suggest that LAC7 countries seem to have faced a credit crunch in October 2008, i.e., at the height of the crisis.1 Mexico and Chile were the most affected with a gap between rollover needs and new issues of around $300 million. The other LAC7 countries also faced a large gap. It should be noted though that $18 billion of the $21.3 expiring liabilities in October 2008 can be accounted for by a maturing syndicated loan of the Brazilian mining giant Companhia Vale do Rio Doce, which had raised $50 billion in January of 2008. The aggregate numbers shown in Figure 2 also suggest that the private sector was generally able to meet its rollover needs from November 2008 onwards, even though new issues have fallen significantly in all markets throughout Latin America. For instance, the private sector in LAC7 countries was able to raise $13.3 billion in excess of its expiring liabilities between November 2008 and February 2009. Furthermore, most of the new capital raised in this period by the private sector, over 97% of the total amount, was raised locally or in the syndicated loan market. In other words, although foreign capital markets have remained mostly closed since September 2008, firms have been able to rely on local markets or on the syndicated loan market for both rollover and new issues. 4. The Role of Governments and GovernmentOwned Firms The data presented in Figures 1 and 2 and described above suggests a decline in access to new capital in all markets since September 2008 for the private sector. Furthermore, Figure 3 shows that governments 1 It is possible that firms raise capital in anticipation to its rollover needs in the near future. Hence, the comparison on a monthly basis of these two figures might not be an accurate measure of the gap in firms' rollover needs. A detailed firmlevel analysis of the timing of new issues is needed but it is beyond the scope of this short technical note. 2 or governmentowned firms have been responsible for a significant share of the total capital raised since then, and especially since December 2008. Hence, the date suggests an important role for government guarantees in attracting investors and syndicated lenders to Latin firms in times of high risk aversion. For instance, over 50% of the total amount raised can be accounted by governments or government owned firms alone in December, almost 66% in January, and more than 30% in February. However, between January and September 2008, the total capital raised by these two agents was on average only 11.5% of the total amount being raised every month. As depicted in Figure 3, the private sector might have been hit harder than the public sector during this crisis. In Figure 4, domestic and foreign markets are analyzed separately to evaluate the role of sovereign guarantees in different markets. a. Foreign Capital Markets Foreign capital markets were closed for two months after the Lehman/AIG episode as shown in the top panel of Figure 4. However, since December 2008, the public sector (including governmentowned firms) has been able raise new capital abroad, being the first sector to tap into new capital in international capital markets. Governments from Brazil, Colombia, Mexico, and Peru issued new debt abroad. Furthermore, between September 2008 and February 2009, only the public sector has had access to foreign capital, with the only exceptions being InPar S.A. from Brazil and Mexoro Minerals Ltd. from Mexico. In other words, governments or governmentowned firms have been responsible for close to 100% of all foreign new issues since September 2008. While this prevented the total of new issues in foreign markets from declining too much, it also suggests a potentially important role for government guarantees in attracting foreign investors in times where access to markets for the private sector is hindered by high risk aversion. b. Syndicated Loan Markets Contrary to the patterns observed in foreign securities markets, the middle panel in Figure 4 suggests that syndicated loans have been accessible to the private sector, including both governmentowned and nongovernmentowned firms. However, lack of data prevents an analysis of the role of sovereign guarantees in loans given by the domestic banking sector. c. Domestic Capital Markets The fall in new capital raising issues in local markets becomes evident in the bottom panel of Figure 4.2 On average, the private sector was able to raise $5.5 and $5.6 billion per month from January 2007 to September 2008, whereas in the period October 2008 to February 2009 the monthly average decreased to $2.5 billion. Nevertheless, as opposed to the patterns observed in the foreign markets, there is little evidence that government guarantees are important for attracting capital from local investors during periods of high risk aversion. The amount raised by governmentowned firms represents less than 15% of the total amount raised through new equity or debt issues in domestic markets. If the same period in the previous year is considered, the percentage is similar, at around 10%. The total amount raised in domestic markets has not been concentrated in a particular country. New issues throughout the region are still taking place. For instance, on average Brazil and Mexico accounted for a larger share of the amount raised locally, around 40% and 20% in the period from October 2008 to February 2009, followed by Colombia and Chile, which represented 11% and 10%, respectively. However, if the same period a year earlier is considered, Brazil and Mexico accounted for 71% and 25%, respectively, whereas Chile and Colombia represented together less than 5%. In February 2009, new 2 Government issues in local markets are not included in these numbers. The local banking system is also not analized. 3 issues by Colombian and Argentinean firms represented 33% and 35% of the total amount raised, respectively, suggesting that sizeable new issues across the region are taking place. Lastly, despite this fall in the amount of capital raised in local markets, the new capital raised has not been concentrated in few issues by large firms. The number of firms that have been issuing new capital has been comparable to historical averages. For example, in December 2008, 4 firms from Argentina, 9 firms from Brazil, and 7 from Mexico raised new capital in local markets. An exception though is Colombia where a greater number of firms have gained access new capital in local markets recently ­ on average only 1 firm raised new capital locally in the 2000s, whereas in the first two months of 2009, almost 5 firms each month had access to new capital locally. 5. Comparison with other Emerging Markets Firms in other regions of the world are facing similar problems to the ones faced by Latin American companies. Figure 5 shows capital raising activity in Southeast Asia and Eastern Europe in both domestic and foreign markets. Similarly to the patterns observed for LAC7 countries, access to foreign capital markets has been almost nonexistent for the 2month period after the spread of the turmoil in U.S. financial markets to the rest of the world. Furthermore, only governments or governmentowned firms have been able to raise any new capital in foreign markets since then. Once more, close to 100% of all foreign issues can be traced back to the public sector. Similarly to what has been observed in Latin America, new issues in domestic markets have decreased in both Eastern Europe and Southeast Asia, as shown in Figure 5. However, while domestic markets remained a viable source of financing for the private sector in Latin America, government guarantees might have played a more important role in domestic markets in these two regions over this period. For instance, governmentowned firms have been responsible for 44% of all new issues in domestic capital markets in Southeast Asia since October 2008, whereas previously in 2008, the share of new issues by governmentowned firms has been on average less than 25% every month. The patterns in Eastern Europe are even more striking: capital raised by governmentowned firms represented 80% of all new issues in local markets after October 2008 versus 20% in the first nine months of 2008. 6. Conclusion New security issues in international capital markets throughout emerging markets have dropped sharply since the onset of the 2008 global financial crisis. Both the public and the private sector lost access to foreign sources of financing during the height of the turbulence. However, since December 2008, only twomonths after the Lehman event, only governments or governmentowned firms from for Latin America have been able to raise capital abroad. Similar patterns are observed in Eastern Europe and Southeast Asia. Therefore, the evidence suggests an important role for government guarantees in attracting foreign investors in times of high risk aversion. In domestic markets, the amount of new issues has also decreased significantly during the current financial crisis. However, while domestic and syndicated loan markets remained a viable source of financing for the private sector in Latin America, government guarantees seem to have played an important role in Eastern Europe and Southeast Asia. In sum, the private sector in Latin America, and in emerging markets more broadly, has been living in a world of scarce foreign capital and have been relying, to the extent possible, on local markets, on domestic banking sources of finance, and on their own cash, to cover its financing needs. Without access to foreign markets and with lesser ability to raise capital domestically, the private sector has been facing stronger credit constraints than the public sector (including governmentowned firms) during these last turbulent months. 4 Annex 1. Figures Figure 1. Capital Raising Activity by LAC-7 Countries Capital Raised 60,000 50,000 40,000 US$ Millioon 30,000 20,000 10,000 0 Aug-07 Aug-08 May-07 Jul-07 Nov-07 Apr-08 May-08 Jul-08 Nov-08 Jun-07 Sep-07 Dec-07 Feb-08 Jun-08 Sep-08 Dec-08 Feb-09 Oct-07 Jan-08 Mar-08 Oct-08 Jan-09 Domestically* Abroad Synd. Loans * Does not include government bonds in domestic markets. Figure 2. LAC-7: Capital Raising Activity and Rollover Needs of the Private Sector All Markets* 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 Jan-07 Mar-07 Jul-07 Sep-07 Jan-08 Mar-08 Jul-08 Sep-08 Jan-09 Mar-09 Jul-09 Sep-09 Total Amount Raised Rollover Needs * Does not include government bonds in domestic markets. 5 Figure 3. The Role of Governments Percentage of Capital Raised by Governments or Government-Owned Firms 70% 60% 50% 40% 30% 20% 10% 0% Dec-07 Dec-08 Nov-07 Aug-08 Nov-08 Feb-08 Apr-08 Sep-08 Feb-09 Jan-08 May-08 Jun-08 Oct-08 Jan-09 Mar-08 Jul-08 * Does not include government bonds in domestic markets. 6 Figure 4. The Role of Governments in Domestic and Foreign Markets Total Amount Raised Abroad 14,000 12,000 US$ Millioon 10,000 8,000 6,000 4,000 2,000 0 Jun-07 Aug-07 Nov-07 Jun-08 Aug-08 Nov-08 May-07 Jul-07 Sep-07 Jan-08 Feb-08 Apr-08 May-08 Jul-08 Sep-08 Jan-09 Feb-09 Oct-07 Dec-07 Mar-08 Oct-08 Dec-08 Total Government or Government-Owned Firms Total Amount Raised through Syndicated Loans 20,000 18,000 16,000 14,000 US$ Millioon 12,000 10,000 8,000 6,000 4,000 2,000 0 Jun-07 Aug-07 Nov-07 Jun-08 Aug-08 Nov-08 May-07 Jul-07 Sep-07 Jan-08 Feb-08 Apr-08 May-08 Jul-08 Sep-08 Jan-09 Feb-09 Oct-07 Dec-07 Mar-08 Oct-08 Dec-08 Total Government-Owned Firms Total Amount Raised Domestically* 14,000 12,000 10,000 US$ Millioon 8,000 6,000 4,000 2,000 0 Aug-07 Aug-08 May-07 Apr-08 May-08 Jun-07 Oct-07 Nov-07 Jan-08 Mar-08 Jun-08 Oct-08 Nov-08 Jan-09 Jul-07 Sep-07 Dec-07 Feb-08 Jul-08 Sep-08 Dec-08 Feb-09 Total Government-Owned Firms * Does not include government bonds in domestic markets. 7 8 US$ Millioon US$ Millioon 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 May-07 May-07 Jun-07 Jun-07 Jul-07 Jul-07 Aug-07 Aug-07 Total Sep-07 Sep-07 Total Oct-07 Oct-07 Nov-07 Nov-07 Dec-07 Dec-07 Jan-08 Jan-08 Feb-08 Feb-08 Mar-08 Mar-08 Apr-08 Apr-08 Southeast Asia May-08 May-08 * Does not include government bonds in domestic markets. Total Amount Raised Abroad Jun-08 Jun-08 Jul-08 Jul-08 Total Amount Raised Domestically* Aug-08 Aug-08 Sep-08 Sep-08 Oct-08 Oct-08 Nov-08 Nov-08 Government-Owned Firms Dec-08 Dec-08 Government or Government-Owned Firms Jan-09 Jan-09 Feb-09 Feb-09 US$ Millioon US$ Millioon 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 May-07 May-07 Jun-07 Jun-07 Jul-07 Jul-07 Aug-07 Aug-07 Sep-07 Total Sep-07 Total Figure 5. Capital Raising Activity in the World Oct-07 Oct-07 Nov-07 Nov-07 Dec-07 Dec-07 Jan-08 Jan-08 Feb-08 Feb-08 Mar-08 Mar-08 Apr-08 Apr-08 Eastern Europe May-08 May-08 Jun-08 Total Amount Raised Abroad Jun-08 Jul-08 Jul-08 Total Amount Raised Domestically* Aug-08 Aug-08 Sep-08 Sep-08 Oct-08 Oct-08 Nov-08 Nov-08 Government-Owned Firms Dec-08 Dec-08 Government or Government-Owned Firms Jan-09 Jan-09 Feb-09 Feb-09