Investment bankers bullish on Brazil.
Brazil will probably account for an even bigger share of Latin America’s investmentbanking fee pool next year, as top bankers predict revenue from the region will reach US$2 billion for the second time in three years.
“We were in a bit of a wait-and-see mode in Brazil, with some deals on hold until the elections gave us a green light,” said Alberto Pandolfi, head of investment banking for Citigroup Inc. in Latin America. “Now we have it, and there’s a lot of excitement and optimism in the private sector,” said Pandolfi, whose firm was one of the top three banks by fees earned in the region this year, according to research firm Dealogic.
With the cloud hanging over the region’s biggest economy lifted with the October vote, Brazil is set to dominate business in the region even more than usual in coming months, according to interviews with executives at Latin America’s biggest investment banks. Elections in Brazil, Mexico and Colombia, along with Argentina’s economic crisis, cut into revenue from advising on mergers and acquisitions and underwriting debt and equity this year. The figure dropped to US$1.43 billion through Dec. 12, about 30 per cent less than the US$2 billion generated for all of 2017, Dealogic data show.
Heading into 2019, optimism in Brazil centres on Paulo Guedes, the new administration’s economic “super minister.”
His team seems to have “the right diagnosis about what needs to be done,” said Martin Marron, head of investment banking for JPMorgan Chase & Co. in Latin America. At the same time, the government’s determination to ferret out corruption in the multiyear Carwash probe “speaks very well about the quality of institutions in Brazil,” said Marron, whose firm jumped to first in fees from Latin America this year from fourth in 2017.
In addition to roughly US$33 billion of deals that have been on hold in Brazil, the government is planning transactions that will add to the total. The new administration’s goal is to sell control of about 140 state-owned companies from among the 150 that now operate, including Petrobras Distribuidora SA, Vice President-Elect Hamilton Mourao has said. Bankers are bullish about those plans even while acknowledging obstacles to implementing them and bemoaning a lack of coordination by the incoming team so far.
Even with the October elections, Brazil accounted for US$714 million in investment-banking fees this year, or about 50 per cent of the total for Latin America, up from 46 per cent last year, according to Dealogic.
Initial public offerings in New York by Brazil technology firms contributed to the total, said Facundo Vazquez, co-head of Latin America equity capital markets for Goldman Sachs Group Inc., the biggest investment bank in Brazil this year by fees.
“When we were pricing an IPO two weeks before the election, many people in Brazil were in a panic, calling me and asking, ‘Are you really going to launch this transaction?’” he said, referring to a deal by Arco Platform Ltd., an education company that successfully raised US$220 million in September. The first round of Brazil’s elections was on Oct. 7.
With Brazil “gaining momentum and driving more positive sentiment in the region, we expect economies such as Peru, Chile and Colombia to be more active both in M&A and in capital markets,” said Citigroup’s Pandolfi. The New Yorkbased company is the top international bond underwriter in Latin America this year, according to data compiled by Bloomberg.
In Mexico, the cancellation of a planned US$13 billion airport, which has already been partly built, and the suspension of a round of bidding on oil-exploration concessions are hurting sentiment. Bankers say they’re expecting more volatility in debt and equity capital markets.
But M&A activity may pick up as deals on hold since the July elections may “resurface again next year,” said Augusto Urmeneta, head of investment banking for Bank of America Corp. in Latin America.
“Mexico’s economy is very much linked to the U.S. economy, which is doing pretty well, and they have a new trade agreement,” Urmeneta said. The deal might help Latin America’s second-biggest economy get a boost, with more job creation and a strong consumer sector, while at the same time the volume of remittances sent home from Mexican workers in the U.S. will likely be increasing, he said.
“M&A conversations are picking up in Mexico, in sectors such as infrastructure, consumer and industrial,” said Max Ritter, head of M&A in Latin America for Goldman Sachs. “There are also local companies wanting to diversify, to have exposure to markets outside Mexico.”
Argentina faces another challenging year in 2019, as presidential elections approach and the economy faces a 2.3 per cent contraction this year, according to estimates compiled by Bloomberg. The International Monetary Fund approved a US$56.3 billion credit line in October in a revision from an original US$50 billion agreement signed in June. Equity offerings dropped 75 per cent in 2018 from last year, to US$1.27 billion, data compiled by Bloomberg show, while international bond issuance was 46 per cent lower, totalling US$13.5 billion.
Still, structured financing could help companies in need. MercadoLibre Inc. had to roll over some of its debt and was able to issue a US$880-million convertible bond due 2028, paying two per cent, in an August transaction led by JPMorgan and Goldman Sachs.
Stressed U.S. equity and debt markets and possible interest-rate increases by the Federal Reserve won’t be much of a hurdle for investment-banking activity in Latin America next year, Urmeneta said.
“I don’t see U.S. markets in turmoil, just a correction, and interest rates are being raised at a very gradual pace by the Fed,” he said. “Emerging markets aren’t going to be impacted much.”
BRAZIL IS SET TO DOMINATE BUSINESS IN THE REGION.