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Abril 2011
Invirtiendo en Deuda Latinoamericana
Agenda
• Latin America Fundamentals
• From a Macro Perspective
• From a Corporate Perspective
• Latin American Debt: Where’s the Value?
2
• Technicals supporting Latin American Debt
The Rise of Latin America
3
Chile
Latin America Macro Fundamentals:
Over a Decade of Structural Changes in Latin America
Entrenched deficits
US$50 billion
Low
1990’s
Fiscal situation
International Reserves
Commodity Prices
2010
US$550 billion (net US$ creditor)
Balanced budgets allow fiscal stimulus
High
4
High and persistent inflation
High rates, short tenor
All junk except Chile
Limited capital markets and bank credit
Inflation
Local Interest Rates
Credit Ratings
Credit Markets
Under control: allows monetary stimulus
Low rates allow for long term markets (mortgage credit)
80% of region is Investment Grade
Strong local issuance by governments and corporates, strong bank lending
Latin America Macro Fundamentals:
Stability has Boosted its Potential Growth Rate
Higher growth mainly explained
by:
• Inflation Control
• Political and Institutional
GDP, PPP Annual Index (IMF)Base 100 = 2003
125
145
165
185
205
LatAm
US
EU
CAGR 2003 – 2009
LatAm: +6.4%
5
• Political and Institutional
Stability
• Developing Credit Markets
• Better Commodity Prices
Source: Cepal and OCD
25
45
65
85
105
125
1980 1985 1990 1995 2000 2005 2010 2015
EU
CAGR 1980 – 2003
LatAm: +4.8%
US: +5.7%
US: +4.2%
Latin America Macro Fundamentals:
Less Levered than Developed Markets
Sovereign Debt/ GDP
30
40
50
60
70
80
6Source: Moody’s
0
10
20
30
Devoloped Economies Latin America
2000 2005 2010
Latin America Macro Fundamentals:
LatAm Entered the Crisis with a Balanced Budget
Fiscal Balance (% GDP)
-4
-2
0
2
4 Fiscal Balance(% GDP)
7Source : Central Banks, FMI and Bloomberg
-14
-12
-10
-8
-6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
LatAm
US
Euro Zone
Japan
Latin America Macro Fundamentals:
Inflation Under Control: Flexible Monetary Policy
20
25
30
35
40
45
CPI rate (%)
LatAm Nominal Interest Rate (%, weighted average)
8Source : Central Banks, The Economist, IMF
0
5
10
15
20
1995 1997 1999 2001 2003 2005 2007 2009 2011E
Latin America Macro Fundamentals:
Countries Saved The Surpluses During Good Years
Latin America FX Reserves and SWF (USD bn) 2010 Foreign Exchange Reserves
10%
12%
14%
16%
400
500
600
700
SWF Chile
SWF Brazil
% GDP
Argentina
Brazil
Chile
Colombia
9Source: Official agencies of each country, Bloomberg
4%
6%
8%
0
100
200
300
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 0% 10% 20% 30%
Mexico
Peru
Venezuela
LatAm
Latin American Debt: Where’s the Value?
Sovereign Debt: Markets Have Recognized Better Credit Quality
2000 Apr-2011
Argentina BB- B
Brazil B+ BBB-
Chile A- A+
Colombia BB
S&P RATING
1.500
2.000
2.500
EMBI+ Brazil
EMBI+ Mexico
EMBI+ Chile (Global)
BBB-
10Source: BloombergData as of March 2011
Colombia BB
Mexico BB+ BBB
Peru BB-
Venezuela B BB-
Dominican Republic B+ B
Investment Grade
BBB-
0
500
1.000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EMBI+ Mexico BBB-
Latin America Corporate Fundamentals:
Improved Cash-flow and Decreasing Leverage
Revenues and EBITDA have mutipliedby almost 4x
CAGR 2000-2010- Revenues: 14.4%- EBITDA : 13.6%
0%
10%
20%
30%
40%
50%
0
100
200
300
400
500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
LatAm: Revenue & EBITDA Performance
Revenues (LHS) EBITDA (LHS) EBITDA Margin (RHS)
Indebtedness and Interest Coverage Ratio
LatAm: Revenue & EBITDA Performance
11Source: J.P. Morgan LEI Corp Index, Barclays Capital, Santander Investment, BTG Pactual, Bloomberg, GBM , Deustche Bank y J.P. Morgan and companies’ financial statements Note: Revenue and EBITDA Performance based on Latam Large Cap; Leverage Ratio: Net Debt to EBITDA; Coverage Ratio: Interest Expenses to EBITDAData as of December 2010
Indebtedness and Interest Coverage Ratio
Leverage has fallen all across thecorporate universe
Coverage ratios therefore haveimproved
Despite a brief spike in 2008/2009due to lower EBITDA generation, bothsides of the equation are nowimproving.
3.7x3.8x
4.2x
3.8x
3.0x2.9x 2.9x 2.9x
3.7x
3.3x
2.7x 2.7x
2.3x2.1x
3,5x
4,0x
4,5x
5,0x
5,5x
6,0x
6,5x
7,0x
0,0x
0,5x
1,0x
1,5x
2,0x
2,5x
3,0x
3,5x
4,0x
4,5x
2000 2002 2004 2006 2008 2010LTM 2011E
Indebtedness Interest Coverage (RHS)
Issuers have focused on decreasingleverage and on extending debtmaturities.
Change in corporate maturities over the last two years
LatAm corporate debt maturities by year
Latin America Corporate Fundamentals:
Extension of Maturity profiles
0
5
10
15
20
25
30
35
40
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021+
US$ billion
12Source: JPMorgan.
Change in corporate maturities over the last two years
Substantial decrease in debtamortizations for next 5 years
Low default probability for LatAmcorporate issuers .
-5
0
5
10
15
20
25
30
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021+
US$ billion
2011 Default 2010 Default
Region Forecast Actual Default % Outstanding % high yield
Total EM 0.5% 1.4% 4.0% 11.5%
Asia 0.5% 0.4% 2.2% 11.0%
Emerging Europe 0.4% 1.2% 8.5% 19.6%
Latin America 0.6% 2.1% 3.1% 7.1%
Middle East & Africa 0.9% 1.9% 1.0% 2.4%
2009 Default
2010 Default Forecast vs. Actual YTD and 2009
Latin America Corporate Fundamentals:
Default rates near Historical Lows
Default rates in LatAmare forecasted at just0.6% for 2011
13Source: JPMorgan and Moody’s.
Historical Global vs. LatAm defaultsWhile rising in 2009,default rates haverapidly declined during2010 reverting tohistorically low levels
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
-95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09
Global Latin America
LatAm issuers rating upgrades to downgrades+
Rating Agencies have reflected thisby providing more corporateupgrades than downgrades
Latin America Corporate Fundamentals:
Fundamentals - Credit Quality
Fitch Global Corporate Finance rating actions by region:
3Q10(As % of Regional Ratings YTD)
Downgraded Upgraded
Asia/Pacific 4.9 8.9
Europe 8.7 7.8
Latin American and Caribbean 4.5 11.6
Middle East and Africa 2.3 2.3
North America 7.7 8.6
Total 7.1 8.3
Region
14
LatAm issuers rating upgrades to downgrades+(since 2009)
Source: Global Corporate Rating Activity Report” published on Dec 1st, 2010 - JPM from Moody’s, S&P, and Fitch
Note: Number of upgrades and downgrades considers the aggregate of the 3 major rating agencies.
Clear improvements in creditquality since 2Q09
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-Jan-09 Jan-10 Nov-10
Upgrades to Downgrades
Yield in LatAm HY Index at April’s month end = 7.7%
Latin American Debt: Where’s the Value?
LatAm HY & IG in a Low Yield World Context
5.6 5.66.1
7.37.7 7.9
5
6
7
8
9
Yield
(in %)
15US Treasury: Barclay’s U.S. Treasury Index; US Inv Grade Credit: Barclay’s U.S. Corp. Inv. Grade Index; US High Yield: Barclay’s U.S. Corp. High Yield Index; LatAm High Yield and High Grade: J.P. Morgan CEMBI Broad Latin High Yield and Investment Grade Index; EUR High Yield: Barclay’s Pan-European High Yield (Euro); Emerging Market Debt: J.P. Morgan EMBI+ Index. Note: Yield reflects the yield-to-maturity (YTM) for a bond or index. Data as of April 2011
In a low yield world, LatAm HY emerges as one the best yielding fixed income asset class
Unclear economic recovery weakens equity while strengthens fixed income
0.1 0.3
1.9
3.9
0
1
2
3
4
3-month
T-bills
3-month
LIBOR
US Treasury US Inv
Grade
Credit
EM Europe
Corp
LatAm High
Grade
Emerging
Market Debt
US High
Yield
LatAm High
Yield
EUR High
Yield
LatAm holds similar yields than the high yield universe, but with better credit quality and higher economic growth…
Latin American Debt: Where’s the Value?
LatAm HY vs. Developed Markets HY
LatAm HY U.S. HY EUR HY
Leverage 2.9 3.8 3.9
Economic Growth 4.3% 2.7% 1.7%
Rating BB- B+ BB-
16LatAm HY: CEMBI Broad Latin HY Index ; US HY and EUR HY: Barclays US High Yield and EUR High Yield Indices.
Leverage figures were computed by Moneda‘s Research Department taking individual companies’ Net Debt/EBITDA metrics that belong to each Index from Bloomberg data. GDP Growth figures are IMF estimates. Data as of April 2011.
…LatAm deserves tighter yields than developed markets
Rating BB- B+ BB-
YTM 7.7% 7.3% 7.9%
Current levels of spreads still offer a potential compression of 260 bps to last bottom (203bps)
Latin American Debt: Where’s the Value?
LatAm I.G. vs. LatAm H.Y.: Spreads
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
217217217217
464464464464
17Source: JPMorgan CEMBI Broad Latin High Yield and Investment Grade Indices, since December 2005.Note: Spread according to average life of each index. Data as of April 2011.
In the current global and regionalscenario, due to macro and creditfundamentals, our estimations suggesta compression of around 150bps forthe spread between High Yield andInvestment Grade credits…
0
200
400
600
800
1,000
1,200
1,400
247247247247
CEMBI Broad Latin America IG CEMBI Broad Latin America HY
Latin American Debt: Where’s the Value?
EM Local Bond Market: Stellar Performance & Still Attractive Spreads
Local bond market total return (USD)
LatAm Sovereign bonds in localcurrency have had stellar returnsversus other EM regions…
18
Local bond market yields(% - Local Currency)*
Source: BAML Weekly Bond Monitor Report - April 17th, 2011
Although its stellar performance, itpresents the highest spread among itsEM regional peers
High interest rates even despite:
- Better public situations in LatAmthan in developed countries
- Willingness to fight inflation
- Companies with better perspectives
Latin American Debt: Where’s the Value?
EM Local Bond Market: High local rates & FX appreciation Potential
0
2
4
6
8
10
12
14
16
18
20
22
Brazil
Mexico
Long Term Rates
Colombia
Chile
19
There is still room for currencyappreciation:
- Rebalancing of the world economy
- Currencies have not yet returned topre-crisis level
Source: Central Banks, Bloomberg, IMF, JP Morgan.
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
50
60
70
80
90
100
110
120
130
140
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
LatAm currencies vs USDIndex. Jan/00=100
Developed currencies vs USD Index. Jan/00=100
Since the last crisis there has been areallocation towards fixed incomeassets
But cash is still at high levels
Technicals supporting Latin American Debt
Strategic demand for fixed income
Global Portfolio Weightings
20Source: JPMorgan December 2010. FRB Flow of Funds, Haver, Barclays Capital
The strategic shift by pension fundsmanagers into fixed income productsrepresent a long term positive trendfor global credit
Asset liability mismatch magnifiedduring the last crisis has increased theneed for assets with better liabilitymatching potential, such as fixedincome
Target allocations by US pension funds
Conclusions
• Macro Fundamentals Macro level:
o Structural change: Balanced Budgets, commitment to maintain inflation under control
o Sustainable growth driven by internal consumption and China
• Corporate Fundamentals
o Clear deleveraging and improved amortization profile in the LatAm universe
o Outlook for default rates in the region close to its lowest historical level
• Where’s the Value?
21
• Where’s the Value?
o Local currency corporate and sovereign debt, and high yield corporate debt
• Supportive technicals
o Lat-Am is under-owned, allocation is still far relative to the role and weight of the region under different metrics
o Inflows to the region mainly to hard currency sovereign debt
o Institutional demand should gear towards fixed income and specifically towards the EM re-allocation story