Friday, 6 February 2009

Tú, Coutinho? Tú Tambêm? These Guys Are a Joke ...


Coutinho: In a few days he will be saying that he was
misunderstood, that he didn't quite mean to say
what he said ... you know what I mean, right?

Read this. This is simply unbelievable. As one source says, this ranks first for joke of the week. The story is ''courtesy´´ of Bloomberg News ...

WTO Claims That Brazil Subsidizes Loans ‘Unfounded,’ BNDES Says


Feb. 6 (Bloomberg) -- World Trade Organization claims that the Brazilian government subsidizes companies by offering loans at less than the benchmark interest rate are “unfounded,” the state-development bank’s president said.


The cost of borrowing from the government-owned lender, known as BNDES, is higher than rates on similar loans in rich nations, bank President Luciano Coutinho told reporters today in Sao Paulo.


Fála sério!
What does this borrowing-costs-in-developed-countries argument has to do with the fact that Brazil is facilitating loans at below-market rates to companies in exchange for political perks or favours? Gimme a break ...

Luciano, correct me if I'm wrong: Lending rates in developed economies are smaller than those in Brazil because the former have a decent record of creditworthiness, or pursued orderly fiscal policies for decades or were somehow friendly to businesses. Borrowing costs in those countries probably reflect a small probability that consumers and companies are likely to default on their obligations. The cost of credit in those nations, not in Brazil obviously, represent risk perception, so the lower the rate, the smaller the perception of risk. Anyways, ... Brazil's cheap BNDES loans are a dumping-like practice and someone must help abolish them.

Petrobras, The Bond Issue and Some Credit Metric Issues -- The Fitch Version

Petrobras headquarters in Rio de Janeiro.
The ugliest company building I have ever seen


Petroleo Brasileiro SA, the pride of state-controlled companies in corporate Brazil, sold $1.5 billion of ten-year bonds this week. Fitch Ratings said today that Petrobras, being a net volume exporter, has a healthy generation of foreign currency cash flow. While Fitch recognizes the positive credit effect of the market-oriented measures implemented over the past several years as well as improvements in corporate governance, there are some concerns. Let's list them ...

-- Among factors that may hinder company ratings and credit metrics are Petrobras' vulnerability to fluctuations in oil prices, exposure to local political interference, currency risk, domestic market revenue concentration and significant medium-term capital-investment requirements linked to the company's ambitious strategic plan.


-- Ratings may be revised if the combination of government control, which underscores the ability to influence corporate strategy and long-term policy decisions, and a domestic market focus, continues to affect operations.

-- Petrobras recently unveiled its $174.4 billion 2009-2013 investment budget, which includes for the first time funds for its pre-salt area in the Santos basin. This investment plan is 55 percent higher than the previous $112.4 billion five year plan released last year. In spite of the $12 billion funds available through state-development bank BNDES, Fitch believes that Petrobras' $29 billion capital expenditure for 2009 may be curtailed given the plunge in oil prices and increasing cost of capital.

-- Having said that, Fitch expects credit metrics to deteriorate; they will remain consistent with the company's ratings, though. The expected drop in hydrocarbon royalty and tax payments will allow Petrobras to still generate sufficient cash flows despite the drop in prices.

Fitch Says Latin Miners Face 50 Percent Ebitda Drop This Year. Investors Ignore Warning, Favour Mining Stocks in Today's Trading Session

Pig Iron: its market in Brazil was paralysed before
year-end after buyers disappeared and price formation collapsed

Fitch Ratings issued on Feb. 4 a report on the Latin American metals and mining industry called ''Bruised but Not Beaten.´´ The report says that regional metals and mining companies are braced for a decline of over 50 percent in their Ebitda along 2009 as prices decline and demand for raw materials, especially in China, tumbles. Yet, after amassing cash in their balance sheets during the 2003-2008 bull market characterised by high demand and high prices, the companies seem to be well positioned to face the current downturn. Yet, Fitch warns: ''The next twelve months will prove difficult for these companies.´´ Jay Djemal, the lead author of the report, said that leverage and interest covenants may be breached by some metal and mining companies in the region as ''a result of the tightening cash flows due to the subdued demand and low metal prices. But very strong cash positions mean it is unlikely that any of the big players will default on their debt obligations.´´ The argument is a bit convoluted ... but it is a warning anyways.

Markets ignored this report -- as opposed to Fitch's very timely report on Brazilian homebuilders, which sent the Bovespa down for a couple of days, two weeks ago. Cia. Vale do Rio Doce, the world’s biggest iron-ore miner, gained today in São Paulo for a fourth day following an improvement in Goldman Sachs Group Inc.'s ratings on the company as demand for iron-ore begins to recover.

Let's say this -- the outlook for this industry is quite complicated, especially in Brazil and Perú. In November I attended a MMX conference with analysts. The company's CEO (Martins, maybe? I forgot his name, apologies ...) at the time told us that the pig iron market had collapsed! There was no pricing -- can you imagine that? He also said that exports were close to zero in both October and November and that, even as local orders were not bad, they were cooling at quite a fast rate. Companies from Vale to Cia. Siderúrgica Nacional and MMX to Rio Tinto announced delays in their capital expenditure projects and trimmed their production levels in response to the slowing demand and to cope with tightening cash flow generation. As an anecdote, the town of Corumba in southeast Brazil, an iron-ore production pole, has seen more than 10,000 citizens lose their jobs as MMX, Vale, Rio Tinto (or is it Anglo American?? -- I think either of those two have a significant operation there) reduce their workforce and negotiated with unions to place employees on paid leave. Mills and mines have been shut down. And, just finalise, the companies are facing the toughest credit markets in at least four decades. The outlook is not good -- and that is why investors should welcome this Fitch report.

Fitch added that the median cash/short-term debt coverage ratio for the group of the Fitch-rated Latin American metals and mining companies for the 12 months ended on Sept. 30, 2008 was 1.6 times, down from the 2.5-times peak seen in 2006. Median short-term debt for the same period accounted for just 21 percent of total debt, with the majority of large amortizations not being due until after 24 months. Fitch included CAP, CSN, Gerdau, Vale, Samarco, Usiminas, Siderar, Sidetur, Ternium Mexico, Codelco, Southern Copper Corporation, Minera Escondida, Molymet, Alcoa Aluminio and Clarendon Alumina in its report.

Intimidation Campaign is Just Starting: Fausta's Blog Says Blogger Detained in Venezuela for Campaigning Against ''No´´

A que no me agarran intimidándolos, escuálidos!

Click here on this link to check Fausta's posting about a Venezuelan blogger detained for campaigning against Venezuelan President Hugo Chávez's infamous re-election referendum.

Who is infringing the law, the blogger for making use of his prerogative for free speech, or the government for curbing free expression? Chávez's referendum proposal has serious legal flaws. In choosing to hold the referendum at the start of this year, the president sought to bypass electoral board requirements (red tape.) The current initiative is illegal -- the constitution prohibits the same reform proposal to be considered twice during a single presidential term (he pursued another referendum containing the same proposal, the abolition of presidential term limits, back in Dec. 2007. He lost, ha!) Chávez suggested in an interview with CNN last week that he would be willing to respect the results of the Feb. 15 referendum; but he insisted that that if the proposal was rejected by voters, the government would seek to create a Constituent Assembly empowered to draft a new Carta Magna.

Any decision to respect the outcome of the vote is unlikely to stop Chávez from scaling up confrontation. In the meantime, an effective campaign of intimidation and rampant spending to promote that Frankenstein is giving him an edge in polls. The opposition has been quite lame in campaigning against it, we have to say. But Venezuelans have become quite good at lying to pollsters -- they did that ahead of the past two elections. That may well hand ''Mr. Chav
´´ a lovely defeat on his attempt to become the eternal ruler of Venezuela.

Poll Results: Readers Say Bank Regulation in Latin America is Weak. What to Do to Resolve That Problem?

Chris Cox, the infamous head of the SEC who failed to ask himself
why people in the markets were making so much money with
some opaque instruments called collateralised debt obligations. He is one of the many we
should blame for the mess that we are dealing with these days.


I don't know the solutions to this problem. All I can say is that, out of 11 people who took part in our poll this week, six said that bank regulation in the region is deficient. There are several examples to mention, evidence is ample: the pyramids scandal in Colombia that has reached unimaginable proportions (the only way that this infamous activity was stopped was when one of the crooks involved in one of those companies accused the children of President Alvaro Uribe of doing business with his firm. The president should have slapped his children in front of TV cameras first.) The derivatives scandal in Mexico and Brazil indicated that the creation of financial products and the development of certain specialised markets are both outpacing the imposition of better and more effective regulatory controls, that accounting needs to be overhauled quickly, that corporate governance remains very incipient and is short of becoming an effective protection tool for minority shareholders.

We are moving towards an era of more stringent
regulation on the financial industry. Let's make sure we don't morph the teachings of the regulatory mistakes in the U.S. and other developed economies into an excuse for witch-hunting of financial institutions, or a reason for politicians to extract more rents from banks. Banks that fail to do their job properly should be let go down, so long as their bankruptcy doesn't hamper confidence in the system. It is urgent that governments begin to invest more in training financial regulators to avoid future Madoffs, pyramid schemes, Ponzi schemes, misuse of government bailout money, etc. The guy in the photo (right) is Harvey Pitt, the other infamous SEC chief who also was to blame for the poor oversight of the Enrons and the WorldComs and the Tycos that starred a spree of scandals in 2001 due to accounting malpractices. Pitt is the type of regulators that the media and investor groups ought to scrutinise since the very first day of their nominations. In general the press failed for its poor scrutiny of these people. Pitt was a former executive of one of the Big Five accounting firms ... he didn't want to deal with conflicts of interest faced by these forms in their commercial relations with companies that were inflating their books to win the favour of markets. Where is Pitt now? He is probably in Florida, drinking Cuba Libres ... libre because he was never sued nor tried for his negligence as SEC head.

Finally, one of the lessons that this poll brings, in our view, is the need that financial industry groups, the government and independent consumer watchdog agencies spend more of their time teaching the small investor about their rights, the pros and cons of financial regulation and how they can participate in the oversight process. The more we get investors engaged in overseeing actors in the system, the quicker signals of systemic problems will arise.

Romer Joins the Group of Economists Urging to Start Up New Banks, Stop Saving Failed Ones

In a wonderful article posted today in the WSJ, economist Paul Romer (photo,) the same who pioneered endogenous growth models that became the paradigm for successful policy-making since 1986, is basically telling us that bailout funds shouldn't necessarily be funneled into existing banks. The money will surely end up stuck in lenders reeling from past problems even after the transfer. The first round of TARP aid, which was probably done in a rush without thinking of the most likely consequences, ended up in struggling banks that in turn failed to create new lending.

Says Romer, a professor at Stanford University: ''Proposals for turning existing banks into good banks -- recapitalizing them, nationalizing them, transferring the toxic assets off their balance sheets, or insuring the toxic assets -- require prices for all these hard-to-value assets or, worse still, prices for derivative contracts on the toxic assets.´´ Is this likely to occur? Uhhhmmm, let me doubt it. And he adds: ''If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish.´´ At this point, Romer's proposal sounds more reasonable than those proposed by former Bush administration officials, who were using taxpayers' money irresponsibly in the form of subsidies to reckless institutions that skipped reasonable risk-assessment rules and gambled with both their depositors' and their shareholders' money.

To read the entire article, please click here.

By the way, I would like to wish good luck to Emma Moody, a former boss of mine, in her new job as a WSJ editor after a 13-year stint at Bloomberg News.

ISA May Tap Cross-Border Bond Market to Finance Projects, LatinFinance Reports

Colombia's Interconexión Eléctrica SA, known as ISA, is considering tapping international bond markets ''in the latter half of the year to finance its many projects in Brazil, Colombia and Peru,´´ said newsletter LatinFinance, citing ISA CFO Camilo Barco. ISA is Latin America's biggest electricity distributor company and is based in Medellín, Colombia.

One option under consideration is the issuance of a three-tranche cross border, ten-year bond of benchmark size or bigger, to fund ISA’s units in Brazil (CTEEP), Colombia and Peru. The debt whose proceeds would go to the units outside Colombia could be sold locally -- in Brazil and Perú, -- Barco told the newsletter.


Yields in Brazil's Secondary Market for Corporate Bonds Are Surging, Helping Lure New Buyers

Yield increases for notes sold by Bradespar and Vale do Rio Doce are beginning to attract buyers. With Bradespar's 2013 notes trading at yields close to 9 percentage points above the benchmark inflation index (IPCA), or a 14 percent rate, private banks are being lured into these investments to offset losses suffered in the stock market (the Bovespa fell about 40 percent in the past 12 months.) According to Andima's www.debentures.com.br, private banks and brokerages are starting to buy the notes from cash-strapped individual investors. But, hey! Institutional investors are starting to look for highly-rated paper, not simply the debt that offers the highest returns.

Among the notes that are being snapped up by investors is Sabesp's seven-year note issued in October, which has gained in price so much that yields dropped from 13 percent above the IPCA five months ago to less than 10 percent now. The Vale notes are now yielding almost 113 percent of the CDI (the benchmark interbank lending rate that is trading around 12.7 percent these days.)

Colombia Exchanged $1 Billion Out of $14 Billion in Swap-Eligible Bonds. Result is Quite Satisfactory

Colombia was one of the very first nations in Latin America that sought early refinancing of its obligations as the credit crisis unleashed. Such preemptive approach is helping improve the government's maturity profile for the next three years -- a very positive development as domestic and external conditions worsen. Colombia's finance ministry concluded this week a domestic bond swap to stretch out debt maturities and improve the liquidity of longer-term Treasury notes. The swap was worth 2.48 trillion pesos in fixed-rate TES maturing between 2009 and 2011 -- a similar amount to that swapped in October. Investors received in exchange notes due 2012, 2014, and 2018. This in addition reduces the likelihood of bigger-than-expected offerings of TES for the rest of the year.