Wednesday, 25 February 2009

Industrial Bank of Korea Goes on Non-Deal Investor Roadshow; Is a Financing Window Opening Again for Emerging Market Companies?

Bank of America Corp.'s investment-banking unit and Merrill Lynch & Co. have been mandated as the sole coordinator for a non-deal investor roadshow for the Industrial Bank of Korea. The company is rated A2 /A by Moody's Investors Service and Standard and Poor's. The purpose of the roadshow is to update investors on the health of their bondholdings as well as to examine the overall status of the Korean financial system.

Dates and places for meetings: March 2 in San Francisco; March 3 in Los Angeles; March 4 in Boston, and; March 5/6 in New York City.

Para Todo Se Acabar na Quarta-Feira! Site Voz Recommends a Piece on Brazilian Malandros (Port.)

Segue uma notinha enviada por Claudia Quiñonez, do Site Voz.
''Para quem se interessa em entender o povo brasileiro, este é um texto interessante, que fala do primeiro malandro retratado na literatura brasileira. A malandragem que volta a discussao toda vez que tem carnaval (nao sei exatamente se é realmente necessaria a analogia todos os anos) e toda vez que o tal do jeitinho é empregado indiscriminadamente. Eu acho que o jeitinho, bem direcionado, é empreendorismo. E o empreendorismo aprisionado numa visao imediatista, sem espaco para florescer em um ambiente sem corrupcao e livre de burocracias em excesso, vira esse jeitinho. Solução de curto prazo onde talvez alguem supostamente se beneficie, mas no final das contas todos saem perdendo.´´
Clique no link aquí para acessar o artigo recomendado por Claudia. Está escrito em portugués ...

Indonesia Bond Sale -- New Terms Out Just Now

We had announce this sale in a previous posting at the end of January. The sale forms part of a $4 billion issuance programme of Global Medium-Term Notes. Check our previous posting on Indonesia by clicking on this link.

Issuer: Republic of Indonesia

Ratings: Ba3/BB-/BB
Size: U.S. Dollar Benchmark (At Least $500 Million)
Coupon: Fixed Rate
Maturity : May 2014 / February 2019
Leads: Barclays Capital Plc. / UBS

Read James Saft's Column on Drug Legalisation and Taxes -- A Few Days Ago Three Latin Presidents Lashed Out at U.S. War Against Drugs

Brazil's Cardoso (left) and Colombia's Gaviria. Both have admitted their past
with maconha, or bareta, as pot is known in their respective countries.
Now they want it legalised. They only dared to say this after they left office.
The U.S. war on drugs, apart from intimidating great minds, has only
sparked chaos and more instability in Latin America.

Here is James Saft's Reuters column for this week. Click here for link to the story. Saft says he half-jokes when he says one decent exit to resolving U.S. fiscal woes would be legalising marihuana and other drugs, taxing trade and saving on interdiction, domestic law enforcement and the prison and court system.

Recently, three former Latin America presidents (Colombia's Cesar Gaviria, Mexico's Ernesto Zedillo and Brazil's Fernando Henrique Cardoso) lashed out at the results of the U.S. war on drugs in an article originally published by the WSJ. Part of the group of people who signed the article too includes Colombian politician and former presidential candidate Antanas Mockus -- the architect of the revival of Bogotá in the late 1990s. Click here for the link to a Tribuna Latina story (in Spanish.) The ex-presidents argued in the WSJ article that the U.S.-sponsored (or -imposed, maybe?) policies based on manual and chemical crop eradication, interdiction and criminalisation of consumers had not been effective, but have instead contributed to violence, political and judicial corruption and the flourishing of mafias linked to drug-trafficking. The three musketeers fell short of recommending across-the-board decriminalisation and legalisation, but advised treating addicts as patients of the public-health services rather than criminals, focusing on the health effects of cannabis, and mounting educational campaigns to partly mend the mistakes of the ongoing policy framework.

Speaking from the other shore, the consumer countries' point of view, Saft asserts: ''Drug legalisation, just like for alcohol, is essentially a moral and political decision about which reasonable people can disagree. It’s also, to put it mildly, not very likely.´´ But he stresses that the war on drugs costs billions of dollars, entices violence and crime, sends to prisons thousands of people that cost the state billions of dollars a year, but more importantly and ''seemingly never get us much closer to victory.´´ He finishes his idea with a fine touch: ''The waste and misery involved must make it rival the sub-prime bubble as a misallocation of resources.´´

Inca Kola News Again: Readers Wll Find Its Morning Piece on Venezuela's Currency Insightful and Very Solid

Inca Kola News ended third in last year's
Web Log Awards for best Latin blog

Inca Kola News does it again. After admitting IKN's latest postings were too mining-focused and perhaps they were becoming too much a sleeping material, the author decided to write about Venezuela's (beleaguered currency, my comment) bolivar fuerte. Excellent decision! Click here for the link to the story.

IKN argues that a devaluation might be on the cards, that dollar assets remain strong and that market worries of a collapse of the currency system might be overstated. True. IKN also defends Hugo Chávez's decision to seize $12 billion from international reserves for his off-budget Fonden fund -- the least transparent Sovereign Wealth Fund in the world, -- saying it doesn't hurt the country's financial position. Plausible thesis, but hard for some of us to swallow:
We've recently had a whole bunch of blog-based Venezuelan 'experts' doing mutual handwringing sessions over that supposedly polemic withdrawal of reserves. These people seem to miss entirely the real point while preaching to their own little choirs. Venezuela's reserves are in good shape.
We at MM may form part of that selected group of blog-based Venezuelan ''experts,´´ -- as IKN dubs skeptics on the country's currency system, -- and we are happy to contribute ideas to the debate. Our purpose is not siding a priori with any party on this but bringing elements for a further discussion of the issue that you can judge a posteriori. In a recent chat with Samuel Malone, a U.S.-born economist now at Universidad de los Andes in Bogotá, I realised how dogmatic has this issue of the bolivar became among markets people -- investors, company executives, analysts, journalists, professors, politicians.

Malone developed a very interesting model for the Venezuelan black market currency in the stock-flow tradition of Rudi Dornbusch, the late MIT professor; Malone compares his findings with a group of five other models in finding the determinants of the black market dollar in Venezuela. The model (obviously no model is perfect) has the lowest RMSE (root mean square error) of all the sample of different models he picked for his paper. He found strong correlations between the trend for the black market dollar and the level of international reserves (or government dollar assets), the pace at which the black dollar exchange rate depreciates and the lagged premium. The model also shows the black market rate is very sensitive to changes in the differential rate of expected profits from purchasing black market dollars.
Shortcomings of the model include the lack of a PDVSA cash holdings proxy (in general, my experience covering this market suggested that people were very attentive to the financial situation of PDVSA and such worries affected the quotation of the black market rate.) I assume its inclusion would just make the model too complicated for the author's purposes.

I apologise to readers because Malone's speech and our chat took place the same day, almost a month ago, and I lost track of key details. Nevertheless, I took down some notes and managed to piece them together.

Malone identifies a few policy dilemmas: 1) Money creation has caused inflation. However, the Hugo Chávez administration has committed to transfer programs (the so-called Misiones) that keep the oil windfall flowing into the economy. Soaring money supply coupled with a fixed exchange rate stoked excessive growth in imports. 2) Growing demand for imports ''creates a drain on the government’s international reserves, especially as seen during 2007´´ and 2008, he says. 3) The government has sell debt (remember the famous and almost no transparent colocaciones especiales, or the at-some-point very successful PDVSA bond sale) to soak up excess bolivares from the domestic market. While this worked temporarily to lower the parallel market rate, it hasn't lowered the drain on foreign reserves. Venezuela keeps wasting too much money in imports -- no matter how fast reserves growth, now with the oil price decline that situation will tend to worsen unless demand is put the brakes effectively.

Yet, 4) the increased debt sales boosts government liabilities. This translates into higher spreads on both domestic and foreign debt -- no matter whether the oil price is high or low. The higher borrowing costs are then passed on the domestic firms and individuals, Malone says, which discourage the undertaking of investment. Then add the impact of the price controls and the exchange rate system shortcoming and you will have what you have now: under- or simply dis-investment (I know this word doesn't exist in the dictionary, but it exists in mine and you should be able to understand it as destruction of value.) Thus, volatile reserves and exchange rates, including the parallel market rate, contribute to high spreads. Also, volatile oil prices contribute to volatile base money, which implies a volatile sovereign asset. In Malone's opinion, the government’s goal of keeping the fixed exchange rate regime and capital controls is unsustainable in the medium term. That oil bought Chávez some extra time is different. Common sense, which doesn't necessarily goes hand in hand with economics thinking, tells us there is something wrong happening there, not simply the tantrum and unwillingness of the opposition to work for the country. Malone likens Venezuela to a Dutch Disease economy combined with an unsustainable exchange rate regime. The element of indebtedness and sovereign risk creates the conditions for high inflation, low investment, and falling productive capacity in the non-oil traded sector. He said this crisis can morph into one of increasing probabilities of default. I disagree with that -- Venezuela still has $70 billion in dollar assets at disposal. Professor Malone says there is still room left to correct these imbalances, but the room to maneuver is falling dramatically now that oil is on the low $40 a barrel.

When I asked him why the government kept the controls in place, he said this: ''There are a number of political economy reasons to do this. Macro economically speaking, I am afraid I don't know them.´´

Cemex Must Raise $2 Billion Before April to Avert Downgrade. Asset Sales Likely Step if Bond Sale Fell Short of Goal

Cemex SAB announced yesterday it may tap international bond markets soon with a dollar-denominated, benchmark-size issuance. Bankers at Citigroup Inc., HSBC Holdings Plc. and Banco Santander SA are arranging investor meetings in New York City, London, the U.S. West coast and Europe to sell the idea -- and the paper -- to potential buyers. As we mentioned yesterday in a posting about investor inflows into emerging markets, the demand for this issuance possibly exists, it should be there. The problem might be the amount raised -- and the borrowing cost that investors will charge. For now, investors are focused on figuring out what cost of borrowing would be ideal -- based on the spread of the company's credit default swaps and market debt prices for competitors, according to a corporate debt analyst based in Mexico City. Given that, the note would be priced to yield at least 9 percentage points above Treasuries of comparable maturity, the analyst estimated. Oil company Pemex sold bonds at 8.125 percent; Petrobras of Brazil followed suit, but at a yield above 8 percent too. Different industries, yes, different terms, yes -- but different refinancing and liquidity conditions.

Standard and Poor's recently put Cemex's ratings under review for downgrade, citing the company's tight debt refinancing calendar for 2009 and 2010. Fitch downgraded Cemex yesterday to BB on concern the company's total adjusted net debt to EBITDAR ratio will remain above five times this year and about four times during 2010 (Fitch's definition of adjusted debt includes the perpetual debt instruments issued by Cemex, which are treated as equity under Mexican GAAP, as well as operating leases.) The ratings companies allege leverage metrics are worsening due to slowing activity in three key markets for the cement producer: the U.S., Spain and the U.K. These markets make up for about three-fourths of Cemex global revenue. S&P argues the company will have to divest some of its assets to make good on debt payments; such asset sales might be hampered by declining values and the paralysis of credit markets. The company has debt maturities of approximately $4.1 billion, $3.8 billion and $7.8 billion during 2009, 2010 and 2011, respectively.

The company is certainly making an effort to cover the shortfall in funding for the 2009 and 2010 maturities schedule. On Jan. 27, Cemex and banks agreed to reschedule $2.3 billion of short-term bilateral loans that fall due this and next years into terms that will result in $607 million maturing in 2009, $536 million in 2010 and about $1.2 billion in 2011. The company was also able to extend the maturity of $1.7 billion of a $3 billion obligation that was due in December 2009 until 2011. But if the company fails to raise the money (about $2 billion) before April, S&P will cut the BB+ rating -- that is our interpretation. As of Dec. 31, Cemex had total adjusted debt of $23 billion and cash and marketable securities of $993 million.

REITs, Real Estate Companies in Developed Markets Seen Tapping Equity Markets to Cut Debt, According to Julius Baer

Julius Baer, the Swiss wealth management bank, says REITs (Real Estate Investment Trusts) in Australia (Westfield), the UK (British Land, Hammerson) and Singapore (CapitaMall) have begun to tap the equity markets in an effort to de-lever. In the U.S., numerous companies are paying part of their dividend in stock to protect cash holdings. Low valuations will spark a recovery in U.S. REITs by the second half . Asian REITs look attractive -- the problem is the unstable business environment there, said the bank.

''As fewer buyers are in sight due to the shortage of bank loans, as institutional investors are faced with redemptions and as leveraged investors remain absent from the market, an accelerated price decline is in the cards,´´ says the bank in its February Investment Policy report. ''In the direct market, price declines have not reached the bottom, but the sector should be halfway through the downtrend.´´ It finalises with an interesting comment about bond markets: ''Stabilising bond markets could be supportive for global real estate stocks as a near-term catalyst.´´

Earlybird, Feb. 25, 2009

Seré yo, maestro? David Murcia, head of Colombia's biggest investment scam.
He now points his fingers at President Alvaro Uribe, who he alleges
sponsored his company. Los pájaros les disparan a las escopetas ...

These are the headlines:

U.S. -- Obama Says Pulling Country Out of Recession Requires 'Bold Action´(click here for link to Bloomberg story): U.S. President
Barack Obama, delivering his first address to a joint session of Congress, said the credit crunch must be fixed now or the country risks ending up paralysed. One interesting comment he made about the economic crisis was what he described as a short-sighted attitude that infected Main Street, Wall Street and Washington. ''We have lived through an era where, too often, short- term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election.´´ His comments came at a moment where the world was looking for an aggressive, encouraging speech by the president. Early reactions to the speech were positive. The speech also coincided with remarks made by Federal Reserve Governor Ben Bernanke that bank nationalisations aren't either the policy solution nor the focus of the recovery plan. Markets should react today positively to these two stories.

U.S. -- Merrill Hit By Unexpected $500 Million Charge (click here for link to Financial Times story): Ineffective internal controls at
Merrill Lynch & Co. caused the firm to understate its 2008 losses by more than $500m, the investment bank said in its annual report. Then, Bernanke says banks will do what they have to do without imposing them additional controls. BS. Well, at least they won't nationalise banks such as Merrill that fail to do their homework properly.

BRAZIL -- Carnival Ends; Petrobras to Invest $2 Billion in Nigeria in Five Years (click here for link to Estado story): Petroleo
Brasileiro SA, the state-controlled oil company, will invest in Nigeria, a country with worse political risk instability than Colombia, $2 billion by 2014. Well, that $174.4 billion five-year plan is big enough to pay for this and other investments.

COLOMBIA -- Defense of Pyramid Scheme Owner Will Ask Judge to Summon President Uribe (click here for Tiempo story link):
Gimme a break! The defense lawyer of David Murcia, owner of the DMG pyramid investment company, alleges President Alvaro Uribe urged Colombians to invest in DMG. Well ... I wonder who of these two have more credibility.