Wednesday, 11 March 2009

Brazil Cuts Interest Rate to 11.25 Percent (Update)

Check this Bloomberg News story by reporter Andre Soliani. Very good reporting with all relevant data.

SeekingAlpha Says Copper Price Drop is Hammering South America Producers. Will We See a Chile-Peru Copper Cartel?

Click here to read SeekingAlpha's posting on copper producing countries in South America. Says Paul Harper, the smiley guy who writes this blog:

''With global copper prices sinking from a 2008 high of $4 per lb, down to today's miserly, $1.25 per lb, it is hardly surprising that the two major copper producing countries in South America are looking at ways to buoy up their operations. Last week, Peruvian president Alan Garcia dropped some strong hints that Peru and Chile should coordinate on copper production, in order to achieve greater control of prices on international markets.

“I believe that as countries with a strong mining presence in the world we must work in a joint manner, because when brotherly countries produce and compete with the same metal, the only thing we achieve is a fall in the price of copper, and we are both losers,” said Garcia.´´

S&P Reaffirms Chile Ratings -- and Sends Warning Over High Corporate Debt Ratios

Everyone keeps saying Chile is the safest country in the region it sounds like a fragment of a Psalm. It became creed. Chile, is true, is a hell of a safe place to invest your money -- but it also has problems, do you know? Standard and Poor's reaffirmed its A+ ratings on the Andean nation, saying its ''record of disciplined fiscal management, which has brought greater economic stability and predictability, supports´´ (the ratings.)

Yet, constraining the ratings are Chile's narrow economic base and high private-sector external debt, said S&P. Although Chile's overall international investment position has improved in recent years, the country's private sector's reliance on external funding makes the country vulnerable to the impact of the global credit crunch.

Unfortunately, we don't have available data on Chile's corporate debt stock, or interest payments, or refinancing needs. We will have them for the next posting -- hopefully it won't be too late by then.

LatinFinance Has Interesting Story on Brazilian, Peruvian Banks' DPR Sales This Year

Magazine LatinFinance's daily newsletter today moved an interesting story about booming sales of bonds backed by Diversified Payment Rights (which is nothing else than a securitisation of future flows) in Latin America in recent weeks. The newsletter says on today's edition that, for regional banks, it has become ''the obvious option´´ the ''securitisation of future flows, including remittances, exports, and foreign direct investment (FDI) flows, through issuing DPR bonds.´´

The step indicates a departure from common practice in recent years, when the world abounded in liquidity and issuers were able to place unsecured debt instead of guaranteed paper. It reflects that conditions for corporates are becoming much tougher by the day -- remember our recent postings on Cemex and Digicel. Potential issuers such as Colombia's Ecopetrol (which is considering the sale of $8.1 billion of debt in coming months and has embarked on a $3 billion refinery upgrading project alone) will face more investor scrutiny; companies like Petrobras will face tougher refinancing conditions; and companies like PDVSA will have access to credit closed (unless the Chinese want to break the market rules.)
LatinFinance says: ''The boundary between bonds and loans becomes blurred with MT100s, since they are typically privately placed with a small group of investors.´´

According to LatinFinance, Brazilian banks sold around $2.3 billion in DPRs alone, (also known as MT100s,) and ''several Peruvian banks including BCP, BBVA Continental, and Interbank also deployed the structure.´´ Among the banks that are considering tapping the markets through DPRs are Interbank (the fourth largest Peruvian bank) and Brazil's Banco Bradesco (which is a very active issuer in the DPR and private placement markets.) For those who know little about the structure, we recommend visiting a 2005 posting by Ambac in which the structure is explained with details. Here is the link.

Pimco's Gross Boosts Holdings of Government Debt to Highest in Two Years

Bill Gross, manager of the world's largest bond fund, the $800+ billion Pacific Investment Management Co., boosted its holdings of government bonds to the equivalent of 15 percent of its Total Return Fund -- the largest percentage since 2007. The TRF has a size of about $140 billion. A sign of the times -- suggar daddy offers a safe haven ... hopefully not for long.

On the other hand, the strategy might suggest the California-based fund is also concerned over the return of inflation in a few months. Good news? definitely -- after all the recession being endured by the U.S. shouldn't turn into depression, which at this very moment can only be a good news.
Government debt offers investors protection against accelerating inflation.

By the way, we still don't have a picture of Bill Gross.

Click here to read Bloomberg News story on Gross.

WSJ Opinion Column on Biotechnology: When Governments Irresponsibly Want to Impose Controls on Markets ...

The same evil we fear will happen to the financial industry if the path of nationalisation is chosen is clearly haunting the U.S. biotechnology and health insurance industries -- if the Barack Obama administration begins to flirt with price controls and rationing. The Wall Street Journal says:

The U.S. is the last major pharmaceutical market without universal price controls, and as such has been the world's main financier of new drug discoveries. In a world of government-run and -priced health care, biotech innovation will also be as much at risk as traditional drug development. The biggest price we may pay for a health-care system run from Washington are the therapies we never get as a result.

Click here to read the entire article.

Bloomberg News columnist Amity Schlaes also
wrote about this issue (her article is quite complicated though.) Click here to read her article.

The Market Memorandum's Official Wednesday Lunch Break Readings

Hi -- we tend to change the name of this section to the Weekend Reader, or the Authorised Reading List or any stupid name we come up with. Today we offer you a variety of links, with articles ranging from literature to modern culture to sex to economics. We hope you enjoy it.

HARVARD MBAS FIASCO: Harvard MBA fingerprints are only screwing up. Click on the link to read the story.

IS THE AMERICAN DREAM DEAD?: No, so long as the porn industry has access to bailout funds, says Larry Flint. No no no ... writer David Kamp asserts the American Dream can still give citizens a decent chance to scale the walls and achieve what they wish.

ARE MALES FUNNIER THAN FEMALES?: I certainly am not as funny as most women I know. Read the article to find a few theories about that.

Cemex Downgraded by S&P; Cash Flow Generation Prospects Seem to Be the Main Concern For Now

Standard and Poor's downgraded Cemex's debt ratings to B- from BB+, a cut of five notches. Let's first see what S&P defines as a BB-rated and a B-rated credit and then we continue with the analysis of the ratings company's decision:

BB: An obligation rated 'BB' is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial , or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.

B: An obligation rated 'B' is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

So S&P still 1) trusts on the ability of Cemex to refinance its obligations; 2) believes that serous financial conditions are impairing the issuer's ability to refinance its obligations, and; 3) is sure that conditions have turned even more challenging since Monday's announcement that it was pulling the bond sale and began a refinancing process with its main lenders. The decision to downgrade Cemex reflects S&P's concern that free cash flow generation won't be enough to meet debt payments and operational commitments satisfactorily. The cash flow deficit might jump to as high as $2 billion this year. Says S&P: ''We remain concerned that depressed asset prices and the dearth of credit around the world will put additional hurdles to its refinancing efforts and asset sales, making the company's access to new funds will either take longer than initially expected or smaller than originally estimated.´´ The translation into English is mine. Apologies.

The downgrade decision is, thus, purely speculative. Although it is supported by a series of facts: one, that the company faces $1 billion in debt maturities by April and it may generate free cash flow of less than $1.3 billion on average during this year. Two, that it also faces $2.4 billion in maturities in the fourth quarter; its main markets (U.S., Spain and Mexico) are in deep crisis. We will see how the renegotiation talks go ... and after that we will learn with anticipation whether S&P and the other rating agencies will continue slashing Cemex's ratings.

Earlybird, March 11, 2009

The headlines for today are:

U.S. -- Schools Are Seeking to Separate Boys From Girls; The Excuse, Behavioural Problems (click here for the link to the NYT story): Single-sex classes are being tried as an experiment to address sagging test scores and behavioral problems. We hope this is not the start of some ambitious Democratic Party-sponsored reform to U.S. lifestyle.

BRAZIL -- Statistical Outlier Probably Helped Exaggerate GDP Decline in Fourth Quarter Data (click here for the link to the Valor Econômico story): The use of a statistical resource that was ignored for 13 years was probably the reason behind the steepest-ever drop in Brazilian GDP numbers. The factor was added after some exceptional numbers were found in the data that comprises the GDP survey (for example, the 27 percent drop in car sales reported in November was an atypical number) and therefore, the outlier had to be included in the elaboration of the GDP series for the quarter. Bottom line -- the numbers will have to be revised -- we hope the Brazilians don't end up copying their Argentine statistical agency colleagues ...

BRAZIL -- Minister Mantega Finally Does the Math Homework: GDP Number for 2009 Hardly Will Top 4% (click here for the link to Estado story): Thank God! Unfortunately it will take a recession to prove that Finance Minister Guido Mantega is always wrong -- when it comes to forecasting, formulating economic policy, debating macroeconomic issues, etc. He is the cabinet equivalent to Dunga -- that infamous defensive midfielder, a winning World Cup player in 1994 who is now the coach of Brazil's football team.

VENEZUELA -- Bingo! Chávez Offers Support to Cuba, Endorses FARC's Armed Struggle. Is There Anything New Here? (click here for link to Espectador story): I have to apologise for my awful news judgment. There is nothing new here. But I put it on the Earlybird because ... it's funny. President Hugo Chávez does both things -- but the world knows it. Is this the new CIA Modus Operandi? How boring! We will end up missing those days of cover operations, double dealings with allies and foes, etc.