Think Global Invest Local Perspectives on Investment Opportunities in Latin America LABA Conference February 16 th, 2007 Guillermo Jasson Latin America Regional Head and Head of Investment Banking 1-212-761-7056 Guillermo.Jasson@morganstanley.com
Opening Remarks: What is Hot? Countries Brazil Mexico Colombia, Central America, Peru, Argentina Chile is stable but not as hot Sectors Consumer lending Real Estate Infrastructure Commodities and Basic Materials (Bio)energy Food Retailing 2
Opening Remarks: Why, Structural or Cyclical? Halley Comet? Mt St. Michel or North Pole? Sandbox? Forrest Gump? 3
Table of Contents Exceptional Environment Cyclical Drives Structural Where as important as What and How Expect the Unexpected 4
Exceptional Environment 5
In a Low Return World Emerging Markets Are Striving International interest rates are at historical lows US, European and other equity markets have moved sideways for the last 5 years and there is enormous liquidity Commodities are on an extended cycle driven by secular changes Brazil, Mexico and the rest of Latin America are benefiting from these trends with an unprecedented access to capital both in terms of debt and equity Country risk premiums have collapsed and valuations are attractive on a relative basis vis a vis developed countries creating unique opportunities to expand, exchange and diversify risk/exposure in historically record [favorable] terms 6
Equity Markets Evolution May 2006 Present Equity Markets Evolution: May 2006 Present Indexed to 100 130 120 110 100 90 80 70 28-Apr-06 6-Jun-06 13-Jul-06 18-Aug-06 26-Sep-06 30-Oct-06 S&P 500 Brazil Mexico Turkey China Russia India Argentina China 25.5% Mexico 10.3% India 6.9% S&P 500 5.1% Brazil -2.6% Russia -5.0% Argentina -6.5% Turkey -7.5% Source: FactSet 7
Price / Earnings Evolution May 2006 Present Price Earnings Evolution: May 2006 Present x 25 20 15 10 India 23.8x China 21.7x Turkey 18.8x S&P 500 17.6x 5 28-Apr-06 5-Jun-06 11-Jul-06 16-Aug-06 21-Sep-06 30-Oct-06 S&P 500 Brazil Mexico Turkey Russia Argentina China India Argentina 15.4x Mexico 14.2x Brazil 11.3x Russia 7.5x Source: FactSet 8
Country Risk Premium Evolution (1) May 2006 Present Country Risk Premium Evolution: May 2006 Present Basis Points 430 380 330 280 Argentina 288bps 230 180 130 129bps Russia 111bps 80 28-Apr-06 5-Jun-06 11-Jul-06 16-Aug-06 21-Sep-06 30-Oct-06 Brazil Mexico Turkey Russia Argentina Turkey 183bps Brazil 178bps Mexico Source: FactSet (1) Calculated as the sovereign US$ denominated 10 years bond spread over UST 10-year bond. No US$ denominated external debt for India and China. 9
Historical M&A Activity Correlates better with US than Latin American Public Equity Markets US$ Bn Latin American M&A Activity (1) $Bn # Of Transactions 120 100 80 60 40 Off the radar screen Search for growth with volatility risk Privatizations & Strategic Investments 31 72 78 68 103 44 40 600 Volatility certainty with growth uncertainty 500 Ownership & 400 Debt Restructurings 300 Emerging Markets Shine a Low Returns World 200 20 11 13 18 10 11 17 18 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Total Deal Value S&P 500 MSCI Latam Avg. Deal (Size $MM) 735 570 354 266 347 403 313 503 477 478 618 478 583 399 0 2004 2005 # of Deals 15 23 50 37 33 42 100 143 164 142 166 92 69 Source Thompson Note 1. Total industry volume includes deals with Latin American acquirers 10
Cyclical Drives Structural 11
Crisis? What Crisis? Episodes of Crisis and Distress: Banking crises have been all too common in Latin America and the Caribbean Argentina Bolivia Brazil Chile (3) Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Guyana Haiti Jamaica Mexico Nicaragua Panama Paraguay Peru Trinidad and Tobago Uruguay Venezuela (3) Year 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Source: IMF publications: and World Bank database (Caprio and Klingebiel 2003) Note: (1) Defined as the exhaustion of much or all of bank capital and usually involves a run on deposits. Financial Sector Crises (1) (2) Defined as low or negative net worth without a systemic run on deposits. Financial System Distress and Averted Crises (2) (3) Chile 1976: Venezuela 1978. 12
Banking Crisis Have Been Frequent and Costly Costly Crisis Resolution Output and fiscal losses have been large, and recovery can take years Number of Banking Crises (1994 2003) Average Crisis Length (Years) Fiscal Costs of Banking Resolution (% of GDP) Average Cumulative Output Loses (1) (% of GDP) All Countries 30 3.7 18 16.9 Emerging Market Countries 23 3.3 20 13.9 Developed Countries 7 4.6 12 23.8 Banking Crises Alone 11 3.3 5 5.6 Banking and Currency Crises 19 4.1 25 29.9 Source: Hoggarth and Saporta (2003): Hoelscher and Quintyn (2003): and IMF staff estimates Note: (1) Deviation from trend growth three years after the crisis. 13
Cyclicality Created Conditions for Structural Changes Latin American countries are going through multiple democracy cycles Environment allows for extraordinary inflows that have created an enhanced perception of fiscal discipline Most countries are growing at substantial rates Most countries reducing/eliminating external debt Development of local capital and credit markets Reduced dependency on foreign currency debt/exposure All the stars seemed aligned! 14
Where as Important as What and How 15
Major Themes Financial sponsors react faster and adjust cost of capital and leverage aggressively and beat strategic players in auctions Decelerating top line growth and rising cash / market cap Low world return has driven investors to reward companies that launch transactions Shareholder activism as a new phenomenon and investors requiring removal of antitake over provisions Hostile activity increasing, particularly in Europe Some Brazilian companies migrating to one share class FCF Yield on EV > WACC and many companies find it difficult to deploy capital in Emerging Markets Emergence of Super-champions (including many Latin American Multinationals multinationals) Unlike the rest of the region, Mexico s significant US economy dependency results in China being both a positive factor and a threat Growth of economy and distribution of income will be key to further develop the internal market opportunity Mortgage and real estate boom (Brazil IR) Energy and infrastructure investment needs are key to growth sustainability Corporates focused on credit rating with a preference for reduced leverage Migration into issuing securities with enhanced governance Capital markets exuberance 16
Sandbox Analysis Greater number of deals? Geographic Dynamics f (regulation, markets, etc.) Global/ Regional Multi-Local Local Real Estate Telecom Cement Beer Banking More cross-border activity? Low Medium HIGH Consolidation/International Ownership Levels 17
Expect the Unexpected 18
What s on the Horizon? The classic Latin American Wild-Card! Commodity Cycles Peaking? Increasing Interest Rates China, U.S. and World Growth Rates? Development of local capital markets: Br, Mx, Ch Political developments? Currency Pressures? Sovereign uncertainties? Changing Momentum in Emerging Markets? 19