New Wave of Corporate Restructuring Drives M&A in Latin America

Industry: Other    2016-03-15

A new wave of debt restructuring all over Latin America is poised to drive dealmaking as many companies find no other way to obtain cash. “Most of the transactions out there require credit and, whether you are an investor or a banker, either you figure out how to do that or you don’t have a deal,” Jim Allen, head of merger and acquisitions in Latin America for Morgan Stanley, said in an interview in New York. He added that many private equity firms are “playing the whole balance sheet.” Major restructuring initiatives include companies like Brazilian mobile phone company Oi SA, which hired PJT Partners to restructure 60 billion reais ($16.7 billion) of debt after a proposed merger with Telecom Italia SpA’s unit in the country fell through. Colombian driller Pacific Exploration & Production Corp. last month won a reprieve from some of its bondholders after it missed interest payments. Mexican construction company Empresas ICA SAB defaulted on $1.35 billion in bonds in December and has been trying to work out a deal with creditors. The first wave of restructurings can be traced back to 2014, when a probe into alleged corruption at Brazilian oil company Petroleo Brasileiro SA pushed the company and suppliers into a credit squeeze. This month, when former Brazilian President Luiz Inacio Lula da Silva was detained and questioned in the corruption inquiry, it was yet another signal that political stability had yet to come to the region’s largest economy. The overall economy in Latin America is expected to shrink 0.8 percent this year after a contraction of 1.2 percent in 2015, according to data compiled by Bloomberg. Economists expect Brazil’s economy to contract 3.3 percent this year, after it was down 3.8 percent last year. Asset Sales Recession, political turmoil and falling commodity and oil prices added to rising interest rates, making it tough for companies to generate free cash flow. Hence, asset sales are the order of the day to meet debt payments. “Assets that we never thought would be coming to the market are now for sale as some companies and sectors are distressed and multinationals are announcing huge divestment plans,” said Marcus Silberman, co-head of Latin America mergers and acquisitions for Bank of America Merrill Lynch. Duke Energy Corp., the largest U.S. utility, has engaged advisers to sell its Central and South American power plants after drought conditions and an economic downturn in Brazil hurt operations. Global miner Anglo American Plc is selling its Brazilian niobium and phosphate mines. Citigroup Inc. plans to sell its retail-banking operations in Brazil, Argentina and Colombia. Total merger and acquisition volume in Latin America and the Caribbean jumped 14 percent so far in 2016, compared with the same period a year ago, to $26 billion, according to data compiled by Bloomberg. The rise comes after total M&A volume in 2015 dropped 28 percent $130.4 billion, the data show. Cautious optimism may be warranted, according to Ignacio Benito, the head of Latin America M&A advisory at JPMorgan Chase & Co. “We expect M&A levels to somewhat increase this year in Latin America as companies are getting used to the new price levels that seem to be there to stay,” Benito said. Martin Sanchez, Bank of America’s other co-head of Latin America M&A, said the situation in Latin America is complicated since risk perception increased. “When you have volatility, it’s generally more difficult to get buyers and sellers to agree on price,” he said. This is where those who can provide credit come into the picture. EIG Global Energy Partners, the $10.4 billion private equity fund based in Washington, is offering to buy Pacific’s distressed bonds and take control of the company. Darby Overseas Investments Ltd., a Washington-based firm, is raising a fund of up to $500 million for Latin America, according to two people familiar with the matter, who asked not to be named because the information is private. Though Darby Chief Executive Officer Richard Frank declined to comment on new fundraising, he said that the firm’s mezzanine funds worked well for investors and companies. Mezzanine lending works particularly well for those companies that “may have already pledged all their buildings and land to a typical-collateral-oriented bank loan,” he said. Frank said Darby started the business 20 years ago in Latin America, investing in more than 20 companies in the region. The need for this type of funding “is more relevant today then it was when we started, given the constraints in conventional corporate lending market,” he said. Control Obstacles Buying up debt as a way to take control of a company in distress may face obstacles in Latin America, however. “Some of the features of the U.S. bankruptcy laws have not been developed or tested to the same extent in Latin America,” said Paola Lozano, head of the Spanish-language corporate practice at Skadden, Arps, Slate, Meagher & Flom LLP. “There are also less publicly traded companies in the region and a large number of these firms still have small market floats and a controlling shareholder group,” Lozano said. That hasn’t stopped distressed funds from appearing and, “looking very closely at the mining sector for investment opportunities,” said Cynthia Urda Kassis, a partner with law firm Shearman & Sterling. China investors may come into the region to do deals, and some sovereign wealth funds and private equity funds are also buying as prices and exchange rates become more favorable, said Antonia Stolper, Latin American regional managing partner for Shearman & Sterling, in an interview in New York. “It is the perfect storm for Latin America,” said Morgan Stanley’s Allen. “But Latin Americans are adept at charting a course through stormy waters.”

Source: Bloomberg.com