1. Opportunities for Corporate Finance in Latin American Capital Markets John C. Edmunds Professor of Finance Financial Columnist, América Economía March 2006

2. Overview of World Capital Markets Demand for bonds and stocks is very strong. Demand for bonds and stocks is very strong. Hundreds of millions of people are buying securities every month. Hundreds of millions of people are buying securities every month. The dollar value of bonds, common stocks, and bank deposits now exceeds $150 trillion, more than three times the value of world annual output. The dollar value of bonds, common stocks, and bank deposits now exceeds $150 trillion, more than three times the value of world annual output.

4. Overview, 2 Latin American companies have issued corporate bonds recently, but Latin American companies have issued corporate bonds recently, but They have not issued as many as the market will absorb. They have not issued as many as the market will absorb. The total amount of private debt securities outstanding in Latin America was only 12% of GDP in 2003. The total amount of private debt securities outstanding in Latin America was only 12% of GDP in 2003.

5. Overview, 3 The total amount of private debt securities outstanding in Latin America was still only 11% of GDP in 2004. The total amount of private debt securities outstanding in Latin America was still only 11% of GDP in 2004. For those same years, the amounts of private debt securities in Canada were 38% and 41% and of GDP. For those same years, the amounts of private debt securities in Canada were 38% and 41% and of GDP. Latin American companies issued more bonds in 2005. Latin American companies issued more bonds in 2005.

6. Overview, 4 Latin American companies can issue MORE BONDS. If they issue approximately US$800,000 million more private debt securities, the region’s ratio of private debt to GDP will reach Canada’s. Latin American companies can issue MORE BONDS. If they issue approximately US$800,000 million more private debt securities, the region’s ratio of private debt to GDP will reach Canada’s. The collateral exists in Latin America to support that amount of private bond issuance. The collateral exists in Latin America to support that amount of private bond issuance.

7. Overview, 5 The total amount of private debt securities in Latin America would then be approximately $1 000 000 millions. The total amount of private debt securities in Latin America would then be approximately $1 000 000 millions. That figure sounds large but the world capital market is MUCH larger. That figure sounds large but the world capital market is MUCH larger. $1 000 000 millions is less than 3% of the total amount of bonds that exist in the world. $1 000 000 millions is less than 3% of the total amount of bonds that exist in the world.

9. Overview, 6 During 2005 Latin American companies were able to place bonds in international markets and also in local markets. During 2005 Latin American companies were able to place bonds in international markets and also in local markets. Total private bonds outstanding increased approximately US$20,000 million in five countries. Total private bonds outstanding increased approximately US$20,000 million in five countries. Local bond markets were VERY receptive to new issues. Local bond markets were VERY receptive to new issues.

10. Overview, 6 Latin American equity markets also absorbed new issues of common stock. Latin American equity markets also absorbed new issues of common stock. The strong performance of these equity markets was due to the capital market reforms that five countries have put into effect. The strong performance of these equity markets was due to the capital market reforms that five countries have put into effect. The commodities boom helped but was NOT the only reason for the rally. The commodities boom helped but was NOT the only reason for the rally.

11. Local Buyers The buyers of these newly issued bonds and stocks include LOCAL pension funds and mutual funds. The buyers of these newly issued bonds and stocks include LOCAL pension funds and mutual funds. International portfolio investors are also buying but the local buyers are maintaining a steady, firm tone to these markets. International portfolio investors are also buying but the local buyers are maintaining a steady, firm tone to these markets.

12. Implications for Corporate Financing Alternatives Historically Latin American companies borrowed from commercial banks in the countries where they were operating or from commercial banks in financial centers like London. Historically Latin American companies borrowed from commercial banks in the countries where they were operating or from commercial banks in financial centers like London. These loans were short term and often were denominated in foreign currency. These loans were short term and often were denominated in foreign currency.

13. Implications for Corporate Financing Alternatives, 2 In the past, companies in Latin America had to be very wary of using borrowed money. In the past, companies in Latin America had to be very wary of using borrowed money. The cost of borrowed money was very volatile. The cost of borrowed money was very volatile. Companies now have a much better range of financing possibilities, and should not be as wary of using debt financing. Companies now have a much better range of financing possibilities, and should not be as wary of using debt financing.

14. Implications for Corporate Financing Alternatives, 3 Latin American companies can now more easily match the maturities of their debt to the maturity structure of their assets. Latin American companies can now more easily match the maturities of their debt to the maturity structure of their assets. The era of financing fixed assets with short term debt is coming to an end. The era of financing fixed assets with short term debt is coming to an end.

15. Implications for Corporate Financing Alternatives, 4 Latin American companies can now create “natural hedges” for exposure to foreign exchange risk. Latin American companies can now create “natural hedges” for exposure to foreign exchange risk. They can borrow local currency and foreign currency in the proportions that match their local currency and foreign currency cash flows. They can borrow local currency and foreign currency in the proportions that match their local currency and foreign currency cash flows.

16. Implications for Corporate Financing Alternatives, 5 Latin American companies can also consider issuing equity securities in local markets. Latin American companies can also consider issuing equity securities in local markets. There have been many initial public offerings in Brazil and Chile and many more are in the planning stages. There have been many initial public offerings in Brazil and Chile and many more are in the planning stages. Equity markets are functioning well and can perform a larger role in raising capital for private companies. Equity markets are functioning well and can perform a larger role in raising capital for private companies.

17. A New Competitive Environment The financial policies of many Latin American companies used to be very conservative. The financial policies of many Latin American companies used to be very conservative. They did not use much debt financing. They did not use much debt financing. They did not list their shares on local stock exchanges. They did not list their shares on local stock exchanges. These policies now need to be reviewed. These policies now need to be reviewed.

18. A New Competitive Environment, 2 Now the companies that take advantage of the new opportunities that capital market reforms have created will have an advantage. Now the companies that take advantage of the new opportunities that capital market reforms have created will have an advantage. The amount of capital they can safely use will be larger than it used to be; The amount of capital they can safely use will be larger than it used to be; And their cost of capital will be lower. And their cost of capital will be lower.

19. Conclusion The wave of capital market reforms in five Latin American countries has made Latin American securities more attractive. The wave of capital market reforms in five Latin American countries has made Latin American securities more attractive. The world’s appetite for Latin American bonds and common stocks has not been satisfied. The world’s appetite for Latin American bonds and common stocks has not been satisfied. Latin American companies can issue bonds and stocks and place those successfully. Latin American companies can issue bonds and stocks and place those successfully.