april, 2001 - moneda asset management: outlook for latin america sovereigns

Abril 2011

Invirtiendo en Deuda Latinoamericana

Agenda

• Latin America Fundamentals

• From a Macro Perspective

• From a Corporate Perspective

• Latin American Debt: Where’s the Value?

2

• Technicals supporting Latin American Debt

The Rise of Latin America

3

Chile

Latin America Macro Fundamentals:

Over a Decade of Structural Changes in Latin America

Entrenched deficits

US$50 billion

Low

1990’s

Fiscal situation

International Reserves

Commodity Prices

2010

US$550 billion (net US$ creditor)

Balanced budgets allow fiscal stimulus

High

4

High and persistent inflation

High rates, short tenor

All junk except Chile

Limited capital markets and bank credit

Inflation

Local Interest Rates

Credit Ratings

Credit Markets

Under control: allows monetary stimulus

Low rates allow for long term markets (mortgage credit)

80% of region is Investment Grade

Strong local issuance by governments and corporates, strong bank lending


Stability has Boosted its Potential Growth Rate

Higher growth mainly explained

by:

• Inflation Control

• Political and Institutional

GDP, PPP Annual Index (IMF)Base 100 = 2003

125

145

165

185

205

LatAm

US

EU

CAGR 2003 – 2009

LatAm: +6.4%

5

• Political and Institutional

Stability

• Developing Credit Markets

• Better Commodity Prices

Source: Cepal and OCD

25

45

65

85

105

125

1980 1985 1990 1995 2000 2005 2010 2015

EU

CAGR 1980 – 2003

LatAm: +4.8%

US: +5.7%

US: +4.2%


Less Levered than Developed Markets

Sovereign Debt/ GDP

30

40

50

60

70

80

6Source: Moody’s

0

10

20

30

Devoloped Economies Latin America

2000 2005 2010


LatAm Entered the Crisis with a Balanced Budget

Fiscal Balance (% GDP)

-4

-2

0

2

4 Fiscal Balance(% GDP)

7Source : Central Banks, FMI and Bloomberg

-14

-12

-10

-8

-6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

LatAm

US

Euro Zone

Japan


Inflation Under Control: Flexible Monetary Policy

20

25

30

35

40

45

CPI rate (%)

LatAm Nominal Interest Rate (%, weighted average)

8Source : Central Banks, The Economist, IMF

0

5

10

15

20

1995 1997 1999 2001 2003 2005 2007 2009 2011E


Countries Saved The Surpluses During Good Years

Latin America FX Reserves and SWF (USD bn) 2010 Foreign Exchange Reserves

10%

12%

14%

16%

400

500

600

700

SWF Chile

SWF Brazil

% GDP

Argentina

Brazil

Chile

Colombia

9Source: Official agencies of each country, Bloomberg

4%

6%

8%

0

100

200

300

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 0% 10% 20% 30%

Mexico

Peru

Venezuela

LatAm

Latin American Debt: Where’s the Value?

Sovereign Debt: Markets Have Recognized Better Credit Quality

2000 Apr-2011

Argentina BB- B

Brazil B+ BBB-

Chile A- A+

Colombia BB

S&P RATING

1.500

2.000

2.500

EMBI+ Brazil

EMBI+ Mexico

EMBI+ Chile (Global)

BBB-

10Source: BloombergData as of March 2011

Colombia BB

Mexico BB+ BBB

Peru BB-

Venezuela B BB-

Dominican Republic B+ B

Investment Grade

BBB-

0

500

1.000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

EMBI+ Mexico BBB-

Latin America Corporate Fundamentals:

Improved Cash-flow and Decreasing Leverage

Revenues and EBITDA have mutipliedby almost 4x

CAGR 2000-2010- Revenues: 14.4%- EBITDA : 13.6%

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

LatAm: Revenue & EBITDA Performance

Revenues (LHS) EBITDA (LHS) EBITDA Margin (RHS)

Indebtedness and Interest Coverage Ratio

LatAm: Revenue & EBITDA Performance

11Source: J.P. Morgan LEI Corp Index, Barclays Capital, Santander Investment, BTG Pactual, Bloomberg, GBM , Deustche Bank y J.P. Morgan and companies’ financial statements Note: Revenue and EBITDA Performance based on Latam Large Cap; Leverage Ratio: Net Debt to EBITDA; Coverage Ratio: Interest Expenses to EBITDAData as of December 2010

Indebtedness and Interest Coverage Ratio

Leverage has fallen all across thecorporate universe

Coverage ratios therefore haveimproved

Despite a brief spike in 2008/2009due to lower EBITDA generation, bothsides of the equation are nowimproving.

3.7x3.8x

4.2x

3.8x

3.0x2.9x 2.9x 2.9x

3.7x

3.3x

2.7x 2.7x

2.3x2.1x

3,5x

4,0x

4,5x

5,0x

5,5x

6,0x

6,5x

7,0x

0,0x

0,5x

1,0x

1,5x

2,0x

2,5x

3,0x

3,5x

4,0x

4,5x

2000 2002 2004 2006 2008 2010LTM 2011E

Indebtedness Interest Coverage (RHS)

Issuers have focused on decreasingleverage and on extending debtmaturities.

Change in corporate maturities over the last two years

LatAm corporate debt maturities by year


Extension of Maturity profiles

0

5

10

15

20

25

30

35

40

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021+

US$ billion

12Source: JPMorgan.

Change in corporate maturities over the last two years

Substantial decrease in debtamortizations for next 5 years

Low default probability for LatAmcorporate issuers .

-5

0

5

10

15

20

25

30

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021+

US$ billion

2011 Default 2010 Default

Region Forecast Actual Default % Outstanding % high yield

Total EM 0.5% 1.4% 4.0% 11.5%

Asia 0.5% 0.4% 2.2% 11.0%

Emerging Europe 0.4% 1.2% 8.5% 19.6%

Latin America 0.6% 2.1% 3.1% 7.1%

Middle East & Africa 0.9% 1.9% 1.0% 2.4%

2009 Default

2010 Default Forecast vs. Actual YTD and 2009


Default rates near Historical Lows

Default rates in LatAmare forecasted at just0.6% for 2011

13Source: JPMorgan and Moody’s.

Historical Global vs. LatAm defaultsWhile rising in 2009,default rates haverapidly declined during2010 reverting tohistorically low levels

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-95 -96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09

Global Latin America

LatAm issuers rating upgrades to downgrades+

Rating Agencies have reflected thisby providing more corporateupgrades than downgrades


Fundamentals - Credit Quality

Fitch Global Corporate Finance rating actions by region:

3Q10(As % of Regional Ratings YTD)

Downgraded Upgraded

Asia/Pacific 4.9 8.9

Europe 8.7 7.8

Latin American and Caribbean 4.5 11.6

Middle East and Africa 2.3 2.3

North America 7.7 8.6

Total 7.1 8.3

Region

14

LatAm issuers rating upgrades to downgrades+(since 2009)

Source: Global Corporate Rating Activity Report” published on Dec 1st, 2010 - JPM from Moody’s, S&P, and Fitch

Note: Number of upgrades and downgrades considers the aggregate of the 3 major rating agencies.

Clear improvements in creditquality since 2Q09

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-Jan-09 Jan-10 Nov-10

Upgrades to Downgrades

Yield in LatAm HY Index at April’s month end = 7.7%


LatAm HY & IG in a Low Yield World Context

5.6 5.66.1

7.37.7 7.9

5

6

7

8

9

Yield

(in %)

15US Treasury: Barclay’s U.S. Treasury Index; US Inv Grade Credit: Barclay’s U.S. Corp. Inv. Grade Index; US High Yield: Barclay’s U.S. Corp. High Yield Index; LatAm High Yield and High Grade: J.P. Morgan CEMBI Broad Latin High Yield and Investment Grade Index; EUR High Yield: Barclay’s Pan-European High Yield (Euro); Emerging Market Debt: J.P. Morgan EMBI+ Index. Note: Yield reflects the yield-to-maturity (YTM) for a bond or index. Data as of April 2011

In a low yield world, LatAm HY emerges as one the best yielding fixed income asset class

Unclear economic recovery weakens equity while strengthens fixed income

0.1 0.3

1.9

3.9

0

1

2

3

4

3-month

T-bills

3-month

LIBOR

US Treasury US Inv

Grade

Credit

EM Europe

Corp

LatAm High

Grade

Emerging

Market Debt

US High

Yield

LatAm High

Yield

EUR High

Yield

LatAm holds similar yields than the high yield universe, but with better credit quality and higher economic growth…


LatAm HY vs. Developed Markets HY

LatAm HY U.S. HY EUR HY

Leverage 2.9 3.8 3.9

Economic Growth 4.3% 2.7% 1.7%

Rating BB- B+ BB-

16LatAm HY: CEMBI Broad Latin HY Index ; US HY and EUR HY: Barclays US High Yield and EUR High Yield Indices.

Leverage figures were computed by Moneda‘s Research Department taking individual companies’ Net Debt/EBITDA metrics that belong to each Index from Bloomberg data. GDP Growth figures are IMF estimates. Data as of April 2011.

…LatAm deserves tighter yields than developed markets

Rating BB- B+ BB-

YTM 7.7% 7.3% 7.9%

Current levels of spreads still offer a potential compression of 260 bps to last bottom (203bps)


LatAm I.G. vs. LatAm H.Y.: Spreads

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

217217217217

464464464464

17Source: JPMorgan CEMBI Broad Latin High Yield and Investment Grade Indices, since December 2005.Note: Spread according to average life of each index. Data as of April 2011.

In the current global and regionalscenario, due to macro and creditfundamentals, our estimations suggesta compression of around 150bps forthe spread between High Yield andInvestment Grade credits…

0

200

400

600

800

1,000

1,200

1,400

247247247247

CEMBI Broad Latin America IG CEMBI Broad Latin America HY


EM Local Bond Market: Stellar Performance & Still Attractive Spreads

Local bond market total return (USD)

LatAm Sovereign bonds in localcurrency have had stellar returnsversus other EM regions…

18

Local bond market yields(% - Local Currency)*

Source: BAML Weekly Bond Monitor Report - April 17th, 2011

Although its stellar performance, itpresents the highest spread among itsEM regional peers

High interest rates even despite:

- Better public situations in LatAmthan in developed countries

- Willingness to fight inflation

- Companies with better perspectives


EM Local Bond Market: High local rates & FX appreciation Potential

0

2

4

6

8

10

12

14

16

18

20

22

Brazil

Mexico

Long Term Rates

Colombia

Chile

19

There is still room for currencyappreciation:

- Rebalancing of the world economy

- Currencies have not yet returned topre-crisis level

Source: Central Banks, Bloomberg, IMF, JP Morgan.

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

50

60

70

80

90

100

110

120

130

140

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

LatAm currencies vs USDIndex. Jan/00=100

Developed currencies vs USD Index. Jan/00=100

Since the last crisis there has been areallocation towards fixed incomeassets

But cash is still at high levels

Technicals supporting Latin American Debt

Strategic demand for fixed income

Global Portfolio Weightings

20Source: JPMorgan December 2010. FRB Flow of Funds, Haver, Barclays Capital

The strategic shift by pension fundsmanagers into fixed income productsrepresent a long term positive trendfor global credit

Asset liability mismatch magnifiedduring the last crisis has increased theneed for assets with better liabilitymatching potential, such as fixedincome

Target allocations by US pension funds

Conclusions

• Macro Fundamentals Macro level:

o Structural change: Balanced Budgets, commitment to maintain inflation under control

o Sustainable growth driven by internal consumption and China

• Corporate Fundamentals

o Clear deleveraging and improved amortization profile in the LatAm universe

o Outlook for default rates in the region close to its lowest historical level

• Where’s the Value?

21

• Where’s the Value?

o Local currency corporate and sovereign debt, and high yield corporate debt

• Supportive technicals

o Lat-Am is under-owned, allocation is still far relative to the role and weight of the region under different metrics

o Inflows to the region mainly to hard currency sovereign debt

o Institutional demand should gear towards fixed income and specifically towards the EM re-allocation story

april, 2001 - moneda asset management: outlook for latin america sovereigns

Economy & Finance