Telecom Deals Dominate Latin America

Mirroring developments in the U.S. and European high-yield markets, telecom companies are now dominating the Latin American corporate issuance market, and will continue to do so for the foreseeable future, sources said.

In June alone, Telecom Argentina and Telefonica de Argentina doubled up to issue $450 million in bonds after Telefonos de Mexico (Telmex) priced a whopping $1 billion deal. This week, long-distance provider Compania de Telecomunicaciones de Chile is looking to place a 200 million euro-denominated transaction, while cellular startups in Mexico and Brazil are preparing issues of their own.

According to Salomon Smith Barney, telecommunications providers issued $3.9 billion worth of bonds during the first half of the year, accounting for 47% of Latin corporate issuance, up from 10% in the first half of 1998 and 5% in the first half of 1997.

Emerging markets and high-yield investors alike are finding their portfolios taking on a telecom tinge as a result of this proliferation of telecommunications issues. "You can't fight the issuance," said Tom Haag, who allocates a modest portion of the $1.5 billion in high yield funds he manages for the Lutheran Brotherhood to Latin American corporates. "There's just a lot of telecoms out there. It's not that we limit ourselves and don't look at other sectors, but if you want to take a peak at [Latin American] deals you're going to end up taking on telecom deals. That's just the way it is."

The ubiquity of telecoms in the new deals market is the result of the sector's relative strength compared to other industries as well as the high capital requirements of telecom companies. Whether they are buying band licenses from the government, as in the case of Telecom Argentina and Telefonica de Argentina, or developing infrastructure and refinancing debt like Telmex, these companies need cash, said Chris Taylor, corporate debt analyst at ING Barings. What sets them apart from most other companies in the region is that they are both attractive enough to bring in buyers and profitable enough that they are willing to pay back debt at current price levels, he said.

Many of the region's telephone companies have historically enjoyed virtual monopolies in their countries and now generate enviable cash flows, even by U.S. standards, said a New York-based analyst covering Latin American corporates.

But telecom issuers haven't been winning over buyers with their financial strength alone, Taylor said, as they've also wooed investors with polished and straightforward presentations. The fact that almost all of the sector's companies are SEC-registered and divulge information regularly to the Street makes them stand out in a market where low transparency is often the norm.

Indeed, strong investor relations have given telecom companies a distinct competitive advantage over many of the region's other companies, who often fall short due to their weak communication skills, Taylor said.

"If your looking for prom dates and there's three guys for every one girl, any [guy] that has zits on his face doesn't have a shot," he said. "It's not just the best company that comes to market, but it's the company that does the best job of marketing itself to investors."

Among less established names like Alestra - a fixed-line telephony provider that issued $570 million of bonds in May - foreign participation has also played a key roll in promoting investor confidence, said Matthew Peck, emerging markets corporate debt analyst at Salomon Smith Barney. If the market allows, a number of other Mexican telephony companies will be coming out with bonds of their own, Peck said. "There's a lot of other long distance and cellular companies out there too, particularly in Mexico, that would love to come to market," he added.

MCI partner Avantel, for example, has been talking to banks about launching a deal, said an analyst covering Mexican corporates. Iusacell - a Bell Atlantic subsidiary - is in the process of an ADR issue and will also look to tap debt markets in coming months, he said, while Alestra is likely to print again before the year is up.

Cellular service providers from Brazil may also join the fray, depending on how well the sovereign's benchmark euro-denominated issue trades in the market, the New York-based analyst said. Companies like Telesp Celular and Tele Celular Sul, which are partially owned by Telefonica de Espana and Telecom Italia, respectively, have made huge investments in purchasing licenses and expanding their networks and are now eager to draw financing from the global debt markets. Before that happens, however, a corporate benchmark will have to be set by Brazil's most widely followed media company, Globo Par.

Whether Brazilian companies participate or not, as long as the market for Latin corporates is open, Peck expects telecoms to continue leading other corporate issuers. "You'll continue to see a large amount of telecommunications issues relative to other sectors," he said. - Matthieu Wirz