Transactional Impact Monitor: Andean Region – Vol. 3

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Transactional Impact Monitor: Andean Region – Vol. 3

15 October 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

CHILE
– M&A Outlook
– Handling the Crisis

COLOMBIA
– M&A Outlook
– Handling the Crisis

PERU
– M&A Outlook
– Handling the Crisis

– Dealmaker Profiles

CHILE

The mood among investors in Chile, and those looking on from abroad at what has long been considered the darling of Latin America for its political stability and liberal trade policies, is tenuous. The plebiscite on constitutional reform, originally scheduled for April, will be held on 25 October, a year after protesters filled the streets of Santiago following a public transit hike to voice their discontent on a range of matters. Among the grievances that led to widespread unrest were human rights abuses, the exclusion of a large swath of the population from the economic gains the country has enjoyed over the last three decades, and a generalized disenchantment with Chile’s form of pro-business, neoliberal democracy.

The economic crisis that gripped the world in 1Q20 caught Chile, and much of Latin America, mid-downward cycle, noted Banmerchant Deputy Manager of Corporate Finance Ignacio Rodríguez. Like other investment banks across the region, Banmerchant had several sale processes underway that were put on hold, Rodríguez said, noting that as the M&A work began to decline, restructuring became the firm’s core business.

“Many companies stopped generating revenues, but their liabilities still needed to be serviced,” he said. Chile’s banks stepped up to support the private sector, funneling low-interest loans with extended grace periods before borrowers had to begin repaying. In September, those grace periods began to expire, Rodríguez said, and if corporate revenues don’t normalize in October and November, a wave of insolvencies will hit Chilean shores. 

The uncertainty surrounding the economic recovery is complicated by the October plebiscite, which has investors, and Chileans in general, anxious. “Everybody wants to restructure their liabilities long-term, but many won’t be able to,” Rodríguez said. “They will either go under or seek fresh capital. That’s where M&A will reactivate, representing an opportunity for foreign investors to enter Chile at very low valuations.”

M&A Outlook
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COLOMBIA

Restrictions governing economic activity in Colombia are easing with all businesses except bars, nightclubs and gyms permitted to open daily as of 22 September, though opening hours continue to be limited for specific sectors. Business confidence has accordingly turned slightly positive for the first time since March, according to the local press. 

“We can now turn the page,” said César Gutiérrez, Managing Director of boutique investment bank Bastion Capital Advisors. After six months of near paralysis, the private sector is ready to get back to business, he said. Many Colombian companies in certain industries are entering restructuring processes, refinancing their debt, looking for capital or exploring sale options after six months of little-to-no business activity, however, he noted. 

Tourism and hospitality and related industries like aviation and catering, have been decimated, said Gutiérrez, and automotive sales are also down sharply. Bastion was recently approached by a company serving the aviation industry that could not continue to finance its overhead when revenue fell flat, Gutiérrez said. Though Colombia’s international airports reopened on 1 September, traffic remains lackluster as the fear of contracting COVID-19 while flying persists, and many corporate entities maintain work-from-home policies, limiting the company’s prospects for a rebound, he noted. 

There is no way to maintain fixed costs for five or six months when revenue evaporates overnight, Gutiérrez said, especially for companies that have relied on debt financing. Colombia’s banks have classified virtually every business segment as high-risk, meanwhile, making it difficult for companies to access bridge financing, Gutiérrez said. 

This looks to be the start of a wave of consolidation, where private equity funds with firepower can buy on the cheap, he noted, whether diversified domestic fund managers that have longstanding interests in Colombia, or those that have always had an interest in investing in the country. A long-awaited opportunity for private debt could finally find fertile ground in Colombia, Gutiérrez noted.

Despite the uncertainty about the timing and speed of the recovery, there will always be appetite for good assets, Gutiérrez said. “When some cry, others make handkerchiefs,” he noted, citing a popular saying. This is the moment for opportunistic investors, both strategic and financial, he added. “I’m very optimistic. This has been a moment to reflect, to analyze where industries are headed, and understand the new opportunities; companies need to get ready for what comes next.” 

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 3

PERU

Following months of strict isolation, the Peruvian government announced it would permit air traffic between Peru and seven countries, namely Bolivia, Chile, Colombia, Ecuador, Panama, Paraguay and Uruguay, beginning the first week in October. The reopening of the country’s airspace comes despite an official death toll attributed to SARS-CoV-2 that puts Peru at the top of the list of nations globally by a significant margin, at over 1,000 per million inhabitants. Despite the health crisis, Peruvian companies are beginning to get back to business, and stalled transactions are getting back on track, according to Hernández & Cía. Abogados Partner Diego Carrión.

Peru was awash with M&A deals in 2015, when Carrión was appointed partner. That wave of transactions hit a bump when the “Lava Jato” scandal in Brazil spilled over into Peru, where Odebrecht and other large Brazilian and Spanish construction firms had large contracts underway in partnership with local entities, many of them, it turned out, won by corrupt means. 

The construction sector was paralyzed as a result of this, with project finance transactions arrested midstream. This was followed by some opportunistic M&A when Odebrecht and other large international construction firms needed to exit some projects, Carrión recalled, while M&A activity in other sectors of the economy continued at a good pace.

Hernández & Cía. Abogados was never involved with Odebrecht, which gave it a great upside, as many clients began to search the firm out for its clean record, said Carrión. Among the important new clients garnered as a result was Graña y Montero, Carrión noted. In 2017, the firm was retained by the company’s new board to guide it through a reorganization, and it has continued to work hand-in-hand with the board and the new management ever since to overcome one of the most dire corporate crises in the country’s history. “They sought us out for the strength of our team, and because we had no conflict of interest,” Carrión said, noting Hernández was part of the “big change” in the company.

The firm’s deal flow isn’t dependent on the construction industry, however, and it has worked on a slew of M&A deals in other sectors in recent years, including several led by private equity investors. Real estate is one sector in which it has invested heavily of late to enhance its expertise. In the midst of the crisis in mid-2020, it poached an entire real estate practice from another law firm to bolster its capabilities in this growing field. 

“This gives us an edge amid strong growth in what has become an increasingly sophisticated real estate market,” Carrión said. Real estate lawyers need to speak the language of the engineers and regulators, and Hernández was losing some business without a clear leader in the space, he said. The runway in the real estate market is tremendous, with construction projects that were shut down in 2Q20 now getting underway again and a pipeline of deals spanning the economy, from the development of agricultural lands to malls. “We now have the capacity to ride this wave,” Carrión said, noting the firm took advantage of its strong balance sheet and the lull in the market to make a strategic move that will position it with the right team. 

While construction projects in the private sector are underway again, the large infrastructure projects tendered by the Peruvian government, including Line 2 of Lima’s metro and the expansion of Jorge Chávez Airport, are progressing at a snail’s pace, Carrión said, amid bureaucracy that’s worse than ever, inducing skepticism, fear and a lack of confidence among participants and onlookers alike. 

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 3

Transactional Impact Monitor: Andean Region – Vol. 3

Transactional Impact Monitor: Andean Region – Vol. 2

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Transactional Impact Monitor: Andean Region – Vol. 2

9 June 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

CHILE
– M&A Outlook
– Handling the Crisis

COLOMBIA
– M&A Outlook
– Handling the Crisis

PERU
– M&A Outlook
– Handling the Crisis

– The View from Milan
– Dealmaker Profiles

CHILE

Nearly a month after Chile tightened the initial restrictions on movement and business activities imposed in mid-March in Santiago, the minister of health announced on 2 June revised figures for the number of active cases under treatment for SARS-CoV-2, resulting in a decrease from 59,100 to 21,325 and an increase in reported recoveries from some 46,000 to just under 86,000. At the same time, health officials announced the deadliest day with 75 deaths attributed to the virus, bringing the total official death toll to just over 1,200 and 114,000 confirmed cases.

The country avoided a total lockdown from the outset by isolating specific districts with tight quarantines based on an aggressive testing program. This strategy allowed much economic activity to carry on uninterrupted, noted DLA Piper Partner Paulo Larrain.

Notwithstanding, there are industries that have been severely affected, Larrain said. “It’s a very bloody process for many.”

The country was still reeling from the social disruption in October 2019, when protests took over the capital calling for a greater focus on programs geared towards reducing persistent income inequality. “These demands are still pending,” Larrain said, noting the plebiscite on social and constitutional reforms has been relegated to October. 

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 2

COLOMBIA

As May came to a close, hope for a swift return to a normal life was dashed for Colombians as President Iván Duque extended the period of mandatory self-quarantine through the end of June, while extending the public health emergency through to the end of August. The official death toll in the country attributed to Covid-19 stands at just over 1,000 with some 33,000 confirmed cases.

Under Colombia’s new phase of restrictions imposed to face the SARS-CoV-2 threat, 43 exceptions were granted permitting the reopening of several non-essential businesses, including museums, libraries, malls and hair salons, while limiting those venues to 30% occupancy. Residents of Bogotá remain confined to their homes until 15 June.

The rosy prospects of 3.7% GDP growth projected at the beginning of 2020 have long since faded, replaced by apprehension over the health threat, and increasingly, an economic recession likely to persist for the next several years, Inverlink Managing Partner Mauricio Saldarriaga told TTR. 

“It’s a call to a simpler life,” said Saldarriaga. Inverlink presciently began implementing an internationalization in 2015, joining global boutique investment bank network IMAP and establishing its own footprint across the region. The move paid off, Saldarriaga said, noting the firm grew through several tough years, including 2018, when the presidential election featured a leftist candidate and many investments in the country were put on hold.

Despite Iván Duque’s victory, the following year was much slower than most thought it should be, Saldarriaga said. “People thought that within two months, things would be flying.” When the country finally turned the corner in early 2020 with a robust start to the year such as hadn’t been seen in a long time, with real estate and financial services deals booming, “the little meteor” of SARS-CoV-2 hit, he noted, and the situation changed entirely; many deals were put on hold, frozen. “Some will die, others are in the process of being reactivated, but everybody went into survival mode, to preserve cash.” In general, companies began to focus on reducing costs, “trimming the fat”, Saldarriaga said. 

“Many companies will face difficulties, even those with healthy balance sheets,” he said. Restaurants, hotels, retailers, all commerce has been hit hard, and there are few winners, Saldarriaga said, namely personal care products, household cleaning products and food retail. “That’s about 10% of companies. Then there’s the 60% that have been heavily affected, and the rest that will have difficulty surviving.” 

Colombia will now enter a period of repositioning and restructuring, Saldarriaga said. “We’re in discussions with a lot of providers of capital and getting started with the airlines, construction companies and industrial entities, which were already suffering. This was the final straw. We all know this is temporary, but with an undetermined duration, it’s very difficult to make plans.”

The crisis will cause great difficulty in Colombia and across Latin America over the next 24-to-36 months, he said, noting the region will face a slower recovery owing to the heavy dependence on commodities. “These economies are facing a huge setback, with an enormous impact on the middle class and on spending power. This will be a marathon, not a sprint. Resilience and survival is the name of the game.” 

Colombia’s ambitious 4G program designed to develop the country’s airports, seaports, highways and social infrastructure, was already enduring growing pains Saldarriaga attributed to trying to go “from crawling to running from one day to the next”. The government’s capacity to keep these projects on track and make them a countercyclical engine of growth following this crisis is challenging in the context of the country’s fiscal issues, he said. 

“Infrastructure has become a great lesson in all of this,” he said. The sector was seen as low risk, with low transaction costs, but the these assets are facing a grave impact as tolls evaporate along with traffic through airports, both previously considered predictably stable. It may be a hiccup, Saldarriaga said, and traffic will surely recover, but in the short term, the sector faces a liquidity crunch. “The materialization of risks in the sector will lead to much negotiation with the National Infrastructure Agency (ANI) and a lot of litigation, reclamations and negotiations between the government and concession holders as they hash out how to assign risks in the context force majeure, he said.

“This will be an opportunity for Canadian infrastructure funds, the Brookfields of the world, to recycle capital and keep companies afloat,” Saldarriaga said. Pension funds that have liquidity now can also benefit from the tight situation over the next six-to-12 months in which there will undoubtedly be a lot of distressed M&A and assets that change hands by necessity, he added. “Institutional investors are watching to see how this will play out.”

Colombia’s dependence on oil revenue, which represents nearly 50% of the federal budget, has led to a simultaneous shock that amplifies the economic shock brought about by restrictions imposed to contain the spread of SARS-CoV-2, Saldarriaga noted. The oil market is distorted and manipulated, and this dependence will make the recovery more difficult, Saldarriaga said. “It obligates us to seek ways to depend less on raw materials and more on value-added products,” he said. The falling value of the Colombian peso makes labor costs and many products more competitive, Saldarriaga added. “These are countries that don’t just need to bounce back, they need to reinvent themselves and bounce back, and we better do it, because oil is surely not a stable bet for the future.” 

Diversifying its revenues beyond oil is an important goal for Colombia, but it’s rightly a medium-term project, Saldarriaga said, given the country is still heavily dependent on extractive resources to improve the standard of living for its citizens. “If we have natural resource wealth, we need to develop it. In the end, it’s what can bring us all prosperity.” The important contribution of hydropower powering Colombia’s electric grid makes the country unique, Saldarriaga pointed out, and balances out to an extent the dependence on oil for fiscal revenue. While the country has indeed put a growing emphasis on renewable energy development in recent years, incentivizing wind and solar, the debate underway in the US and the EU in which proponents are calling for de-carbonization as an engine of growth out of recession is more a first world dilemma at present, he said.

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 2

PERU

On 3 June, the government of Peru extended the country’s health emergency for another three months in the face of the highest death toll in the Andean Region attributed to SARS-CoV-2. The official toll stood at nearly 5,000 with more than 178,000 reported cases. The extension of the declared health emergency is in addition to the state of emergency in place until 30 June.

Peru was among the first countries in the region to implement strict health protocols, ground air travel and impose quarantines and curfews, noted APOYO Finanzas Corporativas Partner Eduardo Campos, “but we were already in a precarious situation”.

M&A Outlook
… Click here to access the third issue of Transactional Impact Monitor: Andean Region – Vol. 2

The View from Milan

The Special Report has sections on M&A, Private Equity and Handling the Crisis, as well as a first-hand account from Italy in The View From Milan, featuring EY Italy Managing Partner Tax & Law and Mediterranean Region Accounts Leader Stefania Radoccia.

Transactional Impact Monitor: Andean Region – Vol. 2

Transactional Impact Monitor: Andean Region

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Transactional Impact Monitor: Andean Region – Vol. 1

15 April 2020

TTR’s Transactional Impact Monitor (TIM) is a Special Report combining local knowledge and market visibility from top dealmakers developed to address extraordinary situations affecting the macroeconomic stability and M&A outlook in core markets

INDEX

CHILE
– Private Equity
– Equity Capital Markets
– Handling the Crisis

COLOMBIA
– Private Equity
– Equity Capital Markets
– Handling the Crisis

PERU
– Private Equity
– Equity Capital Markets
– Handling the Crisis

– The View from Milan
– Dealmaker Profiles

CHILE

Summer vacation was just coming to an end in Chile when the government ordered the closing of non-essential businesses and told citizens to stay inside their homes for an indefinite period of self-isolation on Sunday 15 March. Schools remained closed the next day and Chileans remained homebound until the quarantine began lifting in certain areas on 13 April. Outings required citizens obtain a permit online wherever stay-at-home orders were in place.

Chile faced the business lockdown from the unique perspective of having hosted a destabilizing social upheaval in late 2019, which Carey Partner Francsico Guzmán likened to the “yellow vest” movement in France, in that it had no apparent leader or organized structure.

The social upheaval led to a plethora of tangible demands, including a review of Chile’s constitution, with labor and water rights among the politically sensitive issues surfacing, Guzmán said. 

Investors were cautious in the face of the economic and political uncertainty in 4Q19, he noted. Nonetheless, a strong dollar and cross-border prospects gave Carey a lot of work at the outset of 2020, he said. “That’s when coronavirus hit, and with it a global change.”

Chile was paralyzed by the social movement, and then by the threat of a pandemic, said Guzmán. “The political focus changed from addressing the demands of the social movement to surviving this as best we can,” he said. 

“Fortunately in our case, what we’ve seen is that there’s still work to be done, only the nature of the work is different; it’s more strategic,” Guzmán said. Clients are calling to consult on how best to proceed and to explore restructuring business units, he said.

Renewable energy transactions Carey was working on have continued and even closed in the midst of travel restrictions, Guzmán said, noting this segment had proved particularly resilient to the impacts the crisis was having on Chile.

Retail transactions were held up though, he said. “It’s not as if they’ve fallen apart, but if there was an MOU, the two parties have said, ‘let’s see what happens.’” Retail and infrastructure deals are still being negotiated, but the pace has slowed, he said. “Nobody wants to make a mistake by committing.” More attention is being paid to MAC and force majeure clauses to protect buyers, he noted.

Private Equity
… Click here to access the first issue of Transactional Impact Monitor: Andean Region

COLOMBIA

In Colombia, 2019 was a strong year for M&A with growth in deal volume in all but the second quarter and significant growth in aggregate value in all but the fourth quarter. The first two months of 2020 began at a similar pace with several transactions underway and a strong pipeline, said Brigard Urrutia Partner Darío Laguado. The energy and health sectors were particularly active, he noted, and in mid-February, the outlook was still good, despite indications of a pandemic on the horizon. Now, there’s absolute uncertainty about the implications of the economic shutdown, and most of all, about the duration of the crisis it has produced, Laguado said. 

On 17 March, the government of Colombia declared a state of emergency and announced a countrywide quarantine beginning on 24 March and extended through 27 April. In Bogotá, the quarantine began on 20 March. “Companies aren’t thinking short-term, they’re thinking immediate-term,” Laguado said. 

Some sectors will take an especially hard hit; in others there will be opportunities, Laguado said. Everything that adapts everyday activities for the virtual world will do well, like food delivery app companies, he noted. On a whole, M&A transactions have been difficult to advance working remotely, however, he said.

There are already cases of airlines filing for bankruptcy protection, with entertainment, hospitality, and restaurants taking the brunt of the impact, and the suppliers to those sectors next in line, Laguado said. Textiles, consumer goods and manufacturing companies are also suffering, while the financial structure of major infrastructure projects has been thrown into question, he added. Roadway and airport infrastructure depends on traffic, and projects could be impacted by such a momentous slowdown, Laguado noted. Other segments haven’t felt such a significant impact yet, but everyone is concerned, he said.

“This caught everybody with their pants down. It’s a very new situation, very unique, and there were no protocols in place,” Laguado said, adding, “The major lesson here is to conserve liquidity.” 

A few of Brigard Urrutia’s deals that were at an advanced stage were signed, including the sale of Electricaribe assets on 30 March. Others have required finessing to protect buyers, Laguado said. A few other deals in industries that were not very affected have also closed, he said, noting transactions that are countercyclical are still moving forward.

The energy sector was hit simultaneously by the oil price war, Laguado noted, which has strained Colombia’s finances. This crisis hits Colombia at a precarious moment in terms of fiscal stability, he noted, which will limit the resources made available for emergency measures. “Everything is in the air with a lot of uncertainty. Clients are putting things on hold,” he said.

“We do see that there will be large M&A deals, but they will be more strategic,” he said, noting the firm was optimistic for a revitalization of the market in 2H20 if the downtime is limited.

Private Equity
… Click here to access the first issue of Transactional Impact Monitor: Andean Region

PERU

Peru had a very active M&A market over the past 12 months; deal volume grew by 8% in 2Q19 and by 20% in 4Q19 with some very large transactions contributing to a 417% increase in aggregate transaction value in 3Q19, according to TTR data. 

Rubio Leguía Normand was working on about six deals of various sizes in sectors ranging from construction to agribusiness to technology, some worth more than USD 100m, with prospective closings between May and August, Partner Carlos Arata told TTR. 

The measures imposed in the face of the public health threat have put all those deals on hold, he said. “I don’t expect to see any large deals wrapping up in the next six months, except those that were already very close to closing.”

Buyers are saying that the funds they had allocated for acquisitions need to be reserved for contingencies while sellers are saying that their numbers have fallen. People on both sides are taking a “wait-and-see” approach, Arata said. The agribusiness and health sectors will remain the most active in M&A, he noted. 

“The year started out very well; we had a really strong pipeline of deals built from last year,” said Ian Fry Cisneros, Founder and CEO of boutique investment bank UNE Asesores Financieros 

Antitrust regulation that was to go into effect in August 2020 was encouraging companies to get deals done beforehand, Fry said. This had accelerated deal flow, with many transactions being finalized in the first two months of the year and many more scheduled to conclude in 1H20 or early 2H20, he noted.

Like Chile and much of the world, Peru has been under mandatory lockdown since 15 March, with outings outside the home permitted only to restock essentials.

The quarantine interrupted the entire chain of payments throughout the economy, and whereas some companies may have sufficient capital to survive for a few months, many Peruvians live day-to-day, Arata pointed out. “The situation over the next six months is going to be complicated.”

Of the eight deals UNE had in its pipeline, one was a sell-side mandate for food and beverage retailer that operated in airports, Fry noted. It was in the eye of the storm and it came as no surprise when the bidder backed out, he said. “They’re still interested, but they’ll want to have another look once the storm has passed.” The firm has been fortunate to put its other deals on ice rather than have them called off, to be reactivated as soon as possible, Fry said.

Depending on the sector, negotiations are more or less impacted, he said. “It’s probable that there will be adjustments; it’s only natural that the buyer would say that the situation has changed, even if they are still interested,” he said.

Tourism, aviation and entertainment are suffering the greatest impact, he said, whereas agro exporters are still attracting interest. Suppliers to the food manufacturing and pharmaceutical industries need to be kept productive to ensure the supply of essential goods, he said, and these segments will continue to garner interest as they have been permitted to carry on with minimal interruption.

In general, M&A will slow down as buyers wait out the crisis, Arata said, unless they’re sitting on a large pile of cash. Deals could continue to close in the most resilient and stable sectors, like energy and construction, he said, but most sectors will face a sharp downturn.

The government of Peru is expected to invest heavily in public infrastructure to help the economy recover over the coming months, and many firms that were impacted by the scandals in the construction industry will be looking for strategic partners in the months ahead, Arata said.

Private Equity
… Click here to access the first issue of Transactional Impact Monitor: Andean Region