No place like home: Convincing Peruvian firms to seek financing domestically is a key goal

The past year was a relatively calm one for the Lima Stock Exchange (Bolsa de Valores de Lima, BVL). Despite predictions that the exchange would see multiple new listings in 2012, there was only one initial public offering (IPO), from port operator Andino Investment Holdings (AIH). The listing took place in February, ending what Bloomberg described as an IPO drought in Peru. With no major IPOs predicted for 2013, it appears that the drought has returned. In 2012 the BVL General Index (Índice General de la BVL, IGBVL) was up 5.9% over the previous year, though it plummeted 26.7% in the first half of 2013.

Attracting New Listings

The exchange and its regulator, the Superintendency of the Securities Market (Superintendencia del Mercado de Valores, SMV), are working to attract more companies to list via the Alternative Stock Exchange (Mercado Alternativo de Valores, MAV). The MAV was launched in 2012 and is aimed at addressing the financing needs of small and medium-sized enterprises (SMEs).

Despite these efforts, the BVL is likely to face an additional challenge in its attempts to attract new business as Peruvian companies have had great success in issuing debt and equity abroad over the past year. There was a handful of important listings on the New York Stock Exchange (NYSE) and a large number of corporate debt issuances from both medium-sized and large Peruvian companies. This trend appears likely to continue in the short run, forcing the BVL and regulators to concentrate on implementing reforms that will make the exchange more competitive at the regional and international levels.

Recent Performance

The BVL’s market capitalisation dropped from $131.86bn in January 2012 to $117.73bn in September 2013. Negotiated volumes were $7.6bn in 2012, with a total of 249,000 transactions. Between January and September 2013, negotiated volumes reached $4.78bn, with a total of 153,000 transactions. Like the rise and fall in the IGBVL, the BVL Selective Index (Índice Selectivo de la BVL, ISBVL) was also up, by 13.4% in 2012, only to drop 24.9% in January-September 2013. The ISBVL includes the bourse’s 15 most heavily traded stocks.

The BVL’s varied performance can be attributed to continuing economic growth alongside external instability. GDP expanded by 6.3% in 2012 and 5.7% as of the first semester of 2013. Ongoing fears surrounding the euro crisis were slightly allayed by news of the creation of the European Stabilisation Mechanism, a fund aimed at keeping the most indebted countries afloat. A larger concern for Peru, perhaps, is the possibility of a hard landing for growth in China – the country’s most important trading partner. While GDP growth did slow in China in 2012 and into mid-2013, Lima-based analysts were optimistic that this decline was not large enough to have a major impact on Peru’s economy and capital markets.

Key Industries

Slowing growth in China did, however, signal a fall in commodity prices that led to the poor performance of mining stocks, which account for a large proportion of the BVL’s market capitalisation. Growth in internal demand has helped to counterbalance this, as shares in financial services, energy, banking, and food and beverage firms have soared. Alejandro Rabanal, the head of equity research for Peru at Credicorp Capital, told OBG that “anything related to internal demand” was a hot ticket in 2012. He highlighted significant growth in the food and beverage sector, the stock index for which was up 56% year-on-year (y-o-y) in 2012.

Rabanal accredits this growth to changing consumption patterns. “As salaries are going up, before a family may have made their mayonnaise at home, but now they buy it pre-made. Or women are working more and do not have time to cook, so they will buy higher-value-added pre-made goods. This has caused the sector to really take off.” In particular, shares in Alicorp, a Callao-based manufacturer of oils, wheat flour and desserts, among other products, rose significantly in value in 2012, increasing by 42%.

House Proud

Similarly, a rise in income is encouraging more Peruvians to convert from renters to homeowners. This change in consumption, coupled with a severe housing shortage, has led to significant growth in the construction and cement industries, and the strong performance of equities in these sectors. Three of the six top-performing equities in 2012 can be classified as pertaining to the construction and cement industries.

Roberto Flores, chief analyst at local brokerage firm Inteligo SAB, told OBG that “higher disposable incomes are providing more consumers with access to mortgages. Another cause of growth in construction and cement is the large infrastructure gap that has led the government to make significant investments in public works,” including a plan to upgrade the country’s highways, many of which are in poor condition. Further, as Flores indicates, demand for banking products such as mortgages continues to grow, driving investors’ demand for equity and debt issued by Peruvian banks.

Overall, the BVL’s banking and finance stock market index was up 39% in 2012 before sliding back 3% between January and September 2013. The sector accounts for approximately 5% of trading volume. Analysts anticipate that the banking sector will continue to be a top performer on the exchange over the coming year. However, the introduction of more stringent lending policies and regulations aimed at keeping credit growth under control may lead to more modest increases in share value in 2013.

Energy was another big winner on the BVL in 2012 and early 2013, as the electricity subsector index showed a 34.6% rise in share values in 2012 followed by a 9.3% increase in the first half of 2013. Much of this rise can be attributed to shares in Edegel, the largest producer of electricity in Peru. Shares in Edegel were up more than 9% y-o-y as of October 2013. The energy sector should continue to thrive as electricity demand is predicted to double within the next 10 years.

Mining

Contrary to the performance of the internal demand sectors, 2012 was a rough year for mining. The sector is a significant player on the BVL, accounting for 41.5% of its market value and 12.5% of volume traded in 2012. The BVL’s mining stock index indicates a decrease of 3.6% in share values in 2012. Shares in junior mining companies – smaller outfits that rely primarily on capital markets for financing – experienced an even more precipitous decline in share value of 17.5%.

This fall in share values can be attributed in part to a decline in global commodity prices resulting from slower growth in China and the US, and the impact of the ongoing European debt crisis, which has reduced demand for commodities there. A January 2013 World Bank report predicted that metal prices for the year would remain an average of 14% lower than in 2011. The report further emphasised China’s role in determining metal prices, as the country consumes around half of global metal output.

Social conflicts surrounding mining projects pose an additional challenge. In 2011 Newmont, an American mining firm, put its operations in the Conga copper and gold mine in Cajamarca on hold following protests that resulted in several deaths. Rabanal told OBG that the Conga mining incident had left a lasting impact on the sector. “The fact that such a large project was put on hold lends a lot of uncertainty to the sector,” he said. “There has been some good news that mining projects in the south of the country are progressing, but there has not been any success so large as to cloud investors’ memory of Conga. The junior mining companies are suffering from this, as well as from lower metal prices.”

Analysts are for the most part optimistic that the mining sector will rebound over the next couple of years. Flores told OBG that copper production is expected to triple over the next two to three years following a series of large investments in mining projects. He said that addressing social conflicts will be a key element in making this production increase a reality. In summary, Flores predicted that “new conflicts could generate some volatility in the market, but conflicts will not prevent crucial projects from taking place. Maybe they will generate delays but I think the cost of not continuing with certain projects is so high that the government will find solutions to allow these projects to advance.”

Top Stocks

The BVL’s best-performing equities are concentrated in the retail and construction sectors. Beverage firm Lindley, for instance, gained 26.3% between January and September 2013 and is one of the top performers on the BVL. The growth of such companies is linked with rising income and increasing patterns of consumption among Peru’s growing middle class. Analysts are optimistic that the retail sector will continue to perform well, with Saga Falabella serving as a market leader.

Cementing Growth

Cementos Lima was a leader in the construction sector in 2012, the cement producer seeing a 62% rise in share value. In July 2012 it merged with Cemento Andino to form a new company, Unión Andina de Cementos (Unacem).

Cementos Lima accounted for 72% of the value of the new firm and Cemento Andino the remaining 28%. As of October 2013, shares in Unacem were up 14% over the January-September value. The company should continue to perform well on the BVL as demand for cement grows.

The Lima Association of Cement Producers reported a 15.4% increase in domestic cement deliveries in the period from end-2011 to end-2012. Cement exports rose by 16.9% in the same period.

Shares in Graña y Montero, Peru’s largest construction company, have performed exceptionally well over the past year or so. Shares were up 26% in value y-o-y as of October 2013, with a 2014 expected price-to-earnings ratio of 12.5. In March 2013 the company announced plans to launch a large-scale home-building project which will entail the construction of eight housing complexes in various locations throughout the country. In total, the scheme will produce 4000 new housing units, with the goal of completing 2000 annually for the next two years.

Growth prospects for the company are strong, as Graña y Montero is engaged not only in housing schemes but also in large-scale infrastructure projects, which are high in demand.

New Listings

As mentioned, Peruvian port operator AIH was the only company to conduct an IPO on the BVL in 2012. The firm faced several setbacks in attempting to go public, with the IPO delayed and the listing price reduced before the initial release in February. Shares opened at PEN3.30 ($1.24), but by December 2012 they were trading for as little as PEN2.19 ($0.82), and there is some concern that AIH’s performance on the market may deter other companies from going public in the future.

However, AIH has not been deterred. Following its $43m IPO in 2012, the company raised another $110m through a loan. It also announced plans to raise a further $170m on debt markets to continue financing its growth plans, which include the expansion of five regional airports. At time of press it was unclear whether AIH would raise funds through the domestic debt market or internationally.

Prior to the AIH issue, the last IPO that had taken place in Peru was that of Pesquera Exalmar, a fishery and fish processing firm, which raised $98m in November 2010. In January 2013 Exalmar was in the news for issuing some $200m in debt on the Luxembourg Stock Exchange, a bond offering that was four times oversubscribed.

International Debt Issuance

Exalmar follows in a financing trend that has become popular among medium-sized and large Peruvian companies over the past year or so – issuing debt abroad. In July 2012 one of Peru’s largest sugar companies, Coazucar, issued $325m in bonds abroad, with orders exceeding $3.4bn. Rabanal told OBG that the Coazucar offering was unique in that it indicated an opening up of Peruvian firms to international capital markets. “Normally Coazucar is quite closed from doing capital market deals in the capital market,” he said. BBVA Continental, one of Peru’s largest banks, also issued debt internationally in 2013, earning $500m on bonds with a 5% coupon rate set to mature in 2022.

Christian Laub, the president of the BVL and CEO of Credicorp Capital, believes that the current rhythm of corporate bond listings abroad is likely to continue. Rabanal agrees, saying that “there is a lot of demand for Peruvian corporate bonds. Investment banks are looking at Peru; they have contacts outside the country and investors lined up.”

In addition to corporate bond issuances abroad, several large Peruvian companies conducted major international IPOs in 2012. Cementos Pacasmayo, one of the country’s largest cement producers, raised $250m in an offering on the NYSE early in 2012. Then, in October of that year, Inretail, the supermarket and shopping centre arm of Intercorp, a large Peruvian holding company operating in finance and retail, raised $400m in an international IPO.

There are no other major IPOs in sight for the BVL in 2013. Several analysts have mentioned the possibility of Petroperu and Electroperu, the state-owned petroleum and electric companies, respectively, listing, though this seems unlikely, at least in the short run. “The government has been announcing the potential listing of these companies for five years. It is hard to say when it will actually happen,” Flores told OBG. However, he is confident that if Electroperu and Petroperu do open up to the public, it would be a boon for the BVL. In Colombia, the listing of shares in Ecopetrol, the national oil company, “marked a before and after in the Colombian market as trading volume measured a dramatic increase,” he said.

MAV

While the BVL is unlikely to see any major listings like Petroperu in the near future, it is working to draw more SMEs into the capital market via the creation of a new alternative exchange, the MAV. According to Daniel García, principal analyst for the SMV, the MAV, launched in June 2012, offers companies that would like to list on the exchange a more relaxed set of requirements and reduced costs.

At time of press, only one company, Agrícola y Ganadera Chavín de Huántar, had taken advantage of the MAV to go public. García was optimistic about the level of interest in the new exchange, but emphasised the need to promote a change of mentality among Peruvian business owners, who either do not understand or do not feel comfortable with the idea of going public. To promote the project, the SMV is conducting a series of workshops and seminars aimed at informing business owners of the potential benefits of listing on the exchange.

MILA

Another major exchange project, which combines the Chilean, Colombian and Peruvian stock exchanges in a single platform, the Integrated Latin American Exchange (Mercado Integrado Latinoamericano, MILA) has also been off to a slow start since its launch in May 2011.

Flores told OBG that trading volume on the MILA was “anaemic” in 2012. “Many investors know that the three markets [Chile, Colombia and Peru] have solid fundamentals, but they prefer to have exposure to the MILA through alternative mechanisms,” Flores said. “For example, they continue to work with their stockbrokers. A Peruvian investor often prefers to work with his or her Chilean broker to buy a Chilean stock, instead of buying through the MILA platform.”

The MILA faces additional challenges. Purchasing a stock via the platform can require multiple currency exchanges. For example, a Peruvian investor that wants to buy a Chilean stock must convert soles to dollars and dollars to Chilean pesos to complete the transaction. The three exchanges have all retained their own tax regimes too, complicating investor transactions. Moreover, unlike other markets, all trades become public record, which can deter investors who prefer to remain anonymous. Luis Quispe, general manager of Grupo Coril, told OBG, “There is no reason to keep a record of every sale and purchase on the market, as it is not done in other markets. This is another reason why the MILA has not been as fruitful as it could have been.”

Regulatory Reform

President Ollanta Humala’s administration will be attempting to tackle this tax issue as well as challenges to the development of the capital markets through the creation of a task force charged with implementing reform.

In May 2012 Luis Miguel Castilla, the minister of economy and finance, told local press that he would be working on a project aimed at reforming the capital markets by reducing the cost of accessing them for SMEs, as well as diversifying the investment instruments that are available. To this end, the Securities Market Promotion Act (Law No. 30050) was signed into law in June 2013. The law introduced rules to make the securities market more flexible in the hope of increasing the number of listings, facilitating new financing structures and attracting investors. Castilla said that the capital markets account for only 20% of business financing in Peru, indicating a tremendous opportunity for growth, and that the new law could help add up to 200 firms to the exchange.

A 70% reduction in the transaction fees charged by the BVL came into force on November 1, 2013. Also, following the passing of the Securities Market Promotion Act, there are now no restrictions on the exchange acquiring Cavali, Peru’s post-trade service provider, as part of its process of vertical integration. At present it owns 40% of Cavali, but there had been no news of the BVL proceeding with the acquisition at time of press. In addition, the BVL was testing out a new trading platform as of August 2012. The Direct Market Access (DMA) platform, AccessoDirecto, will allow investors to place orders online, eliminating the need to contact a broker for every transaction. “The reduction in the transaction fees is a measure that we believe will boost trading on the BVL and help AccessoDirecto reach its full potential,” Laub said.

Private Equity

Apart from the BVL, private equity is playing an increasingly important role in Peru’s capital markets. Enfoca is a leading player, managing $750m in assets including investments in Maestro, a home improvement store chain, and Talma, the airport service provider that holds the operating concession for airports in the north of Peru.

Nexus Group is another important player in private equity. In March 2011 the firm raised its first fund of $350m, and the group’s management recently announced plans to conduct a second fundraising drive with a target of $600m. Nexus Group was formed by Carlos Rodríguez-Pastor, chairman of IFH Peru, the parent company of Intergroup Financial Services, one of the largest consumer lenders. Nexus Group owns stakes in several IFH Peru companies.

Private equity is likely to benefit from the creation of more family offices. José Luis Sarrio, a partner at local audit and consulting firm GrantThornton, told OBG that family offices are growing as Peruvians who have been living and working in the US or Europe are looking towards home for investments with levels of return that are hard to find in advanced economies. Sarrio also said that family offices are migrating from Chile to Peru, following a wave of Chilean investment in the country in recent years.

Rabanal said that the growth in private equity could spill over onto the BVL, “In three to five years there could be a boom on the BVL as medium-sized companies that are receiving investments from private equity firms now will grow. Private equity firms will either want to sell off their investments or list them on the BVL. Private equity investment is great for medium-sized companies as it gives them a seal of approval, which could help facilitate their growth.”

Restrictions On Pension Funds

Regulators have also announced plans to reduce the restrictions on pension funds’ use of certain investment instruments. Pension fund leaders particularly hope the reforms bring an increase in limits on foreign investment. Sarrio predicted that the change in regulation would lead to greater differentiation between pension fund returns. At present, pension funds have a limited choice in relation to the investment instruments they can use. This means that all the funds are often invested in the same type of instruments in relatively equivalent proportions, generating only minor differences in returns.

Outlook

Laub expects private equity to continue to grow in the coming years, with a shortage of high-return investment opportunities in the US and Europe likely to drive this trend. Rabanal expects a 31% fall in earnings in 2013. For 2014, he predicts an increase in revenues of 25%, which would see the price index rise 14%. In the most optimistic scenario, the price index would rise by 45% in 2014, assuming a 35% increase in revenues. Flores foresaw BVL market capitalisation continuing to rise with the internal demand that impacts the retail and construction industries. Mining could also make a comeback in 2014, although this will depend on growth in China, the US and Europe, which remains difficult to predict.

As for the MILA, without a change in the fundamentals, including tax policy and currency exchange burdens, the integrated exchange is unlikely to see a significant rise in trading volumes in the short term. Promoting the MILA will require a longer adjustment period for investors to begin to feel comfortable with the platform and regulatory authorities to embrace policies that allow the exchange to thrive.

Meanwhile, Peruvian companies are finding it easy and affordable to issue debt abroad. Analysts agree that this trend is likely to continue throughout the year. A key challenge for the BVL and its regulators going forward will be to create regulatory conditions that make it more desirable for Peruvian companies to seek financing domestically and contribute to the expansion of the homegrown capital market.