Everybody knows Chile is Latin America's economic success story, and executives in the capital markets are happy to talk about it, especially nowadays. Expect those smiles to continue throughout 2005. Brokers and investment banks can offer companies many alternatives when it comes to financing, and they can do it on excellent terms.

This year, bond issues and bank loans are equally attractive financial tools due to favorable spreads and low interest rates, respectively. The domestic stock market has also proven to be very popular among companies here looking to raise money. During 2004, Chilean companies raised US$4.62 billion in domestic capital markets to refinance liabilities or to develop new projects, according to 113 Partners, a Chilean investment bank. Retailers were particularly active; supermarket chains D&S and Jumbo raised more than $1 billion in capital increases, initial public offerings and block trades. That's good news because it reflects domestic demand for goods and services. In the past, Chile reported economic growth largely due to external demand for its copper and other commodities.

Apparently nobody missed out on snapping up stocks in the Santiago Stock Exchange. The IPSA select stock index, an average of the 40 most actively traded Chilean companies, rose 21% during 2004. Last year, Chilean companies' total market capitalization reached a record $116.07 billion, a figure that is not only 27% higher than a year earlier but also 150% greater than the country's gross domestic product.

Financing terms haven't looked this good since the Chilean stock-market boom of the late 1980s and early 1990s, and this rally is likely to continue in 2005 as growing companies tweak their business models. "We're not only seeing financing alternatives by way of capital increases, but there are also cases of companies that have a great opportunity to get out of minority investments and reorient their resources towards others that are more closely related to their principal business," says Javier Contreras, chief of finance at stock brokerage Santander Investment in Santiago.

Chilean companies are also receiving warm welcome in the international markets, too, as access to global syndicated loans or debt instruments are "just as wide open as ever," says Contreras. Just look at Corporacion Nacional del Cobre (Codelco), the state-owned copper miner. The largest producer of copper in the world, Codelco sold $500 million in bonds in international markets last October, achieving a spread of just 95 basis points over U.S. 10-year Treasuries, a company record. Demand for the bonds topped $1 billion.

The companies themselves agree that Chile's capital markets are more sophisticated than in the recent past thanks to the range of multiple financing packages they can find. "All the financial windows are open," says Felipe Ureta, manager of finance and administration at Entel, the second-largest telecommunications company in the country. Generally, Ureta says, long-term and short-term bonds, bank loans and equity sales are alternatives in the present scenario. Low interest rates and good rising share prices have become the norm. "The domestic market is more mature and it is deeper, and currently UF rates are attractive for financing in the domestic currency," says Ureta, referring to the Unidad de Fomento (UF), Chile's inflation-indexed currency unit, which is used for project financing. In the telecommunications market, Entel has set its priorities for 2005 on its wireless operations. This year, up to 80% of the former state-run long-distance company investments will go towards developing wireless telephony.

Despite the current health of the stock market, Entel has ruled out selling fresh equity. If stocks aren't an option, however, cash is. "The investments we are financing are basically coming from our internal cash flow," Ureta says.

Other companies catering to robust consumer demand in both Chile and abroad were very active in the markets last year. Falabella, South America's largest retailer sold the peso-equivalent of $293 million in five-year and 21-year bonds in the domestic market. Sodimac, Falabella's home-improvement retailing subsidiary, meanwhile, grew in Chile and across the region. "We are growing and building new stores and we are carrying out new investments," says Daniel Lazo, head of finance at Sodimac. "The best thing for the company is medium-term and long-term credit." The retailer operates in Chile and Colombia and just opened up two stores in Peru.

Drivers. One of the drivers behind the success of Chile's stock market has been the presence of the six private pension funds, known as AFPs, which manage $50 billion, far more on a per-capita basis than pension funds in the rest of the region. Chile's association of private pension fund managers estimates that AFPs collect $2.40 billion in contributions each year, most of which goes into the domestic debt market. Currently, AFPs can invest 30% of their assets abroad.


"Chilean capital markets are very open and liquid, and they are more and more able to finance long-term projects," says David Goldstein, treasury vice president at ABN Amro Chile. "This could be the case for 30 years."

That's a recent change. Big Chilean companies have traditionally gone abroad for money, as the domestic market was never deep enough to finance sophisticated projects. The financial sector, however, has become more sophisticated and can better tailor financing plans for companies on an individual basis.

"We have seen large bond issues for highways that before were financed abroad in dollars," Goldstein says. "Spreads are historically thin and each time there is a new issue, it's oversubscribed by three or four times. That's because Chile's name is very well known and, for some time now, it has been investment grade," Goldstein says.

Investment funds, and venture capitalists in particular, are waiting for still better conditions to develop, especially next year if Congress approves legislation known as "Capital Markets II." The pro posed rules would include incentives for the development of venture capital and tax exemptions for startup projects. It is estimated that venture capitalists in Chile raised $100 million in financing in 2004, says the Chilean Association of Investment Fund managers. New legislation could send that figure skyrocketing, the association says. Chile wants more venture money in its financial system because they often fund small business, which employs the majority of the workforce.


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