The international economic and financial crisis of 2008/2009 did not affect fund raising activity in Argentina. After the Argentine crisis of 2001 the country paid special attention to the strengthening of the banking system, mainly through the adoption of new controls on financial entities and the restriction of foreign exchange transactions. These measures, together with restructuring of foreign debts (sovereign and private) and an increase in the Central Bank's reserves created an environment that permitted Argentina to navigate the last crisis in relatively good shape.
Government policy was a departure from the past. From April 1991 to January 2002, the so-called Convertibility Law pegged the peso to the dollar (at a fixed one-to-one exchange rate), and legalised the use of foreign currencies in local contracts. Though the Law was crucial to eliminate inflation, it opened up markets to a wave of foreign imports, which led to the closing or selling of the majority of the national industry. This, together with the privatisation of estate-owned companies, triggered an increase in unemployment and a pauperisation of the middle class. At the beginning of this century when the Convertibility Law was abolished, many local companies were affected by the so-called pesification or mandatory conversion of dollar debt into pesos. Since the peso's peg to the dollar was eliminated and the peso was allowed to float, there has been a huge devaluation, leading to an almost immediate recovery after the collapse of 2001, when no external financial support rescued our economy as in other emerging markets.
The result of this process in the capital markets was a reduction in the number of companies quoting shares on the local stock exchanges. The bigger companies became subsidiaries of foreign corporations and withdrew from listing. The possibility of quoting shares on foreign stock exchanges like London and New York contributed to the fall of the local capital market.
Present economic policy encourages the formation of new Argentine-owned companies, which are expected to become public in the local market. We will refer to the local framework applicable to capital markets before addressing fund raising and specific jurisdictional topics specific to Argentina.
Capital market supervisory body
The Argentine Securities and Exchange Commission (Comisión Nacional de Valores or CNV) is the local governmental agency for the supervision of capital markets activity. Created by the Public Offering of Securities Law 17,811, it has a federal jurisdiction and its main purpose is to ensure the transparency of the Argentine securities markets, monitoring the correct market price formation, and protecting investors.
Issuers, stock exchanges, stock markets, the Caja de Valores (Argentine central securities depository) and clearing entities, investments funds and trustees, are under the supervision of this agency.
The CNV supervises corporations authorised to issue securities to the public, the secondary markets where these securities are traded, and those intermediaries involved in the public offering and trading of these securities.
The activity of the CNV also covers public offering and trading of futures and options contracts, which are also under CNV administrative jurisdiction, as are the related futures exchanges, clearing houses and broker intermediaries.
The scope of duties of the CNV is basically the authorisation of public offerings of securities, keeping a register of all entities and individuals authorised to make public offerings of securities, and prescribing the rules that such people and those acting for their own account are to observe; and supervising the compliance with applicable laws, rules and regulations in all matters within the scope of the Public Offering of Securities Law.
The Central Bank
An important role in fund raising is also played by the Central Bank of the Argentine Republic (BCRA). It is a national self-governed institution of the Federal Government and its main function is the preservation of the value of the Argentine currency (peso). It determines and conducts monetary and financial policies, and is not subject to instruction from the executive power.
The Bank is empowered to regulate the amount of money and credit in the economy and to dictate monetary, financial and foreign exchange regulations pursuant to legislation in force.
It monitors the appropriate operation of the financial market and implements the Law of Financial Entities and other regulations; acts as the national financial agent of the federal government; concentrates and manages its reserves in gold, foreign currencies and other foreign assets; promotes the development and strengthening of the capital market; and implements foreign exchange policy.
For purposes of monetary and foreign exchange regulation, it is entitled to purchase and sell notes, foreign currency, and other financial assets in the spot and forward markets. It may also issue notes or bonds as well as shares in its own assets.
It conducts the supervision of finance and exchange activity through the Superintendence of Foreign Exchange and Financial Entities, which reports directly to the President of the BCRA.
Present monetary policy gives an important role to the Central Bank. The Argentine peso is undervalued, as a policy position, in order to promote exports. The Central Bank intervenes daily in the market, buying dollars to keep the currency undervalued.
The capital market regulatory regime
The most relevant laws applicable to the capital market activity are:
- Public Offering of Securities (Law 17,811), which regulates the public offering of securities, the organisation and operation of stock exchanges and stock markets, and the activity of people dedicated to the securities trade. A public offering is defined as the invitation made to the general public or to specific groups or sectors to do any kind of legal transaction with securities, by the issuers or by sole proprietorships, firms or companies either exclusively or partly engaged in the trading thereof, by means of personal offers, newspapers and periodicals, radio or television broadcasts, films, posters, placards or billboards, programs, circulars and printed communications or any other means of public communication.
- Financial Entities Law (Law 21,526) which regulates on: the different kind of banks that can be set in Argentina such as (a) commercial banks, (b) investment banks, (c) mortgage banks, (d) financial companies, (e) savings and loan companies for real estate properties and (f) other credit companies; the transactions that each kind of bank is entitled to conduct vis-à-vis its clients; the solvency that each bank shall meet; and the process that each bank will undergo in case of liquidation.
- Public Offering Transparency Regime (Decree 677/2001) that is applied to those participating in public offerings and to self-regulated entities. It provides that a public offering include any invitation regarding legal acts with other financial instruments, disregarding their nature, traded through an authorised market, such as forward contracts or options.
The new regime introduced the term negotiable securities, replacing the previous notion of securities, and refers to securities held in certificate form or those securities filed in a book entry registry.
The public offering transparency system created by this decree includes several provisions related to information to be provided by issuers, intermediaries and other participants in the public offering procedure, confidentiality maintained by those with access to privileged information, behavior to be followed by intermediaries, obligations of self-regulated entities, and a specific description of certain types of behavior contrary to transparency.
Loyalty and care duties applicable to market participants are also specially considered in the regulation over the acts of issuers' managers as well as over the corporate interest (described as the "common interest of all shareholders" including, with regard to companies participating in the capital market, the idea defined as the "creation of value for shareholders" in other legal systems and international capital markets).
The negotiation systems of securities and forward contracts and options of any nature in a public offering on authorised markets shall ensure the enforcement of several principles, such as the investor's protection, equity, efficiency, transparency, lack of severability, and systemic risk reduction.
- Negotiable Obligations Law (Law 23,576): regulates private debt securities that incorporate a credit right held by the security holder with respect to the issuer company.
- Trust Law (Law 24,441): regulates the trust as a vehicle of credit and guarantee.
- Rules of the CNV: contains rules on the public offering process.
It is important to mention that none of this legislation has been amended as a result of the past financial crisis.
Argentine capital markets
Up to October 2009, total issuance was AR$8.78 billion ($2.38 billion) divided among: financial trusts, 73%, negotiable obligations, 22%, and subscription of shares, 5%. This information does not include restructuring processes or swaps of debt.
The total amount of negotiable obligations was of $532 million (36% more than the same period in 2008), by 13 issuances in national currency and nine in US dollars. Thus, the total amount issued during the first 10 months of 2009 is higher by 32% than during the whole of 2008.
In relation to financial trusts in 2009, 153 issuances took place until October for the total amount of AR$6.39 billion versus 190 in 2008 for AR$7.74 billion, mainly in national currency.
The underlying asset of these issuances was consumer and personal loans (51%), credit card coupons (15%), rights on provision and electric power contracts (17%) and mortgage loans (8%), with the rest divided among agricultural, infrastructure projects, leasing, and credit to small and medium enterprises.
The VCP, a short-term (no more than 180 days) negotiable instrument similar to the negotiable obligations implemented for medium and small enterprises, was also an important product in 2009 with AR$225 million.
The placing of stock reflected an increase with respect to 2008: AR$613 million in 2009 against AR$478 million, corresponding to new subscriptions, liberated shares and exchange due to mergers.
Retirement and pension funds (Administradoras de Fondos de Jubilación y Pensión or AFJP), which manage funds of the individual capitalisation pension system, used to be a very important institutional investor in the Argentine capital market system. However, the pension system was abolished by Law 26,425 in December 2008.
The AFJPs helped to create a vast stock of domestic savings that funded the local capital market since 1994, becoming important players that permitted new companies to have access to capital. It should be mentioned that their participation was in some sense replaced by the National Security System Administration (ANSES)
Pitfalls of securities regulators
Many are the pitfalls that issuers must be aware of when making a public issuing of securities in Argentina.
In first place, it is important to mention that regulators supervise the process under the principle of a moderated formalism, which can be understood as a reciprocal exchange of information and comments on the process between regulator and issuer in order to solve or amend any act that may affect the process, and while the process is taking place.
This principle was clearly applicable after the crisis of 2001/2002 when many of the local issuers defaulted in the payment of debt after the pesification of foreign debts implemented by the National Congress in January 2002. Issuers restructured their debts even when it was not strictly regulated by the securities legislation, and the reciprocal feedback between issuers and regulators was crucial for the success of the process.
And from the regulators' standpoint this principle permits them to deal with legislation that is becoming more complex and that is being consolidated approximately every five years.
Another important issue is the contents of the corporate resolutions that decide the issue of securities. In general, these decisions (board and shareholder meetings) contain broad and even vague wording to avoid any omission that may be raised during the process, since any objection from the regulators on those corporate decisions upon the terms and conditions of the issuance could delay the process for weeks or even months (a request by the regulators to conduct a new shareholders meeting in a listed company could take months) and jeopardise the whole process.
The regulators also note that many prospectuses are a mere copy of other issuances, and in some cases with not much detailed information on the issuer and primarily of the issuance pretended to be launched. As once was said by an officer of the CNV when referring to the models used by issuers, "please adapt but not adopt" the drafting of prior issuances. A prospectus is a contract, which carries obligations for issuers vis-à-vis their investors. And so many pitfalls arise from underestimating the importance of the prospectus, as the information is not clear enough or becomes misleading.
Another important matter related to the prospectus is language. The Rules of the CNV (Section 1 of Chapter 8) provide that the language shall be "easily comprehensible" for the investor, mainly when the offer is not directed to sophisticated investors. The regulators admit that the drafting of the prospectus is generally prepared abroad, and so they contain grey areas sometimes not comprehensible for simple investors. Thus, when the issue is directed primarily to local investors the regulators will object the language since the purpose of the CNV is to obtain a clear set of terms and conditions in the prospectus, to protect investors.
It is also important to consider the timing of the process, and how is it generally affected by requirements where the regulators are not directly involved. It is common to observe that many offers are affected, for example, by the delays caused by rating agencies (used for regulatory purposes under the federal securities regime) in delivering their credit ratings, circumstances that are actually caused by the issuer which does not consider this requirement in proper manner, that may also affect the success of the offering.
Another relevant pitfall on timing arises when the issuer is domiciled in Buenos Aires. Within the process, issuer's counsel must provide evidence of the due registration of the issuer in certain jurisdictions where it may be domiciled. The CNV interacts with some of the local offices of corporations located in the 23 provinces but not all. Thus, certain filings need to be conducted with the local office of corporations for the placing of securities (independently from the CNV). Any delay in registrations related to such filing may mean the granting of the authorisation for the public offer requested to the CNV. Otherwise, in those cases where the CNV interacts it obtains this information directly from the office of corporations with which it interacts, without any intervention from the issuer, thus accelerating the process.
The obligations of the issuer after obtaining authorisation for the public offering are another important pitfall.
Information and documents related to road shows or the book-building process conducted by the issuer (or underwriters involved in the placement) of the securities under a public offering shall be kept by the issuer, since it is possible that both the CNV or the local IRS (Administración General de Ingresos Públicos or AFIP) may request it at the filing of the petition for the public offering or even later. This information refers mainly to evidence that demonstrates that real efforts were made to place the issue (in Argentina or abroad) publicly, efforts that must be described to investors in the prospectus.
Otherwise it could be determined that an offering was not actually "public" and so certain tax benefits could be withdrawn. This is because in the past the regulators noted that many issuances were already placed before the authorisation for a public offer was granted (and thus the issuance was a not under the definition of public offer of section 16 of Law 17,811).
The Negotiable Obligations Law 23,576 and the Trusts Law 24,441 provide tax benefits for the public offerings of securities, for purposes of promoting the use of these financial instruments among the issuers and the potential investors.
These tax benefits refer to exemptions on VAT applicable to the financial transactions in relation to the issue subscription, placement, transfer, amortization, interests and cancelation of the negotiable obligations and their guarantees; the tax assessed on the transfer of the financial instruments; income tax assessed on the sale, exchange, conversion and disposition of the negotiable obligations; and income tax on the interests, and inflation and capital adjustments.
Another case on this type of pitfall is the obligation of issuers to prepare and keep information evidencing the investment plan indicated in the prospectus in relation to the destiny of the investment obtained from then placement of the negotiable obligations (section 36, paragraph 3 of the Law 23,576). The application of the investment shall be in physical assets located in Argentina, working capital or refinancing of liabilities, capital contributions in companies controlled or related to the issuer to be applied to the destinies indicated before (section 36 paragraph 2).
In relation to the trends the regulators referred to the amendment of the public offering regime, mainly in relation to the scope of the duties of the CNV and the BCRA (including a swap of certain duties between both entities), keeping the CNV with the supervision duties and analysis of infringements.
Conclusion
The capital market of Argentina is years off providing the same results as other markets in the developing world (as a source of capitalization and exit strategies). If the policy of recreating a local business sector consolidates in the next few years it may have a healthy contribution to the public quoting of stocks. In the meantime other financial instruments will prevail as a source of capital and finance.
| Author biographies |
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Carlos E Alfaro
Alfaro-Abogados
Carlos Alfaro is the founding partner of Alfaro-Abogados. He has been a member of the Advisory Board of the Council of the Americas, an institution founded by David Rockefeller whose members are the main US corporations with investments in Latin America. He is Chairman of the Argentine-American Chamber of Commerce in the US. He is also member of the Executive Committee of the Section of International Law and Practice of the New York State Bar Association, Vice President of the American Foreign Law Association, and an active member of the International Bar Association. He is a member of the Institute of Transnational Arbitration, the Center for American and International Law, former Southwestern Legal Foundation, and member of the panel of arbitrators of the American Arbitration Association.
He has a long career representing national and multinational corporations, lending institutions and banks, as well as multilateral organisations. This experience represents over 30 years of legal practice in different economic and legal environments (inflation, hyperinflation, deflation, major devaluations, currency boards) in which risk allocation and protection require legal, economic and political expertise.
He is admitted to practice law in Argentina and Spain. He holds a Masters in Comparative Law of New York University and is licensed as foreign legal consultant by the State of New York.
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Sebastian C. Rodrigo
Alfaro-Abogados
Sebastián Rodrigo is a partner of the Buenos Aires office of Alfaro-Abogados. He has wide experience in Commercial Law and Project Finance. He participated as local counsel to the Senior Lenders in the TGM Project, related to the export of gas to Brazil. He has been involved in the reorganization process of Central Térmica Guemes representing bondholders of a Global Bond and in the reorganization process of Compañía General de Combustibles representing Hess Trading Corporation, the trader company of Amerada Hess Corporation.
He participated at the International Bar Association in several panels and is the secretary of the Mediation Committee. He has published several articles as contributor of the Mediation and Insolvency, Restructuring and Creditors´ Rights, and Aviation Committees of the International Bar Association and the International Law Office. He teaches commercial law at the Law School of the University of Buenos Aires.
He holds a Master in Law (LL.M.) of the University of Virginia and a Master in Finance Law in the University of CEMA (Buenos Aires). He has been working at the New York office of Alfaro-Abogados and he is currently lecturing Commercial Law at the University of Buenos Aires. He speaks Spanish and English.
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