Financial trusts

Author: | Published: 1 Nov 2006
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Fortunati & Lucero Abogados

Address

Buenos Aires

Telephone

+54 11 5238 1810

Fax

+54 11 5238 1819

The pace of the public market's growth in Argentina has been markedly restrained in recent years, to the point where the Argentine stock market is not regarded as a liquid market. During 2006, the Merval (the local index on domestic share returns) has registered a negative return on US dollars, while the Bovespa (one of Brazil's indexes, used as Latin America's benchmark) registered, for the same period, a 35% return on US dollars.

The once-important stock market has continued to lose listed firms and suffers from falling trading volumes. The Merval's composition has been modified because of the falling trading volume of some of its former shares.

In this situation, investors tend to focus on securities other than stock securities, such as units of financial trusts or investment funds. This preference also corresponds to the fact that one of the exceptions to the constitution of the mandatory deposit (30% of the incoming funds) set out by Decree 616/05 is the inflow of funds destined for acquiring securities (both stock and notes) in the framework of primary issuance of publicly traded securities, and not in the secondary market. Decree 616/05 is contributing to the decreasing liquidity of the market, placing additional obstacles before foreign investors who are willing to invest in Argentine stock.

People who invest in financial trusts are searching for an instrument of minimum risk regarding the possibility of bankruptcy of the owner of the underlying assets. Mutual funds (unit trusts) have been organized by several local banks as a way of attracting investors, particularly non-institutional investors, to the local stock market. Mutual funds may invest in a variety of instruments, including stocks, public bonds, foreign exchange and gold.

During 2005 to 2006, the financial trust has become one of the most popular instruments used by investors, playing a big role in Argentina's corporate finance. This financial tool allows companies of all shapes and sizes to go to the capital markets or obtain private funds, avoiding the need for finance through bank loans.

After the Argentine crisis, companies only intended to restructure their outstanding notes (obligaciones negociables) and issues of new debt through notes were scarce. But the issuance of new notes has now superseded the issuance of restructured ones. As of August 2006 issuance of new notes represents 53% more than in 2005, while issuance of restructured notes is declining sharply.

A new security that will be available soon in the local market is the so-called perpetual bond. The Argentine Central Bank has recently authorized Argentine banks to issue these bonds, whose tenure would be over 30 years. The aim is to enable banks to get long-term financing and to increase their capital for regulatory purposes so that they can issue longer-term loans such as mortgages.

Perpetual bonds combine characteristics of bonds and stock. Investors are paid a coupon, but payment of the coupon is subject to the existence of utilities and will not be senior to the company's liabilities.

Also, these bonds are to be accounted as part of the company's capital stock instead of being accounted as a liability. So issuance of perpetual bonds would place the issuer in a better financial position than other debt issuers, who would be forced to meet their coupon and principal payments independently of the existence of utilities.