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
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issuance of new notes has now superseded the issuance of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.