Continued interest in Panamanian targets

Author: | Published: 1 Mar 2013
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Eloy Alfaro B. and Virgilio Sosa H. of Alemán, Cordero, Galindo & Lee highlight the unique regional and global opportunities offered by Panama’s robust economy

Panama has historically been one of the world's pre-eminent trading routes. It is no accident that the Panama Canal continues to be the country's foremost landmark. More than just a relic of a distant time, however, the Panama Canal continues to play a central role in global commerce, as evidenced by the huge canal expansion project now underway. With estimated costs of nearly $6 billion, this expansion project has played a tremendous role in Panama's recent fortunes (which have included full employment, an influx of blue-chip foreign multinationals and expats, and rising average household income). This expansion project's forecasted IRR foreshadows a very positive outlook for the country as a whole in terms of its medium- to long-term growth prospects.

Panama's robust regulatory framework provides local and international investors with unparalleled investment opportunities in the region: fully institutionalised dollarisation, no exchange controls or restrictions on the movement of capital, readily accessible credit and increasingly sophisticated and liquid capital markets. Panama has a number of other competitive advantages:

  • Panama's international banking system (with over $86 billion in assets) is home to more than 90 domestic and/or international banks, which include Citibank, BBVA, HSBC, Banco Santander and the Bank of Nova Scotia.
  • The Colon Free Zone is the second largest free zone in the world, with annual imports, exports and re-exports valued at more than $16 billion (2012).
  • Within the last decade, COPA Airlines and Panama's Tocumen International Airport have cooperated to develop the country into the Hub of the Americas, serving more than 60 destinations from around the world and providing the region with its first truly pan-Latin American hub.
  • Panama's dynamic and ever growing port infrastructure boasts Latin America's largest container port terminal (surpassing Brazil's port in Santos) with several new entrants in the pipeline.
  • The Panama Canal Expansion Project is the region's largest infrastructure project to date (if the original Panama Canal project of 1914 is excluded).

As a result of these structural, geographic and/or competitive advantages (in addition to the overall bullish macroeconomic outlook), Panama has been awarded with an investment grade rating by all three main credit rating agencies (Moody's rates Panama at Baa2 with a stable outlook; Standard & Poor's rates at BBB with a stable outlook; and Fitch rates at BBB with a stable outlook). Naturally, this has resulted in increased interest in Panamanian companies, across a wide range of industries, as M&A targets.

Legal framework

The Panamanian government has enacted several important pieces of legislation which are aimed at facilitating public and private investments, by providing innovative regulatory schemes for both domestic and foreign investors that combine incentives, regulatory streamlining and other fiscal and/or regulatory advantages.

Law No 41 of 2004 established the Special Economic Zone Panama-Pacífico, a free zone with a special legal, fiscal, customs, labour and migration framework. Companies established in the Panama-Pacífico Zone are exempt from a series of taxes including dividends, income, withholding, imports and sales taxes.

Law No 41 of 2007 created a special regime for the establishment and operation of multinational corporation headquarters with the intention of attracting investments, generating employment and encouraging transfer of technology. After being granted a special licence the corporations would be exempt from income tax for services offered to entities domiciled abroad that do not generate income in Panama. Additionally, employees of these licensed corporations would be eligible to obtain work visas for up to five years.

Finally, Law No 438 of 2012 created the National Savings Fund/Sovereign Wealth Fund as a forward-looking initiative aimed at safeguarding the country against future negative shocks (such as natural disasters, tail risk events or economic recessions). The Fund Law seeks to provide the Panamanian government with a sophisticated and transparent investment vehicle to manage the country's surpluses.

Partly due to such pro-business legislation as those highlighted here, Panama is now host to almost 100 large international corporations (Brinks Regional Services, APR Energy, HP, Procter & Gamble, Caterpillar, VF Group, Sanofi Aventis and Maersk, to name a few).


Panama has been growing at an average, annualised rate of 7.3% over the past 10 years, which is the highest rate in Latin America and among the highest growth rates in the world (the International Monetary Fund has forecast that Panama will lead Latin America in economic growth from 2011–2015). In spite of the global economic crisis, Panama has emerged as a regional powerhouse, showcasing remarkable economic dynamism as compared to many of its peers. The principal drivers of its growth have been the Panama Canal Expansion Project, an influx of multinational corporations establishing their regional headquarters in Panama, and an ambitious infrastructure investment plan by the current administration, among others. In the medium term, Panama is expected to benefit from the recent ratification of its free trade agreement with the United States, billions of dollars in recent investments in the mining sector, and investments from both domestic and foreign corporations seeking to unlock Panama's vastly underdeveloped logistics capabilities.

From a fiscal perspective, Panama's macroeconomic indicators have continued to improve in conjunction with the broader economy. Over a period of 10 years, Panama's debt-to-GDP ratio has come down dramatically, from a peak of approximately 70% to a trough of approximately 40%. In spite of the government's aggressive investment programme, the overall economy's growth has far outpaced collective increases in capital expenditure. Government critics note that Panama's unprecedented growth rate is unsustainable in the long run, and as such, the government should exercise a greater degree of fiscal prudence and seek to leverage these boom times to vastly improve Panama's fiscal situation. To this effect, Panama's government has taken certain remedial measures to address these concerns. For example, Panama's National Assembly recently created a National Savings Fund as means of safeguarding the country against future negative shocks. This Fund will be financed from the expected windfall profits of the Panama Canal Expansion Project. It should be noted here that Law No 438 of 2012 defines the "rule of accumulation" as the requirement that any and all monies received by Panama's National Treasury – from distributions from the Panama Canal Authority (ACP) – in excess of the equivalent of 3.5% of the country's nominal GDP must be deposited into the Fund. By way of background, the ACP contributes to the National Treasury a sizable percentage of its profits (pursuant to a disbursement that is analogous to a yearly dividend payment). In the event the ACP's yearly contribution to the National Treasury is larger than 3.5% of nominal GDP, the excess would be diverted to the Fund.

In addition to the various industries discussed here, Panama continues to develop as a regional financial hub, with a well-institutionalised dollarisation and a robust financial sector boasting many of the world's pre-eminent financial institutions. Panama's financial sector has contributed to overall economic growth, rather than exacerbating external market and liquidity conditions as has been the case with the worst hit nations of the financial crisis. Panamanian banks boast solid balance sheets, with little to nil exposure in complex financial instruments originated abroad (although, critics correctly point to a significant exposure to domestic real estate).

In addition to ratifying its free trade agreement with the US, Panama has signed several other free trade agreements with countries including Taiwan, Singapore, Chile, and Mexico. Panama has also engaged in a concerted effort to negotiate and ratify double taxation agreements around the globe, further bolstering the jurisdiction's attractiveness from both an inbound and outbound investment perspective. To date, Panama has signed such agreements with Barbados, Luxembourg, Holland, Mexico, Portugal, Qatar, Singapore, to name a few. Agreements with the Kingdom of Bahrain, Belgium and the United Kingdom, among others, are being negotiated.

Panama's continued efforts to increase fiscal cooperation and transparency with the international community, as well as its efforts to enact investment-oriented legislation is reflective of Panama's long-term strategy of becoming Latin America's pre-eminent financial and logistics hub.

Recent M&A activity

After a high level of M&A activity in Panama in the period between 2006 and 2008 (principally in the financial industry), M&A activity has again picked up considerably in the last few years across an ample spectrum of industries. In 2013, the level of M&A activity in Panama is expected to continue its recent growth, or at the very least remain stable. Although difficult to project, this activity should continue to be evenly distributed among several industries, which will most likely include financial services, telecommunications, mining, energy, tourism and food and beverages (manufacturing, distribution and retail). In that sense, there is likely to be a higher level of outright acquisitions, followed by mergers, minority investments and a few joint ventures. Outright acquisitions have historically been the leading type of transaction, and we expect that trend to continue, specifically in the financial sector.

As far as potential targets, traditionally, the majority of M&A transactions in recent years have been in deals involving a domestic target and a foreign acquirer from Latin America, Europe or the United States. Recently, although in fewer numbers, several purely domestic deals have also taken place. Less frequent are deals involving a domestic acquirer and a foreign target in Latin America or outside Latin America. This trend is expected to continue to hold true, in that most of the M&A transactions to take place in 2013 will likely continue to involve a domestic target and a foreign acquirer, with most foreign investors coming from Latin America, Europe and the United States. However, given regional trends, we expect to see a gradual pick up in Asian investors seeking to increase their market presence in Panama. Certain sectors (such as mining, ports and logistics) provide state-owned enterprises and both public and private multinationals from Asia with interesting acquisition targets.

There are still notable differences in how domestic and cross-border deals are being conducted. The type of purchase agreement used in Panama depends a great deal on the nature of the transaction. If the transaction involves a domestic acquirer and a domestic target, it is very likely that the purchase agreement will be a far simpler document than a purchase agreement used when the acquirer is a foreign investor. The differences are mostly reflected in the amount and scope of the representations and warranties, and the affirmative and negative covenants, which tend to be more comprehensive in international-style purchase agreements.

The size of the transaction will also have great bearing on the type of purchase agreement that is ultimately used. As a general rule, foreign investors tend to feel more comfortable using international-style purchase agreements, most often governed by New York state law, and using both New York counsel and Panamanian counsel to draft and negotiate the agreements. Given that there are a larger number of transactions involving foreign acquirers, the international style purchase agreement is considered the market standard for this type of transactions.

Acquisition financing is readily available for deals in Panama. As an internationally recognised banking centre, Panama has become an important hub for the financial services industry, including acquisition financing. Given that most M&A activity involves foreign investors looking to acquire a domestic target, foreign investors typically secure their acquisition financing abroad. Due in large part to the recent wave of M&A activity, however, domestic banks are flush with liquidity from local high net worth individuals and middle income depositors. As evidenced by Panama's real estate boom, domestic banks have the balance sheets to finance billions of dollars' worth of real estate investments without experiencing noticeable reductions in their Tier 1 capital levels. Furthermore, the Panamanian capital markets have managed easily to accommodate very large issuances from both domestic and foreign issuers, particularly in the corporate debt sector. Over time and given the notable increase in the level of sophistication of local investors, we expect to see foreign issuers tap into the Panamanian capital markets as a supplemental means of raising acquisition financing.

For the past several years, Panama has witnessed remarkable macroeconomic expansion. Panama's gross domestic product has increased despite the recent global economic downturn. The significance of Panama being awarded an investment grade rating must be underscored. The culmination of a painstaking and lengthy process that begun in the early 1990s, the country pulled itself up by the bootstraps by putting in place free market legislation geared towards attracting foreign investment. The wave of privatisations in the late 90s paved the way for foreign investors from the four corners of the globe to invest in almost every sector of Panama's economy. Today, several of the largest companies in Panama are owned by foreign multinationals.

The positive outlooks by rating agencies, banks and financial institutions speak highly of the confidence in Panama's economic position and of the prospect stable growth in the long term. On this point, it is important to note that Panama's economy is unique in the region. Being a heavily service-oriented economy, Panama service sector generates more than 75% of the gross domestic product and nearly 50% of the nation's employment. As such, Panama's economy is less susceptible to fluctuations in commodity prices and other hard assets than many of its neighbouring countries. Given the non-existence of capital controls to mitigate any damage caused by rapid inflows and outflows of assets and considering the amount of foreign direct investment into the country, Panama remains particularly susceptible to hot money. For example, the recent passing of Venezuela's president may potentially trigger a material outflow of assets seeking to be repatriated to Venezuela.

Improvements in Panama's fiscal accounts coupled with strong economic growth in the last decade have allowed the country to maintain manageable levels of debt, which in turn have permitted it to meet its credit obligations, both domestically and internationally. Panama has significantly decreased its levels of debt in recent years and its sovereign bonds were already trading on par with countries such as Brazil. Panama today continues to have one of the better-performing economies in Latin America. The four main sectors of the economy – logistics and transportation, financial services, tourism and construction – continue to experience solid growth. Panama continues to be a significant destination for foreign direct investment, attracting more FDI as a proportion of GDP than most countries in the hemisphere. The Panama Canal Expansion Programme of the Panama Canal Authority, which will double the Canal's capacity by its expected completion in 2014, will in time increase Canal contributions to the National Treasury fourfold. Moreover, the current government administration has recently committed $12 billion for a five-year investment plan to improve the competitiveness of Panama's economy, of which $4 billion has been set aside for national infrastructure projects. The investment grade rating has been a milestone for the county and an acknowledgement of the country's sound economic standing, but more importantly, in practice it has allowed Panama to lessen the burden of its debt obligations by gaining access to cheaper financing. It has also significantly increased the interest of international banks and other financial institutions to finance projects and acquisitions in Panama.

Local M&A considerations

There are four key prudential due diligence items that should not be overlooked by investors considering making an acquisition in Panama. The first is to acquaint themselves as much as possible during the early negotiation stages of any possible acquisition, with the target company, the industry in which it operates, and the legal and any regulatory requirements within the industry in which the target company conducts its business.

Secondly, upon the progress of the negotiations, investors should conduct thorough due diligence on the target company (legal, financial, commercial, and so on), preferably on-site, limiting the amount of information exchanged online through virtual data rooms.

Thirdly, investors should assess any key person risk, considering that Panama is at full employment for the near term and replacing skilled labour is costly and unpredictable.

Finally, it is important to obtain feedback and information from local sources and make sure to get the best local professional advice possible (both legal and financial including tax).

No specific changes have taken place in Panama's legal framework in regard to how M&A transactions are conducted. In regards to recent legislation that should be taken into account, Law No 67 of September 1 2011 created the Superintendence of the Securities Market (formerly known as the National Securities Commission) and modified certain dispositions of Decree Law No 1 of 1999 (the Securities Law). Most of the modifications related to the overall administrative structure and operations of the securities regulator, the Superintendence of the Securities Market, but some of the modifications do touch on certain substantive issues relating to the regulatory framework of the securities market.

There have not been many recent regulatory developments in this regard, except for a recent amendment to the Panama mining code, which among other changes, was amended to allow the possibility of foreign governments to directly invest in companies that have been awarded local mining concessions. This is an important development that could result in increased M&A activity, as there are important confirmed metallic mineral deposits either under concession or under current study which will certainly attract foreign investment to Panama, particularly by foreign governments looking to secure future metallic mineral sources. It is also worth mentioning that the current government administration intends to introduce certain reforms to the securities regulation mostly to restructure the National Securities Commission.

Eloy Alfaro B.

Alemán, Cordero, Galindo & Lee

Swiss Bank Building (MMG Tower), 2nd Floor
East 53rd Street, Marbella
P.O. Box 0819-09132
T: +(507) 269-2620
F: +(507) 263-5895

Eloy Alfaro B. is a junior partner with Alemán, Cordero, Galindo & Lee, where he has worked since 2004. His professional practice concentrates on corporate law, mergers & acquisitions, commercial law, banking and securities, public bids, and real estate law.

Alfaro has been a member of the board of directors of GNB Sudameris Bank since 2011. Since 2007 he has also been secretary of the board of directors of London & Regional (Panama). He is a member of the National Bar Association.

In 2001, Alfaro graduated from Columbia University in New York with a bachelor of arts in political science. In 2004 he graduated from University of Pennsylvania Law School.

He speaks Spanish and English.

Virgilio Sosa H

Alemán, Cordero, Galindo & Lee

Swiss Bank Building (MMG Tower), 2nd Floor
East 53rd Street, Marbella
P.O. Box 0819-09132
T: +(507) 269-2620
F: +(507) 263-5895

Virgilio Sosa H. is an associate with Alemán, Cordero, Galindo & Lee, where he has worked since 2012. His professional practice concentrates on corporate law, mergers and acquisitions, and investment fund formation and management.

Sosa was vice president of ARC China from 2010 until 2011, and a summer associate at Shearman & Sterling in 2008 and 2009.

He graduated from Duke University with a degree in economics in 2006. In 2009 he graduated from Duke University School of Law.

Sosa speaks Spanish, English and Mandarin.

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