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Privatization: Argentina

Alejandro Bianchi

When Argentine president Carlos Menem took over from his predecessor Raul Alfonsín in 1989 -five months before his official term was set to begin-- the economy was in shambles. Hyperinflation was rampant and a bloated public sector was sapping the state of much-needed funds. Desperate for revenue, Menem turned to privatization as an answer to Argentina’s financial woes. As foreign and local groups bought up state-owned railroads, telephone and utility companies, money came flowing into the state. According to a World Bank report, “between 1989 and 1992, fifty-one firms were privatized for a total of approximately US$18 billion in cash and debt reduction.” But the major success of this policy along with other stabilization measures was that it paved the way for several years of Argentina’s economic growth

Most of the firms that were privatized were done by way of direct sales or through 10, 20 or 30-year concessions to the best bidder, as was the case with highways and the rail sector. These practices sparked controversy and raised accusations of corruption and favoritism. The media reported that the King of Spain got involved in lobbying government officials on behalf of one group of would-be buyers.

As the privatization process went on, the government decided to use the market to ensure a more transparent privatization process for one of the last state-owned companies to go: Banco Hipotecario, the nation’s largest mortgage credit bank. Banco Hipotecario was established in 1886 by the Argentine government to provide access to home ownership for Argentine families. Throughout most of the 20th century the bank was managed according to the political interests of the party in power and almost always lost money. Those who were lucky enough to get mortgages tended to be people with close ties to power.

All of this changed in the early 1990s with the arrival of the Menem administration. In 1994, Domingo Cavallo, in his first term as Economy Minister, named the economist Pablo Rojo to run the bank. Rojo brought in a team of professionals to clean up the bank’s balance sheet and get rid of bad loans. As the economy became increasingly more stable, credit became more accessible. From 1991 to 1998 the market for mortgages grew at an annual rate of 22%, and Banco Hipotecario reaped the benefits of such growth, leading the residential mortgage market during the 1990s with lending of nearly $2.3 billion since 1994.

Menem --hungry for money for his reelection campaign and for reducing the government budget deficit- encouraged the privatization of Banco Hipotecario, even though members of his party, the Peronists, were against it. (The privatization of Banco Hipotecario went against the Peronist Party’s historic defense of a strong state that would manage banks and companies.) The Argentine president, however, agreed that, for the first time, the process would take place by way of an initial public offering, assuring that anyone who had access to the stock market could end up as the bank’s owner. Credit Suisse First Boston was in charge of taking the company public, an operation that went off without accusations of corruption and that gave no room for lobbying practices or preferential treatment.

The privatization of Banco Hipotecario, was considered a resounding success when it occurred in late January of 1999, just 13 days after neighboring Brazil devalued its currency. In spite of this situation and the fact that the local index Merval had plunged 24% as a result, the offering was still overbooked. Referred to as “The Public Equity Deal of the Year” by the media and analysts alike, the privatization of Banco Hipotecario -in which the government sold 28% of the bank- garnered $307.5 million in much-needed cash for the Argentine government. About 36% of the transaction was sold publicly in Argentina and the rest was placed globally. “Argentina’s ability to sell any equity at all during such a turbulent period was a considerable achievement,” said LatinFinance magazine.

According to the rules of the deal, the private majority shareholder would gain control of the management of the bank. When the bidding was over, that private majority shareholder turned out to be George Soros. Together with Latin American Capital Partners, Soros’ private equity funds --Quantum Industrial Partners LDC and Quantum Dolphin PLC and his real estate affiliate in Argentina (IRSA) ended up with 13.64% of Banco Hipotecario. The remaining equity was split among a number of different parties. Private pension funds bought almost 10% of the shares, while nearly 5% remained floating on the open market. Five percent of the bank’s shares went to employees, while another 5% were put into a trust pending sale to Argentine construction companies. Finally, the Argentine government retained 44% of the bank, which is currently held in a trust, pending a public offering. The remaining 18% of the shares is in the Option Trustee, which holds government shares in the company as collateral. In 2004 that 18% will be sold by the government in the market.

Unfortunately, a four-year recession, a stagnant economy and the devaluation of the peso have all taken their toll on Banco Hipotecario. Not only have the bank’s earnings suffered dearly as a result of the country’s economic woes plunging from between $100 and $200 million in the late 90s to $71 million in the first nine months of 2001--. The bank’s opening stock price was $7; now the stock trades for just $3.

Although the bank is the market leader of its segment, it has been one of the Argentine companies’ hardest hit by the government’s decision to default on its foreign debt. In order to avoid a run on deposits fueled by the political and economic stability of last December, the government froze bank accounts. As a result, Argentines are seriously limited in the amount of money that they can withdraw from the banks. They can only get the money from their salaries, which are directly deposited into checking accounts but they cannot touch their savings accounts. These restrictions on deposit withdrawals have all but frozen credit loan and real estate activity. What’s more, the government has mandated that all dollar deposits and mortgages under $100,000 be paid back in pesos, thus severely reducing future income of the largest country mortgage lender as well as all banks in Argentina who still have to pay back their debts in dollars to foreign creditors.

Another blow to the bank came from Standard & Poor's this past March. The New York-based rating agency said that it would place a default rating on several notes that had been involved in Banco Hipotecario´s tender offer to exchange its debt during 2002. (The debt consists of US$133 million and 200 million euros.) “The securities will be listed in default since the tender offer is what S&P considers a distressed exchange, meaning that the alternatives presented to bondholders are worse than if they paid according to original terms,” said credit analyst Gabriel Caracciolo.

Although the Argentine economic and financial crisis, the bank managed to keep earning money in 1999 ($147 million) and in 2001 ($71 million). In 2000, the bank lost $520 million due to an extraordinary charge of $575 million related to the last clean-up of bad loans and that was previously announced. Thus, investors, analysts and Wall Street firms widely expected this charge and welcomed the measure as a way to bring more transparency to the accounting practice and to become more efficient and competitive. Also they praised the measure because the new private owners decided to absorb the last financial burden of bad loans from the state administration years of the bank.

The question now is what the future holds in store for the bank. Despite the current economic woes, Banco Hipotecario continues to be Argentina’s largest bank in terms of equity. The bank, which holds 40% of the market for mortgages, tends to lend to middle class Argentines, according to research done by Standard & Poor’s. Loans can be requested at any of the 24 branches that Banco Hipotecario has across the country, as well as at the offices of certain real estate brokers and commercial banks that work with Banco Hipotecario.

It will be interesting to see if the new shareholders are up to the task of taking the bank through tough times. Inversiones y Representaciones Sociedad Anonima, one of the shareholders of the bank, said that because it is losing money after years of big profits, it plans to shed assets to reduce debt. Overall, however, analysts are not worried. “The private shareholders are strong and have a great commitment to the bank,” said Fernando López, a bank analyst with the Buenos Aires-based consulting firm MBA. “Their problem is that after the devaluation and the ‘pesification’ of the account deposits and loans, the bank owes dollars to its creditors but its income is in pesos," he explained.

What’s more, say analysts, the private shareholders and in particular Soros, have brought in a strong new management team to weather the storm. Ricardo Cavanagh, analyst with the Argentine broker firm Raymond James, thinks that Banco Hipotecario has done what it can within the parameters of the country’s economic crisis. He trusts the management team now led by experienced economist, Miguel Kiguel, Finance Secretary during the last period of Menem administration, to lead the bank forward.

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