CAF - Corporate Governance in Brazil, Chile, Colombia, Mexico and Peru

Corporate governance in Brazil, Chile, Colombia, Mexico and Peru The determinants of risk in corporate debt issuance Georgina Núñez Andrés Oneto(Coordinators)Project Document Corporate governance in Brazil, Chile, Colombia, Mexico and Peru The determinants of risk in corporate debt issuance

Georgina Núñez Andrés Oneto (Coordinators) Economic Commission for Latin America and the Caribbean (ECLAC)LC/W.654 Copyright © United Nations, February 2015. All rights reserved Printed at United Nations, Santiago, Chile This working paper was prepared jointly by the Economic Commission for Latin America and the Caribbean (ECLAC), CAF-development bank of Latin America and the Inter-American Development Bank (IDB), and was financed jointly by the three institutions. The coordinators wish to express particular gratitude to Alicia Bárcena, Executive Secretary of ECLAC, Enrique García, Executive President of CAF, and Luis Alberto Moreno, President of IDB, for their support at both stages of the project, and to Ángel Gurría, Secretary-General of the Organization for Economic Cooperation and Development (OECD), for the official support provided. The coordinators also thank Luis Miguel Castilla, Minister of Economy and Finance of Peru; Carlos Rivero, Deputy Superintendent for Research and Development of the Superintendency of the Stock Market (SMV) of Peru; Fiorella Torres Tejada, Supervisor of the Division of Markets Oversight of SMV; Fernando Coloma, former Superintendent of Securities and Insurance of Chile; Álvaro Gallegos, Superintendent of Pensions of Chile; Carlos Martabit, Finance Manager of BancoEstado of Chile; and Pablo García, Council Member of the Central Bank of Chile. Thanks are also owed to Maria Helena Dos Santos Fernandes de Santana, President of the Securities and Exchange Commission of Brazil, and João Carlos Ferraz, Vice-President of the National Bank for Economic and Social Development (BNDES) of Brazil, for the official support extended to this project. Special thanks go to all the authors and commentators, and in particular to Mario Marcel and Alejandro Werner for their comments.

Commission of Brazil, and João Carlos Ferraz, Vice-President of the National Bank for Economic and Social Development (BNDES) of Brazil, for the official support extended to this project. Special thanks go to all the authors and commentators, and in particular to Mario Marcel and Alejandro Werner for their comments. The coordinators are grateful to Michael Penfold, Director of Public Policies and Competitiveness, and Andrés Oneto, for their valuable comments; to Eleonora Silva, representative of CAF in Peru, Leticia Riquelme, of the IDB office in Mexico, and Fidel Jaramillo, representative of IDB in Peru; to Daniel Blume, Chief Administrator of the Roundtable on Corporate Governance in Latin America, and Héctor Lehuede, expert in corporate governance of OECD, for the official support provided to this project. Gratitude is extended to Allan Barush González, Executive Director, and Rubén Romero of RiskMathics (Mexico), Dieter Linneberg Director Ejecutivo, Centre for Corporate Governance of the University of Chile, to the National Confederation of Industry (CNI), and to the Institute of Industrial Development for their support in training. The coordinators also wish to convey their appreciation to Santiago Levy, Vice-President of Sectors and Knowledge, Franklin Nieder, Senior Economist, Financial Sector, and Oliver Luis Bernal of IDB (Washington, D.C.) for their coordination and valuable comments on the document, and to Daniel Titelman, Chief of the Economic Development Division of ECLAC, and Inés Bustillo, Chief of the ECLAC office in Washington D.C. Finally, the coordinators wish to thank the staff at ECLAC headquarters in Santiago, especially the conference services staff, for their logistical support, the Programme Planning and Operations Division and the ECLAC office in Washington, D.C., as well as the CAF offices in Colombia and Peru, and the IDB offices in Santiago. We are grateful for the work carried out by staff at the ECLAC offices in Brasilia, Bogota and Washington, D.C., and the ECLAC subregional headquarters in Mexico.

well as the CAF offices in Colombia and Peru, and the IDB offices in Santiago. We are grateful for the work carried out by staff at the ECLAC offices in Brasilia, Bogota and Washington, D.C., and the ECLAC subregional headquarters in Mexico. The opinions expressed in this document, which is a translation of an original that did not undergo formal editing, are the exclusive responsibility of the authors and do not necessarily reflect the views of the organizations mentioned.3 ECLAC – Project Documents Collection C orporate governance in Brazil, Chile, Colombia, Mexico and Peru… Contents Preface ............................................................................................................................................9 Foreword by Mario Marcel .............................................................................................................11 Foreword by Alejandro Werner ......................................................................................................13 Abbreviations and acronyms .........................................................................................................15 Introduction

...................................................................................................................................19 I. Corporate governance an d risk identification for debt instrument issuance in Brazil, Colombia and Mexico: a methodological proposal .................................................................27 A. Project background and scope

........................................................................................27 B. Brief history of corporate debt issuance in Latin America

...............................................28 C. The subprime mortgage crisis and its impact on the issuance

of Latin American debt securities ....................................................................................31 1. Report on the financial cr isis of 2007 ...... ................................................................31 2. High risk lending and infl ated credit ratings ............................................................32 3. Regulatory failures and investment bank abuses ...................................................32 4. Impact of t he financial crisis on issuance of debt securities ..... ..............................33 D. Corporate governance standa rds

....................................................................................34 1. The role of the board of directors ...... .....................................................................35 2. Structure of the board of directors ..... .....................................................................36 3. Chair of the board of dire ctors

...............................................................................37 4. Selecting b oard members ...... .................................................................................37 5. Board of directors committees

...............................................................................39 6. Evaluating the performance of the board of directors

3. Chair of the board of dire ctors

...............................................................................37 4. Selecting b oard members ...... .................................................................................37 5. Board of directors committees

...............................................................................39 6. Evaluating the performance of the board of directors .............................................41 E. Constructing an index .....................................................................................................43 1. Methodolo gy for defining and weighting standards and quantifying an index .........44 2. Structuring the matrix of benchmarks and defining the index

.................................46 F. Applyin g the matrix of standards from the index to companies in Brazil, Chile, Colombia, Mexico and Peru ...........................................................................................49 1. Some thoughts about the indicator

.........................................................................50 G. Final recommendations ...................................................................................................53 Bibliography ............................................................................................................................56 Annex I.1 Comparative analysis between corporate governance and debt issuance indicator categories and provisions covered under Sarbanes-Oxley, Dodd-Frank and Basel ...............................................................................................................................574 ECLAC – Project Documents Collection C orporate governance in Brazil, Chile, Colombia, Mexico and Peru…

II. Corporate governance an d corporate debt issuance in Latin America: institutional investors, investment banks, rating agencies and new empirical evidence............................. 63

A. Introductio n

....................................................................................................................63 B. Relationsh ip between corporate governance and corporate debt and institutional investors, investment banks and rating agencies ...........................................................65 1. Institutional investors ..... .........................................................................................65 2. Investment banks

....................................................................................................66 3. Rating age ncies

.....................................................................................................68 C. The corporate debt market in Latin America

...................................................................69 1. Brief context ...... ......................................................................................................69 2. Internation al debt issuance

....................................................................................71 D. Corporate governance in dicator and debt securities .......................................................75 1. The indica tor

America

...................................................................69 1. Brief context ...... ......................................................................................................69 2. Internation al debt issuance

....................................................................................71 D. Corporate governance in dicator and debt securities .......................................................75 1. The indica tor

...........................................................................................................75 E. The new evidence ..........................................................................................................78 F. Conclusion s ............ .........................................................................................................79 Bibliography ............................................................................................................................80 Annex II.1 Impact of external agents on issuance of debt securities .....................................82 III. What factors impact the cost of corporate bond issuan ce? A study of emerging primary markets

......................................................................................................................85 A. Introductio n

.....................................................................................................................85 B. The operation of the global primary corporate bond m arket

..........................................86 C. The literature on the prim ary corporate bond market ............ .........................................88 D. The primary corporate de bt market: stylized facts and information used ........................89 1. Main chara cteristics

...............................................................................................89 2. Investment banks’ market share and company ratings

..........................................93 E. Determinants of issuance costs

......................................................................................94 1. Issuance cost estimation strategy ...... ....................................................................94 2. The determinants of und erwriting fees ....................................................................94 3. Determinants of primary bond spreads ..................................................................96 4. The impact of underwriter reputation on the cost of capital

...................................97 F. Corporate governance im plications of the determinants of the cost of capital

..............101 G. Conclusion s ............ .......................................................................................................101 Bibliography ..........................................................................................................................102 IV. Bond issua nce and corporate governance in Brazil: a multi-case analysis ..........................107 A. Introductio n

...................................................................................................................107 B. Corporate governance, a

Conclusion s ............ .......................................................................................................101 Bibliography ..........................................................................................................................102 IV. Bond issua nce and corporate governance in Brazil: a multi-case analysis ..........................107 A. Introductio n

...................................................................................................................107 B. Corporate governance, a gency conflicts, regulation and rating

....................................109 1. Corporate governance in Brazil ..... .......................................................................109 2. Agency conflicts

....................................................................................................109 3. The information factor and corporate governance ................................................110 4. The regula tions and rating of debt issues in Brazil ............................................... 111 C. Bond issua nce compared to other forms of financing in Brazil

.....................................112 D. An analysis of various Br azilian cases ..........................................................................115 1. PE

TROBRAS

........................................................................................................116 2. Brade spar ..... ........................................................................................................117

3. Dia gnóstico América (DASA)

................................................................................119 4. Kla bin ...... ..............................................................................................................120 5. Lupatec h

...............................................................................................................121 6. Inep ar

....................................................................................................................123

7. Comparative analysis of the cases studied

..................................................................126 E. Co nclusions and recommendations ............................................................................ 129 Bibliography ..........................................................................................................................1325 ECLAC – Project Documents Collection C orporate governance in Brazil, Chile, Colombia, Mexico and Peru…

V. Corporate governance an d corporate debt issuance in Chile ..............................................137

A. Introductio n

...................................................................................................................137 B. Objectives

.....................................................................................................................138 C. The structure of the capital market in Chile ...................................................................138 D. Debt discipline in corpora te governance ............ ...........................................................143 E. Risk rating agencies ......................................................................................................145 1. Risk rating methodologie s and corporate governance ...... ...................................146

C. The structure of the capital market in Chile ...................................................................138 D. Debt discipline in corpora te governance ............ ...........................................................143 E. Risk rating agencies ......................................................................................................145 1. Risk rating methodologie s and corporate governance ...... ...................................146 F. Corporate governance in dicators

..................................................................................146 1. Review , research and results

................................................................................147 G. Conclusion s ............ .......................................................................................................162 Bibliography ..........................................................................................................................162 VI. Corporate governance an d corporate debt instruments in Colombia ...................................163 A. Introductio n

...................................................................................................................163 B. Capital market in Colomb ia

...........................................................................................165 1. Overview of the capital market in Colombia .........................................................165 2. Some characteristics of the Colombian capital market ...... ...................................168 C. Evolution o f corporate governance regulation in Colombia

..........................................173 1. First stage

.............................................................................................................173 2. Second stage ...... .................................................................................................174 3. Third stage ...... ......................................................................................................174 4. Fourth stage ...... ....................................................................................................175 D. Rating age ncies and corporate governance ........... ......................................................179 1. Regulation s for bond ratings

................................................................................180 E. Case studies

................................................................................................................181 1. Ecopetrol S.A ........................................................................................................181 2. Grupo Bancolombia ..............................................................................................183 3. Grupo Nutresa ..... .................................................................................................185 4. Colombina .............................................................................................................187 5. Comparative analysis of the case studies .............................................................189 F. Conclusion s ............ .......................................................................................................190 Bibliography ..........................................................................................................................192 VII. Corporate governance in Mexico and the evaluation of risk in bond issuance ....................195 A. Introductio n

Comparative analysis of the case studies .............................................................189 F. Conclusion s ............ .......................................................................................................190 Bibliography ..........................................................................................................................192 VII. Corporate governance in Mexico and the evaluation of risk in bond issuance ....................195 A. Introductio n

..................................................................................................................195 B. The debt market in Mexico

............................................................................................196 1. Recent trends

........................................................................................................196 2. Size and characteristics of the current debt market ...... ........................................197 C. Corporate governance in Mexico

..................................................................................198 1. The agency problem with creditors and the importance of corporate governance ......................................................................................198 2. Legal framework and cor porate governance in Mexico ........................................199 3. Corporate governance standards in Mexico .........................................................200 D. CEMEX case study ........... ...........................................................................................205 1. Introductio n

...........................................................................................................205 2. Corporate governance ..........................................................................................206 3. The 2008 financial crisis and its effects on the financial situation of CEMEX

.............................................................................................................208 4. Debt issuance in the prob lem faced by CEMEX ...... .............................................210 E. Controlado ra Comercial Mexicana (COMERCI) ...........................................................211 1. Introductio n

...........................................................................................................211 2. Corporate governance ..........................................................................................211 3. The 2008 financial crisis and its effects on the financial situation of COMERCI ...... ...................................................................................................2136 ECLAC – Project Documents Collection C orporate governance in Brazil, Chile, Colombia, Mexico and Peru…

F. GFNorte ........................................................................................................................214

1. Introductio n

...........................................................................................................214 2. Corporate governance ..........................................................................................215 3. The 2008 financial crisis and its effects on the performance of GFNorte .....

F. GFNorte ........................................................................................................................214

1. Introductio n

...........................................................................................................214 2. Corporate governance ..........................................................................................215 3. The 2008 financial crisis and its effects on the performance of GFNorte ..... ........216 G. Petróleos Mexicanos (PE MEX)

.....................................................................................217 1. Introductio n

...........................................................................................................217 2. Corporate governance im plications of the 2008 oil reform and the 2013 energy reform .................................................................................218 3. Corporate governance in

PEMEX ...... ...................................................................220

4. PEMEX and the debt market

................................................................................223 H. Corporate governance standards, weighted by catego ry

..............................................225 I. Conclusion s ............ .......................................................................................................229 Bibliography ..........................................................................................................................231 VIII. Corporate governance, institutional investors and risk assessment for issuance of debt instruments in Peru ........... .......................................................................................235 A. Introductio n

...................................................................................................................235 B. Corporate governance in Peru

......................................................................................236 1. General ba ckground .............................................................................................236 2. Promotion of investment in Peru ...... .....................................................................236 3. Corporate governance re gulation ..... ....................................................................238 C.

Private initiative: Corpora te Governance Index at the Lima Stock Exchange ............

..238 1.

Joint initiative: Code of Good Corporate Governance f or Peruvian companies

...240 D. Developm ent of the alternative stock market

...............................................................241 E. Public of ferings exclusively targeting institutional investors ............ .............................243 F. Issuance o f international bonds

...................................................................................244 G. Companie s analysed .....................................................................................................248 1. Corporació n Lindley, S.A.

......................................................................................248 2.

............ .............................243 F. Issuance o f international bonds

...................................................................................244 G. Companie s analysed .....................................................................................................248 1. Corporació n Lindley, S.A.

......................................................................................248 2. Banco de Crédito del Pe rú, S.A.A. ........................................................................250 3. Comercio Ferreycorp S.A.A.

.................................................................................251 4. Corporació n Financiera de Desarrollo, S.A (COFIDE)

..........................................253 5. Corporate governance co mpliance indicator for the issuance of international bonds ............................................................................................257 6. Comments on the results of the index

..................................................................259 H.

Conclusions ............ ......................................................................................................260 Bibliography ..........................................................................................................................260 IX. Concludin g remarks .............................................. ...............................................................263 Tables Table I.1 Corporate debt securities (domestic and international) outstanding as of December of each year, 2001 and 2010 ........................................................31 Table I.2 Importance of corporate governance standa rds in issuing corporate debt .............45 Table I.3 Detailed matrix of benchmarks for the corporate governance index in terms of debt securities issuance ...... ..................................................................46 Table I.4 Aggregate infor mation for Brazil, Chile, Colombia, Mexico and Peru: benchmark values by category of standards ..... .....................................................49 Table I.5 Matrix of benchmarks for the corporate gove rnance index in terms of debt securities issuance ...... ..................................................................50 Table I.6 A verage findings for the main categories of the corporate governance indicator ...............................................................................................51 Table I.7 Grades for corporate governance standards applied to companies .......................52 Table II.1 Corporate gove rnance standards that impact debt issuance .................................76 T able II.2 Matrix of corporate governance index bench marks in terms of corporate debt securities issuance .....

...............................................................................................51 Table I.7 Grades for corporate governance standards applied to companies .......................52 Tabl